Eurozone Spins Sustainability

Greece does not need debt forgiveness –

In order to apply pressure on the IMF to change its mind about sustainability, the Eurozone trots out one of its surrogate to argue that Greece does not need another debt write-down because the payments on the debt are affordable.

To make the IMF appear to be acting only because of its outstanding loans, he mentions that the IMF will benefit by the eurozone and ECB writing down their holdings.

This is true, but the real motivation behind the IMF’s position is that its shareholders, the rest of the world, believe that Europe is being treated with kid gloves.

IMF shareholders reason that if a developing country had Greece’s fiscal and economic profile, it would have been kicked out of the IMF program long ago. Therefore, Lagarde is acting to protect her institution by enforcing the “sustainability” definition agreed to in March.

As we have seen in the Eurocrisis, if the rules do not allow a politically expedient solution then ignore them. This has been the case with SMP and OMT, so it should surprise no one that the eurozone wishes to break its own agreement from March.

Rather than admitting that the goal will not be reached, why not just change the goal? The author believes that since Greece’s interest payments as a percentage of GDP are in line with those of Italy and Ireland that Greece’s debt is sustainable, too.

This reasoning conveniently ignores two facts. First, Italy and Ireland are in the midst of a debt crisis with unsustainable debt burdens. Eventually, they will be under the same stress as Greece, just not today. Sadly, this time is not different.

Second, the GDP assumptions used to make the author’s claim regarding interest payments are unrealistically high. Since the debt crisis began, the troika has consistently underestimated the capacity for the Greek economy to shrink. It has been wrong by several percentage points for four straight years.

Each year, Greece misses the GDP forecast. To keep the country on a sustainable debt reduction path, the troika responds by issuing even higher growth projections in the future. There is no reason to believe that the Greek economy is done shrinking in line with its budget cuts and GDP will be lower than forecast.

Nonetheless, the author wishes us to believe that the next forecast will be correct in spite of the evidence. Money and people are fleeing Greece, and unused capital is rapidly depreciating; these factors will actually shrink the output gap that will supposedly lead to massive growth from 2014-2022.

For all the talk, Greece has not reformed its economy as much as the legislation suggests. It’s one think to pass laws and another to implement them. Just like the Greeks do not pay taxes, they also do not follow laws that they object to.

The German-led Eurozone has a very simple agenda. Merkel made a pledge that Greece will receive no new money, and she will stick by this to get reelected in the fall. Once elections are past, Greece will be cut loose and forced to fend for itself. Only then, will we begin to hear from the politicians and its surrogates that Greek debt is unsustainable and that it needs to default and exit the Eurozone.



5 thoughts on “Eurozone Spins Sustainability

  1. Great stuff JMD! Just wondering out loud: If the IMF sticks to its guns and forces OSI haircuts, would change Draghi’s willingness/ability to go deep on OMT with Spain and Italy? My understanding from a quote from Charles Dallara at the IIF earlier this year is that a 100% severity loss on Greek debt would blow a 2X hole in the ECB’s capital base. So even a 30 or 40% write down would be very painful.

  2. So much for standing by your principles. Eventually, as you have stated previously, the Greeks will tire of the endless externally imposed austerity and self-deport from the Euro.

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