Greece is Fixed Again

Troika Greek GDP Forecasts

Grexit ‘dead’ as €34bn loan agreed –

Greece gets new EU aid, declares Grexit era dead | Reuters.

Today Prime Minister Samaras declared an end to the talk of a Grexit. He made this statement totally bereft of irony as it was his New Democracy party that cooked the books for several years with the fraud being discovered after they were voted out of office in 2009. In a destabilized Greece, they were able to regain power this year.

The EU approved €34bn in aid to be released next week with €15bn granted in drips and drabs until March contingent upon the Greek government approving and implementing various reforms.

According to the mainstream media, this deal averts a “catastrophic” default, which is technically true. The ratings agencies do not have a catastrophic default rating, but Greece has been placed in selective default by S&P.

The usual suspects all stepped forward to laud the deal. Jean-Claude Juncker is convinced that the program is back on a sound track. But he also believes that when things get serious, you have to lie. With 26% unemployment and cratering GDP, things are serious.

Christine Lagarde also lends IMF support to the deal stating that the debt buyback and the pledge of additional debt relief would ensure that Greece’s debt will fall to 124% of GDP by 2020 and substantially below 110% by 2022. What she doesn’t tell you is that the only way the projected debt reduction will occur is if the Greek depression ceases after German elections and GDP begins growing over 4% a year for eight straight years. In fact, the troika has a history of overestimating the denominator of the debt to GDP ratio so that the final number is always unrealistic as illustrated in the chart above. Garbage in, garbage out.

Ollie Rehn is so bold about this new plan that he likens those who have been predicting a Grexit to Cassandra. As a drab, gray bureaucrat, Mr. Rehn can be forgiven for having no sense of irony. Cassandra was a woman from Greek mythology who was given the gift of prophecy. After angering Apollo, he cursed her, not by taking the gift away, but by ensuring that no one would ever believe her prophecies. Who is really cursed here? Is it Cassandra or those who fail to heed her warnings?

The Greek situation is nowhere near being resolved. The 2nd Iron Law of the Eurocrisis tells us to ignore the politicians and focus on the numbers:

Which conclusion can you draw from these numbers?

GDP has had one quarter of positive growth since 2008, and the trend is stagnant. It will have to grow a long way just to break even let alone equal the troika forecasts above.


Free falling GDP has two adverse consequences. Employment will continue to suffer and the trend of employed persons shows exactly that. Total employment peaked in 2008 and has been falling ever since.


Falling employment means that there are less people paying income taxes and value added taxes on purchases. The government budget deficit has not improved as dramatically as the cuts and tax increases would lead you to believe:


Mind you, the improvement that you see was not achieved solely by Greek austerity. The bailouts have reduced the interest rate on its existing debt and a significant line item in the budget.

The Greek game is not over. The budget deficit is forecast to be 5.2% or about €12bn, which means that they are expecting it to almost half. Yet GDP, the denominator, continues to fall as does revenue. Stagnation is more likely, and with it, the Greeks will need to fill another €1bn per month budget hole not accounted for by the 3rd bailout.

Greece will need a 4th bailout right in the summer just when German elections kick into high gear. Next time, listen to Cassandra.


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s