So Greece has been “rescued”.
What we had overnight is an agreement in principle, not a final definitive rescue of Greece. Before we crack open the vintage Ouzo, let’s just see how it goes down with the relevant private-sector lenders, politicians in the only creditor country that really matters — Germany — and Greek citizens.
That “agreement in principle”?
- Even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of the new €170bn bail-out.
- Even in best case scenario, the country will need at least €50 billion on top of €136 billion.
- A German-led group of creditor countries – including the Netherlands and Finland – has expressed extreme reluctance since they received the report about the advisability of allowing the second rescue to go through.
The deeper truth emerges from the BBC:
“The funds that are coming in are not staying in Greece, are not being invested in Greece, are not here to help the Greeks get out of this crisis,” Constantine Michalos, president of the Athens Chamber of Commerce and Industry, told the BBC.
“It’s simply to repay the banks, so that they can retain their balance sheets on the profit side.”
This reminds me of a comment made by Andrei Canciu yesterday:
I think that even the original (i.e. current) architecture of the Euro would have been workable if it were not for the “innovations” in the banking system during the last 10 years. That is, overindebtedness would have always been solved through defaults by punishing the the irresponsible lenders (i.e. those tight spreads between Northern and Southern European countries), while the defaulting countries would have gotten some post-default aid.
I read somewhere that a Greek default would have been totally manageable 10 years ago. That’s no longer the case with the shadow banking system and the incomprehensible web of derivatives.
And there we have our problem: this isn’t really about Greece at all. It’s about the fundamentally perverse nature of the global economic system that cannot withstand a default or liquidation without bringing down the entire system. Even if China and Japan threw all their FX reserves into bailing out the Eurozone this would merely postpone the systemic breakdown. Because, the problem is the system. The global economic system needs to be able to withstand defaults, liquidations, crises. It needs to be robust. And the Byzantine workings of the shadow banking system — where everyone owes money to everyone else, and if one falls they all fall — is a hyper-fragile juggernaut that is bound to come down eventually. If it’s not Greece it will be something else. And that will be a good thing — because we will be abe to switch to an economic system less prone to absurd bubbles, hyper-fragility, and forced bailouts.
Anyway, I am still virtually certain that this bailout is a total sham, and — even if stomached by Germany and international creditors — is doomed to abject failure.
It’s demanding even greater and deeper austerity from an already-bleeding Greek nation. As I’ve said before, austerity in a depressed economy usually results in larger budget deficits as a result of falling tax revenues. Simply, this medicine is poison. Very shortly, Greece may well be back in the hole.