There’s something a bit surreal about the 130 billion euro ($173 billion) Greek bailout agreement reached early Tuesday in Brussels. Virtually no one save the European finance ministers who served as its architects believe the rescue package helps Greece in the long run.
Too bad Baghdad Bob wasn’t around to announce the deal. Remember him? He’s the guy who, despite all evidence to the contrary, told the world in 2003 that Iraqi troops were successfully repelling the advances of American soldiers in the early days of the Iraq War.
It was funny for a while.
The general consensus is that, at best, the Greek rescue package, which requires private investors to take a 53.5% writedown on their Greek bonds, temporarily staves off a messy default by allowing Greece to push past a March 20 deadline for repaying 14.5 billion euro in bond debt.
The euro, the single currency used by the 17-member eurozone, rose initially after the deal was announced early Tuesday. But the optimism was short-lived and investors soon began expressing concerns that the deal did nothing to address Greece’s broken economy.
In short, the deal essentially gives Greece enough cash to pay the interest on its massive credit card bill for a few more months. While the bailout takes a stab at reducing the principle and curbing the cardholder’s spendthrift ways, those goals are decidedly elusive.
What’s overtly missing from the bailout – and what’s been missing from the entire Greek ordeal – is some type of plan to spur economic growth in Greece, a plan that would generate additional revenues to help pay down that principle and reduce Greece’s need to borrow in the first place.
“The eurozone does not seem to realize that Greece’s problems will not be solved without a strategy for growth.”
- IHS Global economist Diego Iscaro
Analysts have been hard-pressed to explain why European finance ministers seem determined to craft a complex and risky rescue package rather than allow Greece to default and start over from scratch.
“I think it mostly came down to ‘pride’ and bad advice. Even at this stage they are desperate to avoid the word ‘default,’ yet how is a 53.5% write-down not a default?” asked Peter Tchir, a founder of TF Market Advisors in Connecticut.
It’s almost incomprehensible that Greece’s debt woes have tied up so much of Europe’s time and resources for over two years now. Greece, after all, accounts for just 2.5% of the 17-member eurozone’s GDP.
“Too many moving parts. Too many politicians. Too many interests. And too few people with detailed knowledge or expertise?” Tchir speculated.
The deal has its benefits: had Greece defaulted on its payments due March 20 it’s likely Greece would have been forced out of the eurozone and the unprecedented nature of that event would have shaken world markets. But many analysts believe the long-term effects of a Greek default have been greatly exaggerated. No one seems to know why.
In any case, restructuring Greece’s debt while at the same time scaling back some of Greece’s more lax spending practices – notably its overly generous public employee pensions – are a good start but something that should have been done years ago.
Greece has been mired in recession for five years and civil unrest has escalated as the day-to-day existence of the average Greek citizen has grown more difficult. Unemployment is at record highs, doubling in the past four years, and food costs are soaring.
Meanwhile, the latest rescue package demands an additional 325 million euros in spending cuts – “structural expenditure reductions” -- on top of the severe austerity measures already enacted.
“The main problem is that, after years of economic contraction, the eurozone does not seem to realize that Greece’s problems will not be solved without a strategy for growth,” said IHS Global economist Diego Iscaro. “The economy is immersed in an ‘austerity trap,’ where fiscal austerity and a deep recession feed each other with dire consequences.”
Let’s return to the credit card analogy. The bailout covers Greece’s interest payments for a while and staves off default. And the debt restructuring will pare down the principle a bit over time. But it’s going to take years for the budget reforms to have an impact and things could get worse for Greece before they get better.
If things get worse and the recession deepens, pushing unemployment even higher, political support for the reforms is likely to weaken. The local politicians who ultimately have to approve the austerity measures being handed down from above by the European financial ministers eventually have to be re-elected. Like all politicians, they’ll do what they need to do to accomplish that.