Spotted the huge flaw in the Greek bailout deal, yet?
No, it’s not the assumption that 130 billion euros will do the trick. It’s
not the assumption of GDP growth sufficient to bring debt-to-GDP down from 160%
to 120% by 2020. And it’s not the assumption that the Greek people and all the
other the Eurozone countries will sign up to the deal. It’s not even the
assumption that Greek bondholders will take a 70% haircut.
Let’s go back to that debt-to-GDP thing.
The Greek
economy, having fallen 7% in 2011, turns on a sixpence (or a dime to US
readers) and manages to get back into positive territory by 2014 – which is a
condition of the bailout.
“Ability to pay” is (rightly) a condition of any loan, and in this case
a correlation is assume between the size of the Greek economy, the direction it’s
taking (i.e. growth or recession) and the generation of enough cash to repay the
interest and pay off the capital at a given rate.
Well, no-one’s actually said anything about repayment of
capital yet (or indeed of interest, if you think about it. The only
stipulation seems to be - aside from years of “austerity” for the Greek people - that
Greek GDP rises far enough to make the debt seem less big).
That’s a little like saying “Your credit card bills are massive – I’ll
only lend you enough to keep spending if you get a job with a salary that
covers 83% of your debts, instead of the current 62.5%.
"Don't worry about paying the loan back. Don't worry how we might feel if
you come back to borrow more (although you might guess at the interest we’ll
charge). Just earn more money and we’ll feel good about things".
And as if that isn’t complacent enough, here’s the big flaw.
Two things need to happen simultaneously – Greek GDP needs to rise inexorably
(and against every expectation) for years, AND the Greek Government needs to collect
more tax each year than it has ever done before, in order to (a) run the
country and (b) pay off the interest - and maybe some capital? - from its debts.
Tax collection in Greece is not what you might call
comprehensive. Or thorough. Or even effective. Which means that Greek GDP can
go through the roof and it won’t make the slightest difference to the ability
of the Greek Government to repay its debts (unless you count that as generating
the wherewithal to borrow more money, which isn’t really what we’re
after here, although that's what the deal offers).
In short, debt-to-GDP is a waste of time as a measure of Greek ability
to repay debt. The key in this deal is debt-to-tax
take. Unless that starts to look as though it will get some serious
attention, we’ll be back here in two years’ time, even if everything else goes
swimmingly.
The markets seem quietly accepting of the bailout, for now. Yet, the Greek people have a very long, very hard road ahead.The really crunchy question is not whether or not the markets like the deal - it's whether or not the Greek people will let it happen.
