Time to put Greece out of its misery

By BJ Bjornson

I swear that watching the ongoing Greek debt debacle is like watching some guy with broken legs in a wheelchair getting “helped out” by a bunch of thugs who proceed to break his arms and then demand he get rid of the “luxury” wheelchair to pay for his medical treatment. Every so-called bailout package, thanks to their ever-more-onerous austerity measures that will crash a weak economy even further, seem designed to make the situation worse rather than better.

And as bad as this latest deal is, it is merely another stopgap measure, since the numbers simply don’t add up.

The problem, of course, is that all the observers and “segregated accounts” in the world can’t turn Greece’s economy around when it’s burdened with an overvalued currency and has no ability to implement any kind of stimulus. Quite the opposite: in order to get this deal done, Greece had to find yet another €325 million in “structural expenditure reductions”, and promise a huge amount of front-loaded austerity to boot.

The effect of all this fiscal tightening? Magic growth! A huge amount of heavy lifting, in terms of making the numbers work, is done by the debt sustainability analysis, and specifically the assumptions it makes. Greece is five years into a gruesome recession with the worst effects of austerity yet to hit. But somehow the Eurozone expects that Greece will bounce back to zero real GDP growth in 2013, and positive real GDP growth from 2014 onwards. Here’s the chart:




Note that the downside, here, still looks astonishingly optimistic: where’s all this economic growth meant to be coming from, in a country suffering from massive wage deflation? And under this pretty upbeat downside scenario, Greece gets nowhere near the required 120% debt-to-GDP level by 2020: instead, it only gets to 159%. And to make things worse for the Eurozone, the report explicitly says that under the terms of this deal, “any new debt will be junior to all existing debt” — in other words, there’s no way at all that Greece is going to be able to borrow on the private markets for the foreseeable future, so long as this plan is in place.

Magic growth is about right, given Greece is being forced to find 325 billion euros in savings with a GDP that is only 220 billion euros and falling. And yet look at that chart! The cripple, being forced to even further cripple himself, is expected to make a miraculous recovery almost immediately! The wishful thinking of this scenario is simply mind-boggling.

This is what happens when you replace empirical evidence and critical thought with ideology, stupidity parading as sense. Unfortunately for the Greeks, the real world consequences of such are going to be quite painful indeed.

Comments

[geoff]

Yeah, BJ, I watched part of the so-called press conference this morning on either RT or AlJazeera and all I could yell at the TV was why are you idiots smelling and why is any reporter in the room even taking you seriously. What a clown show, and given the general reporting on the matter I'll bet most average people think some how the troika is doing those lazy Greek grasshoppers a favour. Yanis Varoufakis has a nice dissection of the old Aesop fable as it relates to Greece here: http://j.mp/zdr4fw .

Half way down the page is what I think a telling interview with Mr Robert Halver, Baader Bank’s Chief economist. The guy obfuscates and seems to live in a world unpopulated with real human beings.