No Surprise: 3rd Greek Bailout

IMF Official: Greece Will Need Third Bailout – WSJ.com.

Flag of Greece

Back in March, Greece was playing chicken with the troika trying to wring the best possible terms out of them for its 2nd Bailout. A market panic was averted as Greece acceded to troika’s (Germany’s) austerity demands.

At the time, it was quite obvious that the 2nd Bailout was merely a can-kicking exercise. The best case scenario envisioned the Greek debt to GDP ratio falling to a still unsustainable 120% of GDP by 2020. If you have been paying attention to the Eurocrisis, you should know that the best case scenario is always a delusion. It was clear that Greece would eventually need a 3rd bailout, but even I am shocked that it happened so quickly.

It is in all of the relevant politician’s interests to keep Greece afloat as long as possible. While some people claim that a Greek exit could be contained, that is a dangerous game to play. Maybe the banks and all of the businesses have succeeded in reducing their exposure to Greece and implementing a Plan B in case Greece leaves the Eurozone, but there will be unintended consequences.

As much as the Greek people protest and complain about their lot, they are addicted to troika payments just as much as the politicians on whom they direct their ire. Greece will continue to do whatever the troika says to keep the money flowing.

The troika cannot risk the consequences of a Greek exit. The potential costs are too great, and it is very cheap to keep Greece going. Greece is the the European Union as Indiana is to the United States in terms of size and economic importance. Don’t you think the United States would come up with a few billion dollars to keep Indiana afloat if its default threatened the existence of the entire country?

The Northern countries’ electorates won’t be happy with another Greek bailout, but they do not want an economic catastrophe either. They will complain, but ultimately they will pay. Here is my detailed reasoning, written last month:

https://dareconomics.wordpress.com/2012/08/27/merkel-is-setting-the-table-for-another-greek-bailout/

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