Bleak Road Ahead
02.21.12 12:44 PM ET
Greek Bailout Deal: A Sad Fairy Tale
“The confidence fairy,” Paul Krugman wrote yesterday with his usual assurance and wit, “has failed to show up.” The New York Times columnist (and Nobel laureate) wanted to shoot down the idea that austerity in a time of recession somehow reassures investors to such an extent that they’ll pour money into floundering economies. Krugman cites ample history to make his case that in the United States and much of Europe this is fantasy bordering on tragedy, or perhaps black comedy. Growth plummets, revenues go down, investors flee, in fact, and countries that follow this advice may find themselves on the austere path to the bottom of a deep, dry well.
Greece, we now know, is already there. But even Krugman had to concede that it’s a very special case. Its public finances have been so wildly irresponsible—until 2009 they were essentially fraudulent —that it may take a generation or more for it to dig out of the abyss. The announcement in Brussels shortly before dawn this morning that a new $172 billion bailout package had been agreed upon, while offering a brief respite, actually underscored how little confidence anyone has in the Greeks’ willingness or ability to deliver on their side of the deal.
The tone of the discussion among Greece’s creditors has long since degenerated from one of profligacy vs. austerity to something more like crime and punishment. Part of the latest bailout deal includes an expansion of the so-called Task Force for Greece—which is a euphemism for inspectors from other countries—to judge whether Athens is abiding by the terms of its parole.
As the haggling about details went on through the night in Brussels after days and weeks of almost-there announcements, a confidential report prepared by the International Monetary Fund, the European Central Bank, and the European Commission was leaked to Reuters and made its way around the assembled press corps.
The situation the report describes is, really, beyond bleak. With no prayer of a quick fix, these huge international institutions are looking at an eight-year horizon for little Greece. Right now it has debts that amount to 160 percent of all the goods and services the country produces. The announcement this morning in Brussels suggests that by 2020, if all goes according to plan, Greece may be able to cut that ratio down to 120 percent. The confidential report suggested 129 percent would be more likely. But even to do that, the Greek economy would have to start growing, and the latest numbers show it’s shrinking, now, by almost 7 percent. Job losses are massive, incomes are declining, and there’s really no relief in sight for the Greek men and women on the street. Many are protesting, some are rioting, and not a few are taking off for Canada and Australia.
In the meantime those banks and other private institutions that were foolish enough to buy Greek debt are supposed to agree to a 50 percent loss off the top and exchange a large part of what’s left for new bonds: not the sort of thing to inspire a lot of investor confidence in the future. And this part of the package is predicated on 95 percent of those private-sector investors agreeing to such a massive “haircut,” which may be more than a little optimistic.
The leaked report goes on to suggest that if the recession worsens and the Greek government also balks at the austerity measures dictated by its creditors of last resort, which is very likely, it could wind up eight years from now with debts that are still at 160 percent. As the report puts it, the whole rescue program could be “accident prone.”
The official statement this morning from the Euro group, the finance ministers of the countries that have the euro as their currency, repeated their “commitment to provide adequate support to Greece during the life of the program and beyond” until somehow, at some unspecified time, it can find buyers for its bonds on the open market.
Apparently Europe still believes in the confidence fairy, but maybe that’s just because there’s no good alternative in this Greek nightmare. As Edmund Burke once wrote, “Superstition is the religion of feeble minds.” Today the same may be true for feeble economies.