Greek debt sustainability is a mass delusion

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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.

Author: Adam Button

Adam Button is the managing editor of ForexLive™. He was previously the chief currency strategist at XForex and has also worked with Intermarket Strategy. Adam believes there's an edge in knowing every tidbit of news. He was formerly the head of the markets team at the Canadian Economic Press and is a graduate of Ryerson University. Adam lives in Montreal, follow him on Twitter: @FX_Button.


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  1. Hi Adam,

    I have a suggestion that you can circulate through all the financial news media: what about we stop talking about Greece (all of us)? Just plainly ignore any new events related to Greece. If we can’t get a debt default to end this story once and for all, then we can give it a “news default”. If nobody talks about Greece, then there is no problem in Greece! It’s magic, like the IMF forecasts ;-)

  2. Next year it`ll be a rush to get banking union and supervision stitched up together with a road map for agered upon fiscal compact/union. Another round of LTRo`s to further recapitalise the banks and then they`ll let Greece leave but remain in the EU with parachute payments from every man and his dog. Question is: before or after German elections? That is Merkels quandry

  3. Nothing very surprising in this latest deal. Eurozone will either evolve into a full transfer union, or it will bust. Obviously the europols prefer the former, and so they will continue to buy time as they attempt to persuade their populations to go along. So, Adam, do you really think this kicks the can fully 6 to 12 months down the road?

  4. True reform will only come when Greece exits the EMU. Fact is when should Germany be telling Greece how to operate their gov?? Never. And same goes for Spain and Italy.

  5. merkel has elections; ergo, greece is saved

  6. Adam,re speech of Bernanke@1.30-PM,any Idee what he will be talking about?

  7. Gives opening remarks at College Fed Challenge. (Think the text was already released..A nothing-burger).

  8. Excellent comment Adam

  9. eurozone will not go bust…..that would drag the world economy into depression…it won`t be allowed to happen.

  10. Nice one Adam. And these politicians even dare talk about restoring confidence and credibility. What credibility?

  11. Good stuff Adam, i was just listening to Bloomberg on this issue and was keen on your take.


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