Tuesday, 21 February 2012

Greece Debt deal: A redemption or a stay of execution?

Greek PM and Finance Minister

The debt restructuring deal just announced for Greece is like sweet and sour sauce.

It is sweet for Greece because it wipes away one hundred billion from Greece's debt obligations.   What is sweet for Greece is sour for investors, banks,  pension funds and private investors.

But it is also sour for Greece because even in the best of hypothesis, in spite of all the austerity which is forcing many Greeks to barely managing to keep their body and soul together, the country will still be left with a very high debt to GDP ratio, expected to remain at 120% by 2020 and that is if all moves as planned.
Even at the reduced level it is highly doubtful whether the easier debt load is sustainable.   Few countries have successfully pulled themselves back from such high levels of debt unless they command one or more of these attributes:

  • They are in command of a reserve currency which commands the trust of most investors throughout the world ( e.g. like the US and the US dollar)

  • The debt is mostly internal and there is strong home bias among local investors ( e.g. as is the case in Malta).

  • The debt has been used for productive and infrastructure investment which can be expected to generate strong economic growth ( certainly not the case of Greece where most debt has been used for consumption).
Greece is undergoing a nightmare like a family whose father always kept his dependants in command of luxurious life style but have just found on his demise that their luxuries were all debt financed and the bills have started coming in.  Negotiating a forfeiture of 33% of the debts with creditors,  still leaves the family in shock and unsure whether it can shed off their luxurious lifestyle, sell the family silver and work hard enough to meet their reduced but still very stiff obligations.

Personally I think that is is no redemption for Greece.  It looks more like a stay of execution.

Redemption requires much more solidarity from Greece's EU family especially from the strong core countries like Germany France and the like.  Not solidarity in terms of more debt forgiveness; solidarity in terms of more economic and fiscal coordination so that the strong countries pump up their economies to permit Greece and other periphery countries in distress to channel their spare capacity from reduced domestic demand to exports to the strong EU countries.

Ultimately I fear that growth can only return to the periphery countries undergoing austerity programmes if the EURO devalues against the USD ( and other currencies) from its present 1.32 to a more realistic 1.15.   And this cannot happen as long as Germany remains in the Euro.   As I have been repeating German surpluses are a problem for the EU and Euro sustainability as much as the deficits of Greece and other periphery countries.

Germany and its friend can run away for some time from this reality,  but they cannot hide.

See brilliant article in today's FT by Stephen King Chief Economist HSBC which makes much the same arguments as above ( that Germany cannot continue to impose its discipline on everybody else)  in the following link:


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