Greek Bailout Inked By Eurozone; Assumes Magic Growth
The Eurozone rescue deal for Greece relies on a ton of assumptions about how to get the country back to fiscal balance and how the markets will react.
At a press conference late Thursday, Chancellor Angela Merkel of Germany confirmed the aid package of 109 billion euros ($157 billion) for Greece. European officials also said that financial institutions that own Greek bonds would contribute 50 billion euros through 2014 through a combination of debt extensions and the purchase of discounted Greek bonds on the secondary market.
The outlines of the plan worked out by the 17 euro zone heads of government seemed particularly bold, dealing with the economic problems of bailed-out Ireland and Portugal as well as Greece, and calling for nothing short of a “European Marshall Plan” to get Greece itself on a road to recovery. The underlying economies of those countries — and others — remain remarkably frail, however.
On the central issue of extending debt, rating agencies had already issued strong warnings that such steps might constitute a limited form of default because creditors would not be repaid in full on the original terms.
The full text of the agreement is here. So the Eurozone ministers are essentially ignoring the rating agencies and hoping for the best. They’re lengthening maturities and putting the country into at least a partial default, with private investors taking a haircut and restructuring the debt. Also, the European Financial Stability Facility is allowed to purchase and hold government debt, buying it up from whoever won’t go along with the plan. This puts a lot of risk on their backs.
Paul Krugman just shakes his head at the most egregious part of the plan.
Here’s what leaped out at me:
9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest.
OK, so we’re going to demand harsh austerity in the debt-crisis countries; and meanwhile, we’re also going to have austerity in the non-debt-crisis countries.
Plus, the ECB is raising rates.
So demand will be depressed in both crisis and non-crisis economies; this will lead to a vigorous recovery through … what?
That’s truly insane, and it’s insulting to call it a “Marshall Plan” when it’s actually quite the opposite. Unless the Marshall Plan just backed up the truck at European banks and let the people starve.
Tyler Cowen writes that “If you had told me it was an Onion-like satire of all the previous plans, and not an actual serious plan at all, I would have believed you.”
The truth is that there’s no real possibility to do anything but a silly non-plan, which relies on a lot of complicated mechanisms and “don’t worry” phraseology, given the current structure of the Eurozone. This will not help Greece and Greece is not allowed to help themselves by leaving the currency and engaging in devaluation. Restructuring like this won’t work because it comes with terms that will ensure bigger future deficits.
It’s a small comfort that Europe looks as totally screwed as the US.