No Solution In New Greek Debt Deal

The Troika has reached a deal with Greece. The deal defuses the imminent risk of an uncontrolled bankruptcy by authorizing the release of emergency cash. The Greek government can now pay its bills for a little while longer. From The Guardian:

European governments and the IMF sought to bury months of feuding over Greek debt levels in a tentative agreement that should see the release of up to €44bn in bailout funds needed to rescue Athens from insolvency. But after almost 12 hours of talks for the third time in a fortnight between eurozone finance ministers, leaders of the IMF, the European central bank and the European commission struggled to reach a consensus, suggesting a lack of confidence that the effort to resurrect the Greek economy will bear fruit or that three years of European bailout policy was working.

Nothing has changed as far as the underlying crisis goes. All the variables that caused the crisis are still in place. The welfare state is structurally intact: it still makes all the same spending promises as it made before the crisis, and it still demands the same taxes as before. The only thing that has changed is that some taxes have gone up, the compensation levels in some entitlement programs are lower and the standard of government-provided services, such as health care, has deteriorated.

It was the welfare state that caused the crisis. Remember: the Greek government debt is nothing but a pile-up of years and years of budget deficits, and the budget deficits are nothing more than years and years of government spending exceeding government revenues. The Greek crisis has nothing to do with any “financial crisis”. The only solution is a structural phase-out of the welfare state.

Somewhere, the parties involved in the debt talks to save Greece know this. They also know that they are all ideologically married to the welfare state and therefore cannot bring themselves to put together a true rescue plan for Greece. The only thing they can muster is a plan that eases the burden of debt and give the country a little bit more time to breathe.

Back to The Guardian:

The meeting agreed to shave projected Greek debt to allow it to level at 124% of GDP by 2020, entailing a 20% cut in Greek debt by the deadline. With the IMF demanding a writedown of Greece’s debt by its official eurozone creditors and Germany leading the resistance to such a move, declaring it illegal, the meeting agreed on a mixture of measures involving debt buybacks, lower interest rates on loans, longer maturity periods on borrowing, and ECB returns to Greece of profits on its holdings of Greek bonds.

Note, again, that the focus of the talks has been entirely on variables related to the government debt, and the plans for how to pay down that debt. Nothing is said about what caused the debt or whether or not those causes are in place for the future. In other words, the Troika’s entire effort is static and frustratingly un-economic in nature.

As an interesting twist, the IMF has forced the euro zone countries to write off part of what Greece owes them. Almost one fifth of the IMF’s money comes from the United States, where Congress and the President are in precipitous negotiations over the federal budget deficit. This is not a good time for the IMF to come to the U.S. Congress and ask for a few more tens of billions of dollars to bail out a failing European welfare state. Better then to force the other failing European welfare states to swallow the bitter pill.

At the end of the day, though, all that this will accomplish is to further raise the tensions between EU member states over an increasingly insoluble crisis. Another article in The Guardian, this one from their Economics Blog, expresses some of the same frustration:

[There] has been an acceptance that Greece needs additional help to make its debt sustainable. The IMF has been making the point that Greece is going through an immense amount of pain for no purpose, since tax increases and spending cuts to reduce the budget deficit are being outweighed by the revenue loss from a country five years into a brutal depression.

If this is indeed what the IMF says, then the IMF is wrong. The brutal depression is caused by excessive government over-spending and has been severely aggravated by years of hard austerity policies.

Since the members of the debt-negotiating Troika completely lacks insight into these fundamental macroeconomic “mechanics”, it is safe to predict that they will continue to demand austerity packages of the Greek government until the full extent of the debt deal has been met. This means, plain and simple, that they will demand a perpetuation of the crisis, which further erodes the country’s tax base, government budget, overall economy – and social and political stability.

As a result, the debt reduction goals negotiated, and reported by the Economics Blog, are little more than fiscal delusions:

European policymakers, after some resistance, have now agreed that there should be a strategy for getting Greek debt down to 124% of GDP by 2020 – almost but not quite the 120% of GDP the IMF was calling for, and substantially below 110% of GDP in 2022.

And let’s once again review what steps they want to take to get there:

A number of measures have been proposed for achieving this objective. Greece could see the interest rate on its borrowings reduced by 100 basis points (a full percentage point). It could pay a smaller guarantee fee on its loans. It could benefit from extra time to pay back its debts. European countries could agree to return any profits they make on their holdings of Greek debt back to Athens.

This is all trickery to ease the cost of the country’s Everest-size debt. But unlike a real mountain, this debt mountain continues to grow as it is fed from the bottom by new deficits and an ever shrinking economy.

What the creditors are trying to do is really very simple. They know that the Greek government is paying interest and principals out of its current tax revenues. If they have any understanding at all of where the Greek economy is heading, they will realize that those tax revenues are not exactly increasing. But even a static understanding of what is currently going on in the Greek economy – a GDP in free-fall, personal income declining, sky high unemployment, depression-level dependency on government – is enough to bring about some insights into the burden that debt service payments place on the Greek government.

Again, though, any alleviation of the debt payment burden will entirely miss the target when it comes to Greece’s long-term macroeconomic outlook. Given the time and political energy that has been spent on stitching together this deal, and given its superficial impact on the Greek crisis, it is next to impossible to imagine how the same power players would be able to do anything that could actually help the country get back on its macroeconomic feet again.