Athens burns

Greece Is Still Doomed: Why the New Bailout Is a Fantasy

Europe kicks the can down the road, while Athens continues to burn

the Atlantic,

22 February, 2012

Greece has finally secured a new $170 billion loan from its European landlords, and the terms are just as unrealistic and doomed-to-fail as you expected. The fact that the country requires a second bailout that's practically the size of its economy -- now crashing through $270 billion and still falling* -- tells you what you need to know about the hopelessness of Greece.

The bailout plan offers financial assistance to Greece at sweetheart terms and asks bondholders to accept a 50 percent scalping. But the object of all this pain -- stabilizing Greece's debt at 120 percent of GDP by 2020 -- relies on fairy-tale growth figures that assume the Greek Depression will stop accelerating some time starting ... yesterday. Here's the fantasy chart, courtesy of Felix Salmon:

Check out that recovery line. It's as if somebody took a ruler and drew a random sharp angle between negative-7% growth and positive-3% growth. (When all else fails, break out the hope and protractors!) Meanwhile, on planet Earth, Greece's recession is getting worse with each passing quarter. The most highly titrated doses of austerity haven't set in, yet. The honest prognosis is for the Greek Depression to deepen, not mitigate, in the next year. For the economy to stabilize within two years would require the services of the Holy Trinity, not the troika.

This plan won't work for the same reason that no austerity and loan plan can work for Athens. Greece's private sector is in a free fall. Unemployment is cresting over 20 percent. Ideally, the government should act as the stabilizer of last resort, and the central bank should flood the country with money to avoid deflation and make exports more competitive. Instead, the opposite is happening. Government spending is down a whopping 34%, and Athens doesn't own the keys to the money-flood machine. The result is turning into one of the worst recessions for a developed country in modern history.

"Greece is totally gone," Desmond Lachman of the American Enterprise Institute once put it to me. "It's just a matter of time until they have a disorderly default." So why this foot-dragging, can-kicking exercise in futility? 

Kicking the can down the road is normally considered idle procrastination. This is different. This is deliberate procrastination. If Greece falls today, nobody knows what kind of economic domino effect it will have on other debtors like Portugal, Italy, and Spain, or the rest of the Europe. Europe has selected the muddle-through and draw-random-recovery-lines option. 

The honest and inevitable choice -- a wild default or even Greece's departure from the EU -- is impossible for euro ministers to imagine suffering through, for today. Meanwhile, Greece suffers.

***

As always, don't forget this: Greece has the worst unemployment rate for under-25-year-olds of any developed country, along with Spain. It is an utter disaster.