Let’s start with the actual Greek deal itself. It:
- Fails to address Greece’s debt issues (the new forecast is that Greece will cut its Debt to GDP ratio to 120% by 2020)
- Slams Greece with additional 3.3€ billion in austerity measures (spending cuts and tax increases) thereby guaranteeing a weaker Greek economy (Greece is already in its fifth year of economic contraction)
- Is anything but guaranteed (Germany and the Netherlands have raised issues that could stop the deal dead in its tracks)
Regarding #1, there really isn’t too much to say here. The facts are that EU leaders are willing to spend another 130€ billion on a country whose GDP is only 227€ billion. Not only that but these folks only expect Greece to gets its Debt to GDP ratio down to an amount that is twice what the original Maastricht Treaty called for within the next eight years.
In plain terms, anyone who thinks this represents a solution for Greece or the Eurozone has lost his or her mind.
Indeed, even the EU, IMF, and ECB don’t believe this plan will work: a report prepared by these groups and leaked to the press admits that Greece will need additional debt relief in order to even meet the Debt to GDP ratio forecast of 120% by 2020.
As for the private Greek bondholders, they’re now taking a 53% haircut and swapping 100€ billion of their current bonds for longer-dated securities that pay a lower coupon (essentially agreeing to let Greece keep their money for much longer while paying them much less in terms of yield). This ultimately means these investors losing about 70% of their money on the deal (through the haircut and lower yield).
And yet, even with this 100€ billion in debt relief, and private bondholders taking a 53% haircut, the ECB, IMF, and EU leaders admit that Greece is going to need more help in the future.
As I’ve said before, anyone who thinks this bailout represents a solution for Greece or the Eurozone has lost his or her mind.
Regarding #2, Greece has already committed to a number of austerity measures, which resulted in open riots in the streets. The Greek economy is in an outright depression. Greece’s GDP fell 6.8% in 2011. And the new bailout assumes Greece will somehow return to economic growth by 2014.
This assumption is outright insane. Greece’s problems stem from far more than its excessive debt. For one thing, demographics wise, Greece is a disaster.
Real Clear Markets shares the following facts.
- Greece’s fertility rate is 1.3 children per women. This is nearly a full child below the “replacement rate”: the number of children needed to maintain the current population.
- Greece’s population of 65 and over has soared from 11% in 1970 to 24% in 2010. It will hit 33% by 2050. Meanwhile, Greece’s working population will decline to 20% over the same time period.
- Because of this, Greece spends 12% of its GDP on pensions.
As if this weren’t bad enough, the unemployment rate for Greeks aged 15-24 is 40%. For Greeks aged 24-34 it’s 22%. Imagine being a young person, not being able to find a job, and then knowing that huge percentage of your efforts (42%) are going to be taxed to fund all the crazy social welfare programs for Greece’s aging population. Small wonder that seven out of ten young Greeks want to work abroad and four of out ten are actively seeking work outside of Greece.
Also, it’s no surprise that those Greeks who do have jobs, don’t want to pay this massive tax load. Consider that the Greek working population is roughly seven million people. 95 percent of them declare annual income of less than 30,000 euros.
So that’s the situation in Greece. Terrible age demographics, an economy that’s in the toilet, and a culture that believes paying taxes is for suckers. The idea that this country will somehow return to economic growth within two years, based on an additional 130€ billion in bailouts is, again, outright insane (Greece already received 110€ billion in bailout funds in 2010… and still posted GDP growth of -4.5% in 2010 and -6.8% in 2011).
And somehow another 130€ billion is going to get this country back to economic growth in two years’ time? Greece hasn’t experienced any growth in five years.
Now for the third and final point: that this second bailout is anything but guaranteed. As I’ve noted on these pages before, Germany wants Greece to hand over its fiscal sovereignty in order to receive the second bailout. Now the Netherlands is joining in, demanding a full-time observation post in Athens to monitor how the Greek government addresses its financial issues.
However, this is nothing compared to what Germany has now proposed: German Finance Minister Wolfgang Schäuble has proposed that Greece should postpone its April elections as part of the bailout package. In simple terms, Schäuble is concerned that the unpopularity of the austerity measures being imposed on Greece as part of the second bailout package will lead to a “wrong” democratic choice.
This is a step up from Germany’s previous demands that Greece submit its fiscal authority to an EU council; now Germany is outright pushing to interfere with Greece’s elections.
Schäuble is no idiot. He knows that there is no way Greece would go for this. So his comment can only be seen as an attempt to incite a Greek backlash while also winning political points in Germany where those who show themselves willing to play hardball with Greece have seen a huge boost in the polls (Merkel recently saw her approval ratings hit their highest levels since her re-election by doing this).
We should also take Schäuble’s statements in the context of Angela Merkel’s recent backing of Nicolas Sarkozy’s re-election campaign in France against adamant socialist François Hollande, who wants to engage in a rampant socialist mission to lower France’s retirement age, cut tax breaks to the wealthy, and break the recent new EU fiscal requirements Germany convinced 17 members of the EU to agree to.
Current polls show Hollande winning in the second round of the election. The fact that Sarkozy’s re-election campaign just kicked off with an MP from his party announcing that the Nazis never deported homosexuals from France to Germany during the Holocaust (hardly a statement that boosts Sarkozy’s chances of re-election) isn’t helping.
Put another way, German leaders, particularly Merkel and Schäuble see the writing on the political wall: that both Greece and France are likely going to find themselves with new leadership that is pro-socialism, anti-austerity measures, and most certainly anti-taking orders from Germany.
Thus, Germany must be aware (as the EU, IMF, and ECB are to some degree) that it is ultimately fighting a losing battle by participating in the bailouts. Indeed, Schäuble even went so far as to recently call Greece a “bottomless pit” where money is wasted (having just participated in Greek bailouts that exceed the entirety of Greece’s GDP, I have to admit he does have a point here).
Schäuble’s statements have not passed unnoticed. Greek politicians have regularly brought up Germany’s lack of war reparations to Greece while the Greek media has begun regularly portraying Schäuble and Angela Merkel as Nazis.
So while a “deal” may have officially been struck for Greece, there are deep underlying tensions that could bring proceedings to a crashing halt at any point.
Big picture, we must remember that Greece is just the opening act for what’s to come in Europe: Italy and Spain are waiting in the wings to take center stage as soon as the Greece bailout deal is finalized (if this happens… which remains to be seen).
Indeed, Greece is just the trial run for what’s coming towards Italy and Spain in short order. NO ONE can bail out those countries. And they must already be asking themselves if it’s worth even bothering with the whole economically crushing austerity measures/ begging for bailouts option.
Which means… sooner or later, Europe is going to have to “take the hit.” When it does, we’re talking about numerous sovereign defaults, hundreds of banks going under, and more. It will be worse than 2008. Guaranteed.
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