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Supporters from the Independent Greeks party wave Greek flags during a protest outside a debt collection agency in Athens last month. (Petros Giannakouris/Associated Press)
Supporters from the Independent Greeks party wave Greek flags during a protest outside a debt collection agency in Athens last month. (Petros Giannakouris/Associated Press)

Another Greek rescue, another Greek fudge Add to ...

Another day in Athens, another fudge. Greece has been granted another two years to knock down its gaping budget deficit, but extra time means extra funding and no one knows where that amount – about €30-billion – will come from. Greece’s debt sustainability is no better today than it was before the agreement was struck late Monday night.

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The two-year extension was seen as sort of a gesture of empathy for a country whose economy is on the verge of collapse after five punishing years of recession, during which gross domestic product has fallen more than 20 per cent and youth unemployment has climbed relentlessly, to more than 50 per cent. Under the new deal, the euro zone finance ministers, with the International Monetary Fund at its side, will give Greece until 2016 to achieve a primary budget surplus, that is, a surplus after interest charges on debt are stripped out.

Not surprisingly, Greek prime minister Antonis Samaras, the head of a fragile three-party coalition, and his finance minister, Yannis Stournaras, hailed the extension as a breakthrough. “It’s a done deal,” Mr. Stournaras said. “It’s very important.”

Left to everyone’s imagination was the plan to fill the funding hole. The finance ministers will meet late this month to hash things out and you can bet another fudge is in store. The least likely funding scenario is more loot from Germany, the biggest single sovereign sponsor of Greece’s two bailouts. With German chancellor Angela Merkel facing an election next year, and the German voters in no mood to fund a third rescue (then a fourth and a fifth?), a mish-mash of stop-gap measures will no doubt be found.

“The most likely outcome of the next two weeks should be a typical euro zone fudge: Lower interest rates on the current Greek loans and an extension of the loans,” said ING economist Carsten Brzeski. “Imagination or creativity has no limits.”

The question is whether debt extension would, in effect, be yet another form of default, this time involving OSI – Official Sector Involvement. The European Central Bank is the primary OSI player because it holds a lot of Greek bonds. ECB boss Mario Draghi has insisted the ECB will take no writedowns on the bonds, but any rescheduling of Greece’s debt would have that effect.

Greece’s two-year grace period is really more about politics than economics. The euro zone leaders, especially Ms. Merkel, are terrified of a Greek default, which would almost certainly send it galloping out of the euro zone. Their fear is that once the euro is proven to be reversible, Portugal, Ireland and perhaps Spain, the region’s fourth-largest economy, would not be far behind. A shattered euro zone would be toxic to banks, corporations, consumer confidence and trigger rampant inflation as local currencies, like the drachma, are reprinted and immediately devalued by 50 per cent or more.

So every effort is being made to keep Greece inside the tent. The trouble is, doing so does nothing to improve Greece’s debt sustainability; it makes it worse. Greece’s own 2013 budget plan, released last month, says Greece’s debt to GDP will rise to 189 per cent by the end of 2013. That’s an impossible debt load for an economy entering its sixth year of recession. The euro zone average is about half that and look how it, as a whole, is struggling.

Marc Ostwald of Monument Securities, quoted in The Guardian on Tuesday, was clear-sighted in his assessment of Greece’s horrendous debt problem. “As we have argued for a very long time, the Greek debt situation will always be unsustainable until its existing debt pile is written down or off to below 80 per cent of GDP, and this will have primarily to involve public sector holdings. There are no other solutions....other than outright default.”

Mr. Samaras must know this. His coalition could easily collapse next year. Syriza, the radical left party, is leading in the polls, with 26 per cent at last count, and might form the next government. Syriza is an anti-austerity party. But no more austerity means no more bailout loans, which in turn would mean default and exit from the euro zone. That is Ms. Merkel’s nightmare. The question for her is whether she can find ways to keep kicking the can down the road until she has safely won re-election.

Follow on Twitter: @ereguly

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