The Greek black hole


And so the circus continues into another night.

It if far to early to tell what the outcome of tonight’s EU meeting to decide on Greece’s €130 bn bailout will be but the delay in anything meaningful suggests that once again the outcome will be underwhelming. As usual, the lead up to the meeting has been peppered with contradictory messages from attendees. The fact that the International Monetary Fund, European Central Bank and Commission reported over the weekend that Greece’s fiscal position is now even worse than expected probably hasn’t helped:

The International Monetary Fund now expects Greece’s debt to reach 129% of the country’s gross domestic product in 2020, three people with direct knowledge of a draft debt-sustainability analysis put together by the fund said on Sunday.

And that was with the bailout set at €136bn. However that wasn’t the worst of it. The same report contained a “tailored downside scenario” prepared for Eurozone leaders which outlines the case for debts to only fall to 160% of GDP by 2020 under the current bailout. Under that scenario, which given the IMFs constantly incorrect assessment of their own policies is probably most accurate, Greece will need €245bn in bail-out aid. This scenario is based on the premise that “there is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term”.  That probably sounds very familiar to my readers.

The IMF has previously stated that the second bailout was only to be given on the proviso that Greece hits the 120% target. One of the questions out of today’s summit is whether the ECB will forgo its profits on the Greek bonds in order to provide additional funding for the program and what other concessions can be given by any sides. The (re-)negotiations with private sector creditors are also on going, but that should be no surprise given my previous statements on what a change in the holdings of Greek debt by the ECB would mean.

Those points aside, what has become apparent to me is the massive amount of political capital that has been destroyed by the mishandling of Greece’s economy by all of those involved. Comments from the Dutch finance minister, Jan Kees de Jager,  and his Austrian counterpart, Maria Fekter, on their way into the summit sum this up. Firstly Jan Kees de Jager:

“When you look at the derailments in Greece which have happened several times now, it’s probably necessary that there is some kind of permanent presence of the troika in Athens not every three months but on a permanent basis.

“We will see to a rigid and very strict implementation of those demands and only then will we make the next step.

“I am in favour of more control, more supervision … Money is the thing we can control Greece with.”

And Maria Fekter:

“I believe states can’t make any more taxes available, that would overburden the states,” Fekter said.

“We would have problems getting that through parliament.”

And there in lies the political problem for Europe. There is very little political capital left in Greece to enact greater levels of reforms that are being requested such as a permanent Troika mission and/or escrow accounts, and there is limited amounts of political capital in the rest of Europe to support Greece any further. In fact, given Ms Fektor’s statements, I suspect that there is limited political capital available in many nations to provide any additional support to anyone.

The northern nations have obviously convinced themselves that the problem with Greece is the Greeks themselves, and in some regards that is true, however the fact is that much of the problem is simple economics and misguided ideology. Which brings us to Portugal:

The eurozone crisis has focused attention on debt-burdened Greece spiraling into decline. Meanwhile, Portugal is seen as the international creditors’ poster-child for obediently slashing spending and welfare benefits.

Nevertheless, the Portuguese national debt continues to grow, and the country is mired in recession and soaring unemployment.


Last May, Portugal received a $104 billion bailout from the European Union and International Monetary Fund, in exchange for deep spending cuts and structural reforms.

While the budget deficit was cut by more than a third, the economy is rapidly shrinking, consumption has plummeted, and unemployment has soared to 14 percent. Among the young, it reaches 30 percent.

This summit isn’t actually the end of anything. Even if it is successful in coming up with a new package for Greece the truth is that it is the beginning as periphery nations of Europe are going to require many years of complex support including large and fundamental changes to the structure of the European monetary system. If the political will across Europe is already dissolving because of the failed outcomes of Greece then I hold little hope for the long term sustainability of the Eurozone.

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  1. “It if far to early”…?!

    DE, have you outlined anywhere what you propose as a solution to the Greek debt situation? (Forgive me if you have, I don’t recall reading it).

    My point is, is there a solution? Other than a default, return to the drachma and serious devaluation to retire debt and restore competitiveness?

  2. Deal done, but all that does is reach the minimum expectation implied in the recent risk-on rally.

    Once the long hard slog of trying to keep the Euro situation contained restarts, markets will have a serious anticlimax. As DE says, there is no more positive energy left on either side and so when things get ugly, as they will, the fallout could be explosive.

    Kinda like an estranged couple that agree a temporary truce for a while…

  3. DE, and after Greece like you say, what then. How are they going to resolve Portugal, Spain, etc.. And for Greece no long term future unless the economy is sustainable. They don’t have any real solution and it get more farcical as time goes on. Now the EU are saying delay the Greek elections. I understand that they want monetary stability, but I can only think the way this is being handled it’s about protecting others and not the specific EU citizens.

  4. I’m not in the slightest bit surprised there’s a deal. I think that was always a given.

    Right now I’m more interested in seeing details as the rhetoric coming from the EU seems to at least acknowledge that just austerity is not going to do it. It also seems that people are beginning to realise Greece cannot take anymore pressure/budget cuts.

      • Your time to gloat will be if there is a day of a full European federation which has printed a gazillion, issued eurobonds and taken control over the finances and politics of the region populated by Europeans, rather than Greeks, Germans, Italians etc.
        You can just feel the love in Europe, can’t you.

        This crisis is not over.The prospect of nasty events in the horizon hasn’t gone anywhere.
        Great if this deal does help the French banks -I mean Greek citizens- to muddle through and to sort things out a bit more. The future however does not look bright.

        • I agree Goldilocks but I don’t think either GB or myself were saying anything along those lines.

          That said, I am still optimistic that there will be a solution in the long term. Two years ago people were screaming that Europe’s collapse was imminent…

          I think sometimes can-kicking works. It’s expensive and frustrating, but it is better than a collapse of the financial system.

          This deal will offer a period of relative rest (well, compared to the last month or so). I hope this will allow more focus to be put on economic growth.

          and btw, I’m i love with Europe already. Go ahead and blast me. 🙂

          • I love Europe too but I do not love or even like the way it is being pushed to become something it cannot be.

            As you know, I am pro European collaboration but not pro the idea of a federation with shared debts. Corruption in the north is very low by global standards, whereas it is high in the south, with mafia even playing a big role in banking now (recent articles regarding Italy). Dangerous stuff IMO.

            To me it seems like it is in the financial interests of non European countries, such as the US, to see the federation idea evolve, but it is not in the interest of many European countries with stable finances.

          • To clarify, I do not see it happening soon, nor would I want it to happen soon for the reasons you mentioned but also simply because the people do not want to see it go that way now.

            50-80 years from now though, who knows. 🙂

  5. I wouldn’t be celebrating just yet. Let us await the outcome of the April elections, as there is a chance of the far left forming a coalition government. I believe they are on the record as saying they would not honor the deal, or at least be seeking modifications to the deal.

    As Goldilocks pointed out, the Greece saga has been a great drama which has captivated everyone’s attention, but the rest of the eurozone is pretty well in recession, and the future prospects for Spain, Portugal, Italy etc look dire.

    • I’m pretty sure the deal will include measures to assure Greece provides continuous compliance. I think this is exactly why there was/is such a mess in the first place… complete breakdown of trust.

      We need details! 😛

        • Thanks DE. I do note that the Guardian newspaper casts doubt on the legality of a new constitutional provision that ensures debt servicing payments are prioritized over other government spending. Not that democracy or the rule of law will stand in the way of any deal I fear.

          “Eurozone finance ministers have demanded that the Greek Constitution be revised to give debt payments top priority in government spending. The Constitution forbids any revision before May 2013, five years after the last. A revision is anyway impossible until after the April election and nobody can promise the result.

          Article 110 of the Greek Constitution lays down the conditions under which it may be revised. No revision is permitted until five years after the last (May 2008).

          The Constitution require two votes at least a month apart in each of which 60% of all members vote in favour of the need for a revision.

          In the first session of the following Parliament, the revisions are to be decided, to be passed by a majority of all members. If the ‘need for’ vote is passed by a majority but not 60%, the details must be agreed by 60%.

          The Greek Government can promise a Constitutional revision. It cannot deliver for over a year, during which the pernicious consequences of the suicide pact will be obvious to all.”