Greece is a crisis postponed, not eliminated. The country's economy and its social fabric are unravelling at an alarming pace and the second bailout, combined with a sovereign bond haircut, will do next to nothing to stop the horror show.
The sad truth is that fixing Greece was never the rescue mission's goal. The goal was to prevent, or at least stem, euro zone debt contagion; to slow the run on the Greek banks for fear that the bank-run could hit other weak countries; to prevent Greece from high-tailing it out of the euro zone and printing drachmas; and to broker a "voluntary" peace agreement with Greek bondholders.
The math of the rescue package says as much. Of the €130-billion ($175-billion) in fresh loot from the European Union and the International Monetary Fund, very little is devoted to massaging the Greek economy, now entering its fifth year of debilitating recession, back to life. Most of it goes finance the swap with private bond investors (the "haircut") and prop up the banks. For example, about €30-billion alone will go for "sweeteners" to convince the private investors to visit the barbershop.
But won't the haircut help the economy in some way? You would think that knocking a bit less than a third off Greece's crushing national debt load of €368-billion (the figure at the end of December) by slicing 53.5 per cent off the face value of the privately held bonds would remove a brick or two from the wall of worry. It won't. While the debt crunch might make the IMF gnomes happy, the economy will remain distressingly uncompetitive.
Labour costs remain too high. The economy is sinfully undiversified and laden with low-value industries, like stuffing tourists onto cruise ships. Corruption is rife. The tax-collection systems are primitive. The professional protection rackets – from truck drivers to doctors – remain intact. The country lacks a working land registry. The bureaucratic red tape leaves entrepreneurs and land owners in despair. An Athens economist told me that the land of a relative was condemned decades ago to make way for a park that has never been built. But the government insists on collecting the property tax even though the land has been unusable and worthless since the writ landed.
As the Greek banks get propped up, and as investors in the sovereign bonds of other countries, like Italy, enjoy value pops in the mistaken belief that the Greek disease is contained, the economy remains in freefall.
This is what the English edition of the Greek newspaper Ekathimerini reported the other day: "As many as 12,000 enterprises are expected to close within the first quarter of the year … The General Confederation of Greek Small Businesses and Traders estimates that a total of 61,200 small and medium-sized enterprises will shut down in 2012 … The jobs lost this year in the sector are estimated at a staggering 240,000, after 150,000 jobs were lost in SMEs last year."
Yes, the IMF and the EU are pleading for structural and economic reform to make the Greek economy competitive. But forgive us for thinking that reform was an afterthought. If it were a priority, Greece's second bailout package would have been entirely focused on improving competitiveness instead of propping up the banks and financing a debt swap.
Even though the markets outside of Greece are calm, buoyant even, in the belief that the worst of the Greek debt crisis is over – the euro on Friday went to its highest level since early December – here's how the whole EU-IMF gamble could backfire.
Greece's economic collapse means the EU-IMF objective to reduce Greece's debt-to-gross domestic product to 120.5 per cent by 2020, from about 160 per cent today, is sheer fantasy. Even if the lower figure were attained, it would be unsustainable. Italy, whose economy is far healthier and more diversified, has 120 per cent debt-to-GDP and look how it is struggling.
As Greek society and the economy get crushed, pushing unemployment ever higher – the youth jobless rate is already approaching 50 per cent – the pressure to scrap the euro and print drachmas will only intensify. The polls say most Greeks still favour the euro. Will that remain the case in a year, when hundreds of thousands of more jobs are vaporized and the inevitable riots turn the streets to smoking rubble, as they did two weeks ago in Athens?
If Greece rids itself of the euro, so it can try to devalue its way to prosperity, all bets are off for the integrity of the euro zone. A Greek exodus would trigger an epic bank run not only within Greece, but within the other weak euro zone countries – Portugal, Ireland, Spain, Italy and possibly even France. Banks would collapse, taking the payments system down with them. Portugal and Ireland, realizing that the euro is "reversible," as Morgan Stanley put it, might decide to bolt from the common currency too. The euro zone could come apart at shocking speed.
Bailing out Greece is not the same as fixing Greece. An unfixed Greece is a grenade ready to go off. The shrapnel will travel far.
Eric Reguly