Missing the Bigger Picture in Greece

The FT has an update on the Greek bailout:

Eurozone leaders face a new round of brinkmanship over Greece’s €174bn bailout after international lenders failed to bridge differences on how to reduce Athens’ burgeoning debt levels, pushing the country perilously close to defaulting on a €5bn debt payment due next week.

The sticking point:

The IMF remains more pessimistic about Greece’s ability to return to economic growth, the amount it will collect in its €50bn privatisation programme, and how much money is needed to recapitalise the country’s teetering banking system.

As a result, Brussels and Washington are 5-10 percentage points apart on where Greece’s debt will stand by 2020, the target date in the rescue programme for returning Athens to sustainable debt levels.

Further complicating negotiations, officials said the IMF is insisting Greek debt levels are reduced to 120 per cent of gross domestic product by 2020, while the European Commission is urging an easing of the target to about 125 per cent by 2022.

If past experience is any guide, the IMF is correct to be skeptical.  But the bigger picture here is that the Troika has repeatedly failed to hit this target of 120 percent, and this time will be no different.  120, 125, or 135 percent is more about political posturing than economic reality.  With any of these targets, the ongoing waves of austerity are doing nothing more than pushing Greece deeper into a death spiral.

Five years of recession and counting.  Unemployment above 25%.  Still too many sticks, not enough carrots.  And remember, the 120 percent target itself does not guarantee safety.  It is largely an artifact of wanting to justify the level of Italian debt.  From Reuters:

The 120 percent figure was fixed on because Italy had debts of 120 percent of GDP at the time and was managing okay. But Italy is a very different case to Greece, with high domestic ownership of its debt, and its situation is now less stable.

I understand this is considered political dynamite in Europe, but I still think it will be virtually impossible to fix Greece without a direct transfer of resources. A large, official debt forgiveness program.  I suspect the alternative – a failed state on Europe’s borders – will be more costly in the long-run.

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