European Union

When Greece Defaults

The second European bailout of Greece will just delay the inevitable.


The second round bailout of Greek debt is just delaying the inevitable—Greece is going to default.

As details have emerged on the European Central Bank, European Financial Stability Facility, and International Monetary Fund joint agreement with private creditors and the Greek government on providing money to make sure Greece pays a March debt bill, it is increasingly clear that this deal will not be enough.

In broad strokes, the agreement will provide a EU130 billion ($172 billion) loan to Greece from Eurozone nations so it has cash to pay its pending debt bill and money to complete a bond swap with private creditors that will help reduce Greece's overall debt by EU107 billion.

In exchange the Greeks will have to fire another 15,000 public employees (on top of the 30,000 they were forced to lay off with the first bailout), cut their budget by another EU3.3 billion, and reduce the nation's minimum wage of EU750 a month by 22 percent for those over 25 years old, and by 32 percent for those 25 and under.

The target is to get Greek debt down to just 120.5 percent of GDP by 2020.

But a confidential 10-page report prepared for European finance ministers that was leaked on Monday suggests that the best-case scenario is closer to 130 percent of GDP by the end of the decade. Furthermore, the report suggested that if the bailout deal is not upheld on the Greek side, debt could rise to the 180 percent of debt-to-GDP range.

To put this in perspective, Greece should be at something more like 60 or 70 percent of debt to GDP to be a stable European nation.

The reality is that the first bailout provisions were not very closely followed. To say that 15,000 public employees will be fired is not to suggest they will be out on the street tomorrow. Rather a multi-year process is put in place to slowly work them off the public payroll. We've already seen a similar process done with the May 2010 bailout of Greece, where by late 2011 there were still no public sector workers who had been officially fired.

The second bailout is also based on overly rosy estimates of economic growth for Greece. Where the Greek economy has seen negative GDP growth of 7 percent recently and is projected to have no growth in 2012 or 2013, the target goal of 120.5 percent of GDP by 2020 assumes economic growth of 2.3 percent in 2014 and 2.0 percent in 2015.

But growth from where?

GDP growth of between 2 percent and 3 percent is about what the U.K. going to be able to muster in 2014. And since the Greek economy has little to build on, and much less substantial infrastructure, this economic target is beyond optimistic—it is ludicrous.

As Athens continues to burn and Greek citizens continue to reject austerity measures, the likelihood that the nation will stick with its pension reform, health care reform, and other budget reform promises is very low. The likelihood that economic growth will result in a debt-to-GDP measure of anywhere close to 120 percent is low. And the result of all this will be that Greece will again run out of money, be in need of a loan from its European brethren, and won't get it, forcing it to default.

As the leaked memo for European officials suggests:

The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned in the baseline… Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalisation may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays.

The frustrating part is that most analysts and finance ministers know this. They have the report. They can see the same numbers we do. But the unspoken thought is that the second Greek bailout simply represents all parties buying themselves more time.

The European governments want more time to get their fiscal houses in order before a Greek default trashes the value of the Euro. European banks want more time to prepare for the economic losses from a default. Italy, Portugal, and Spain want more time to see reform measures lower their debt levels. And collectively, the Eurozone wants more time to insulate itself from a Greek collapse and find a way to eventually push Greece out of the Euro and into the darkness as an IMF protectorate.

Although the bailout deal is political posturing and wishful thinking for anyone who believes this is the end of the story, it does serve as a helpful warning to Italy, Spain, and Portugal. Such sharp cuts in minimum wage, forced austerity, and the sense of a loss of democracy are not welcome pills to swallow—which is why riots continue in Greece even though there are few other options.

The Greeks would be much better off rejecting this deal and defaulting now. Another bailout might postone the inevitable until 2014 or 2016, but eventually, Greece is going to be unable to make its debt payments and there will be no European safety net. 

Anthony Randazzo is director of economic research for Reason Foundation.

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  1. Wrong, wrong, wrong. This time the bailout will work. Because this time, they really mean it.

    1. You see, it just wasn't enough money last time. This time it'll work. Promise.

    2. They're going to put Top Men in charge. Top. Men.

    3. Bi-curious? -Datebi*cO'Mis designed for bisexual and bi-curious individuals to meet in a friendly and comfortable environment. It hopes that all members can make new friends and establish romantic relationships.

      1. Speaking of Top Men...

  2. Although the bailout deal is political posturing and wishful thinking for anyone who believes this is the end of the story, it does serve as a helpful warning to the United States, Italy, Spain, and Portugal.

    1. the main monetary warning is dont lose control of one's currency.

      1. Warning of what, exactly? You can have an 11-figure bailout for the low, low cost of some political posturing?

        There's not a single one of the other hurtin' Euro statelets that won't be demanding the same deal, soon enough.

      2. Don't worry. Our currency is under control.

  3. Substitute US for Greece in every instance and you have 2014's article already written!

    1. There is one important difference. The US has its own currency, so default is much less likely. Not sure that massive inflation is better, but at least the Reason writers will still have something to do.

      1. Yeah, if you print your own currency and can force people to use it an official default is not going to happen.

        It will be an effective default though, once the economy just seizes up.

        1. Yeah, hasn't China already warned us about "quantative easing?"

          1. The Chinese invented paper. I think they invented written promises to pay 10 minutes later.

            1. They invented the death penalty for ducking the government's debased currency.

      2. Meaning our future isn't Greece, it's Argentina. I don't feel so encouraged by that.

        1. Ooooohhhhh... yay!!!1!1!11!!!

          We can eat dinner at 10 PM, after taking public transport to the local restaurant because our flat doesn't have a kitchen. Buenos Aires is sooo dreamy.

          And latin men!

          1. ..."our flat doesn't have a kitchen."

            But, it's CHEAP!

      3. "There is one important difference. The US has its own currency, so default is much less likely."

  4. What a bunch of irresponsible spendthrifts. I'm glad I live in the US, where good stewardship of the public treasury is the cardinal virtue of all of our elected officials.

    1. Sarcasm is a fraudulent weapon.


        1. Fascinating!

  5. They need more experience at being a country. Once they get that they'll be able to solve their problems.

  6. If I were Greek, I'd be sewing any extra Euros I can get my hands on into my mattress (either that or move to Germany). As much as I would like to enjoy some Schdenfreude about the failure of their ridiculous overspending, I can't help but think of how awful it is going to be when they are forced to drop out of the Euro. I have little sympathy for the idiots rioting, but I am sure that there are some honest people in Greece who saw this coming and who don't deserve to lose all of their wealth.

    1. Greece hasn't exhausted the option of a U.S. Bailout, Zeb.

      Shorter: Get your checkbook ready...

      1. Paulson is gone and Geithner told them to fuck off in January.

        The Era of Big Bailouts is over (2008).

        1. Define "bailout"

        2. Define "Big".

          1. Define "Big".

            Whatever it is, it won't be big enough.

            1. You will be banned!

      2. IMF to the rescue. Benny and the Inkjets will save the day.


        1. Yeah, after one supranational bails out a few banks and then boots them out, another will loot the drachma carcass.

      3. This is a US bailout. The Fed has set up a couple of trillion-dollar monetary facilities for overseas use. Can't recall the details, exactly, but the money trail for these bailouts runs right through the Fed.

        1. You would be wrong. The Fed set up a swap facility with the ECB and is charging .05% for it. That was in December. Since then the Euro/USD has turned in our favor a bit. A currency swap can hardly be called a "bailout" although both parties could very well benefit. The Fed did the same thing with Japan after the disaster there.

          I know that frightens libertarian sensibilities but its good for the US economy not to have a trading partner suffer.

          1. Gotta rebuild the house of cards. It won't fall down this time!

            1. shrike, answer me this:

              Why is gas nearly double what it was upon Sir Obama's inauguration while aggregate demand for oil has declined?

              1. Oil fell to $33/bbl in the Crash of q4 2008. It had been $147/bbl in July. Commodities notoriously overreact to demand fluctuations.

                1. shrike, take a broader measurement of the relationship between the two, US retail gas prices and and overall US oil demand, say over the last 8-10 years.

                  What do you see?

                  1. I see NOTHING, I hear NOTHING....

            2. By borrowing a few cards from our own house of cards!

          2. "I know that frightens libertarian sensibilities but its good for the US economy not to have a trading partner suffer."

            Shorter shriek:
            The top men are in charge this time. What can go wrong?

    2. "I have little sympathy for the idiots rioting"

      I have some sympathy. Might as well fuck shit up, right?

      1. exactly. I can't wait to loot some shit over here

      2. The idiots rioting continually astounds me. As in screaming at my computer monitor, "There's no more money to demand! Get it? Why don't you silly rioters grasp this pertinent fact?!!"

        please see link:

  7. The whole euro thing needs to be disbanded....

  8. Zareed at CNN says that it's happy times in euroland.
    Why you lie?
    You make the lackey scribes of the ruling class cry?

  9. At least the Greeks have been given the European right to seize privately-owned gold.

    1. Is this true?

      1. You'll have to look at the NYT for a link, I'm out of free looks for the day. But that's where I read it. The NYT wouldn't lie, would they?

        1. Here it is (f'in cookies):

          1. Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece's lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal, and that future bonds issued will be governed by English law and in Luxembourg courts, conditions more favorable to creditors.

            I skimmed the article, and this is the only reference to the word "Gold".

            I interpret this as the opposite. Private lenders have the right to seize gold from the Bank of Greece (I'm assuming Greece's National Bank) to get paid.

            Am I interpreting this correctly?

          2. Greece's lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal

            Nothing about private holdings. Gold as collateral. The Fins demanded that provision, I think.

            Greece's private lenders will agree to write down 100 billion euros of Greek public debt and take a loss of more than 70 percent in exchange for longer-term bonds

            So, nothing. Private lenders get nothing. Got it. And the Troika et al expect 95% voluntary participation rate. What's the CDS say?

            Pardon me while I go laugh blood out my nose.

            1. What's the CDS say?

              The CDS says what the ISDA wants it to say. And the ISDA says "No default."

            2. This is what happens when you invest in government paper.

  10. "If you owe the bank a hunnert bucks and can't afford to pay it back, you have a problem; if you owe the bank a billion dollars and can't afford to pay it back...."

    1. Fascinating!


        1. Awesome!

    2. In the 80's, it used to be that if you owed the bank a $100 thousand, you were in trouble. If you owed the bank $100 million, the bank was in trouble. If you owed the bank $100 billion, the whole world was in trouble. Seems kind of quaint now.

  11. The latest Troika demand is to amend the Greek constitution... I think to prioritize debt service but that can't happen until 2013 b/c they need a new parliament?? It's such a clusterfuck and changes hourly.

    March 20th is a huge day.

    1. There's even some rumblings about the possiblity of a Greek military coup of there's a default. Don't fuck with the Greek Army.

      1. This is SPARTA!

      2. The frequency of your linking to that picture is...interesting.

        1. His real name is Paulos and he dreams of a restoration of Greek hegemony in the West.

          1. ..."restoration"....???

        2. I apologize. Whenever the Greek Military comes up... I just can't help it.

          1. Those are some seriously high kicks. They must be experts in Greek martial arts. What's that called? Spartate? Zeuso?

            1. It's the pom-poms that make the uniform. They engender that kind of bad-assery that only the sharpest military uniform can convey.

              1. Truly dangerous soldiers don't need cool or manly uniforms. Which is how we know not to fuck with Greece. No wonder Europe keeps bailing them out.

                1. Any man (or woman) willing to charge into the field of battle wearing that uniform has my respect. Clearly, he fears nothing.

      3. Mediterranean national socialists? Oh fuck.

      4. You know what other European army used to raise their right arms like that...

        1. The Portugese?

        2. The French....but they had a white flag in it.

  12. OK you really have to wonder who comes up with all thats stuff??

  13. I wonder if there will be seamen discharged in Greece.

  14. in stark contrast to Greece's mortgaging of their whole country is Iceland which took a decidedly more fuck you approach.

    Iceland's $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based OECD estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to November estimates.

    Housing, measured as a subcomponent in the consumer price index, is now only about 3 percent below values in September 2008, just before the collapse. Fitch Ratings last week raised Iceland to investment grade, with a stable outlook, and said the island's "unorthodox crisis policy response has succeeded."

    1. Don't you just love it that letting insolvent banks actually go under is now an "unorthodox" policy response?

      1. It would be a Greek Unorthodox policy, for sure.

        1. "Greek Unorthodox"

          LOVE it!

      2. It also sounds like they told foreign investors they got nothing and gave all their citizens (not that many of them are there?) a break on their debts.

        May be harder for them to get credit and investments from abroad in the near future.

    2. It's not a coincidence that Iceland is on the path to real recovery, either.

      1. You think they're on the path to real recovery?

        You republicans are idiots. Try to reading something that doesn't agree with your limited world view.

        1. shrike |2.22.12 @ 8:21PM|#
          "You think they're on the path to real recovery?"

          OK, shriek, let's see the evidence.

          1. Asking Shriek for evidence! 10/10

        2. Like what, some Council on Foreign Relations report? Or IMF spiel?

    3. What this doesn't tell you is what happened to the kroner vs the currencies most of the people borrowed in to buy that property. Iceland did well under the circumstances, but ordinary Icelanders got fucking killed in the FX markets.

  15. Our commentary will make A Difference?!


    1. Yes, it is fun to make a difference.

  16. This is like the worst chat room ever.

    1. You should have been here in the Postrel era. That was a chatroom!

  17. "Another bailout might postone the inevitable until 2014 or 2016,"

    The reality is that Greece has already defaulted. There is no way in any sane world a 70% "haircut" is not a default. The only reason it hasn't been declared as such as that would enable the bondholders to finally (!) get their CDS money. It would also mean that the French (mostly) and German banks holding all that debt will be well and truly screwed. And we can't have that. As for Iceland? Merkozy and the Troika would rather Greece be burned to cinders and all remaining citizens reduced to permanent penury then let them "Go Iceland".

    The next interesting crisis point will be when the Greeks (try?) and hold their elections in April --the non-elected EU puppets would be thrown out and this latest "agreement" to make sure selected French and German banks get theirs would be tossed.

    1. The CDS positions are hidden in a dark market. I imagine a lot of CDS were bought by the eurobanks to hedge Greek bond positions.

      1. "Hidden in a dark market", stick to your christfags and bushpigs, you have no clue what you are talking about.

      2. hidden in a dark market.

        HAHAHAHA You're so full of shit it's coming out of your mouth.

      3. A lot were my CDs. Worth more than Euros.

    2. "enable the bondholders to finally (!) get their CDS money."
      That is too fucking funny!

  18. An interesting fact, in the "This time its different" book by Rogoff, Greece has been in default about 50% since its modern nation gained independence.

    1. To be in Europe is to be in default.

  19. The Euro depended on (past tense intended) the 'new soviet man' writ as the 'new soviet nation'. The presumption was that the various populations (and their vote-seeking politicians) wouldn't act in their own best interest.
    SURPRISE! The 'new soviet man' never existed and never will. So long as Greece (and Italy and...) can continue to suck wealth from those who produce it, they will.
    So long as the Euro represents a wish of people really wanting others to prosper at the cost of the people making that choice, the Euro is a slow-motion wreck. Period; it can be no other.
    The USSR took 70 years to prove Von Mises correct. The Euros have yet to institute mass murder, so it'll take a bit longer, that's all.

  20. Greece should be allowed to leave the Euro and default just as Argentina and Iceland have done.

  21. Democracy ain't it great???

  22. The best thing for Greece is truly to default as soon as possible. If they receive another bailout it will only be a slower more painful (if you can imagine) default process. I can see and understand why the EU is behind the bailout as I would be too, allowing to buy more time to prepare for the default of Greece and make the impact not as harsh for their interests.

    Government handouts, lazy workers, "entitlements", and other destructive socialist ideas will always end poorly. Especially when the said nation doesn't produce anything.

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