Greek debt sustainability is a mass delusion

Author: Adam Button | Category: News

The market isn’t cheering the 44 billion euros tossed into the Greek money pit today. What a shocker.

For Greece, it’s a staggeringly good deal — less interest, a longer payback period and refunding of interest paid, among other things.

The new cash is Greece’s reward for its budget-cutting vigor. The reforms fell hardest on some of Greece’s most-vulnerable while turning a blind the rampant tax evasion that costs the Greek Treasury billions.

But that’s not what undermines the IMF and the Eurozone finance ministers who brokered the deal. Here’s how they justified re-writing the bailout:

The outlook for the sustainability of Greek government debt has worsened compared to March 2012 when the second programme was concluded, mainly on account of a deteriorated macro-economic situation and delays in programme implementation.

What they are saying is that as a result of the utterly unforeseeable events over the past 8 months — like a weak economy and political turmoil — the target for a 4.5% primary surplus has been pushed back two years to 2016.

Now tell me what is more likely:  1) That the outlook in Greece has changed so radically in the past 8 months, or 2) That the Eurogroup forecasts were ridiculous to begin with.

If you chose Option 2 it’s probably because you’ve been following the Greek saga for the past 2 years. Every 6 months the Troika rubber-stamps a new set of forecasts and agreements — all of them leading to the magical 120% debt-to-GDP threshold by 2020 (from 189% in 2013).

This time they couldn’t even fudge the numbers enough to get to 120% so they deemed 124% as good enough and wrote the cheque. The numbers don’t matter because in 6 or 12 months we will do it all again.

Why? Because it’s insanity to think any country can cut its debt-to-GDP ratio by 65 percentage points in 7 years. Let alone one that has been in recession for five years and posted a deficit of 9.4% of GDP last year.

The real question is why anyone puts up with this charade.I see why Greek politicians do it — because they like their jobs.

The rest of the continent seems to think it’s a firewall to keep the bond vigilantes away from Spain and Italy. That’s a fantasy.

What will keep the bond market at bay is growth and balanced budgets. The problem is politicians — everything they have achieved is from telling lies. They don’t believe their own forecasts but have been conditioned to tell another lie so they can score another victory.

But debt is the ultimate scorecard and the market isn’t fooled.

Greece will default and the rest of the currency union will survive based on how much debt it has. In the meantime, Spain and Italy borrowing money at 5% and handing it over to Greece isn’t helping.