Other Voices
SATURDAY, AUGUST 17, 2013
Don't Ignore the Greek Problem
By WILLIAM THAYER
The ECB has put off a euro-zone crisis by printing bailout and bond money as fast as it can.The final cost: higher interest rates and tanking bonds.
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Tim Foley
Have you read anywhere that the Greeks will soon be requesting a third bailout? Probably not. Thus far this summer, the euro-zone leaders and the European Central Bank have successfully papered over the real problems in the south of Europe.
If only denial, smoke, and mirrors could solve the euro-zone crisis. The euro wasn't a bad idea, but the euro zone should have been limited to those countries that can make it without bailouts. That list probably does not include Greece, Ireland, Portugal, Spain, Italy, and Cyprus. Those countries will have to leave the euro, default on at least some of their debts, and institute their own devalued currencies. Then they can reform and hope to rejoin the euro at some future date.
In the middle of 2011, I published a book, Euro: How to Save It, in which I predicted that the first Greek bailout would not succeed, and that the Greeks would run out of money in early 2012. That's exactly what happened. I also predicted that the euro zone would collapse because of the Greek default. I was wrong on that one—so far.
What I completely underestimated was the willingness of the stronger European countries to bail out every troubled country. They operate on classic Keynesian assumptions: If you can just throw in a little more money, demand will increase, and everyone will live happily ever after. It's not working out that way, not even in Greece, which has received huge bailouts.
IN THE GREEK CRISIS IN mid-2010, the country had a gross domestic product of about $320 billion, a national debt of $390 billion, and a yearly budget deficit of $30 billion. The first Greek bailout was for $143 billion for over three years. It was easy to predict that the country would fail again, in early 2012, because the Greeks had to roll over about $40 billion a year in existing debt, plus cover the $30 billion annual budget deficit. Sure enough, the Greeks went through $140 billion in two years, and they were insolvent again by the first half of 2012.
The Greek debt had grown to about $490 billion, but the European Central Bank, the International Monetary Fund, and the European Union (often called the troika) let the Greeks default on 25% of it, a loss of roughly $137 billion to private bondholders. Then the troika gave the Greeks another, even larger bailout of $220 billion that all sides said should last until 2020. How much of that $220 billion is left? Just $14 billion, barely enough to get the Greeks past the German elections in September. Few things in finance are more likely than a request from the Greeks for a third bailout.
The trend is not good. Consider:
Bailout 1: $143 billion
Default 1: $137 billion
Bailout 2: $220 billion
Total: $500 billion
Have you read anywhere that the Greeks will soon be requesting a third bailout? Probably not. Thus far this summer, the euro-zone leaders and the European Central Bank have successfully papered over the real problems in the south of Europe.
If only denial, smoke, and mirrors could solve the euro-zone crisis. The euro wasn't a bad idea, but the euro zone should have been limited to those countries that can make it without bailouts. That list probably does not include Greece, Ireland, Portugal, Spain, Italy, and Cyprus. Those countries will have to leave the euro, default on at least some of their debts, and institute their own devalued currencies. Then they can reform and hope to rejoin the euro at some future date.
In the middle of 2011, I published a book, Euro: How to Save It, in which I predicted that the first Greek bailout would not succeed, and that the Greeks would run out of money in early 2012. That's exactly what happened. I also predicted that the euro zone would collapse because of the Greek default. I was wrong on that one—so far.
What I completely underestimated was the willingness of the stronger European countries to bail out every troubled country. They operate on classic Keynesian assumptions: If you can just throw in a little more money, demand will increase, and everyone will live happily ever after. It's not working out that way, not even in Greece, which has received huge bailouts.
IN THE GREEK CRISIS IN mid-2010, the country had a gross domestic product of about $320 billion, a national debt of $390 billion, and a yearly budget deficit of $30 billion. The first Greek bailout was for $143 billion for over three years. It was easy to predict that the country would fail again, in early 2012, because the Greeks had to roll over about $40 billion a year in existing debt, plus cover the $30 billion annual budget deficit. Sure enough, the Greeks went through $140 billion in two years, and they were insolvent again by the first half of 2012.
The Greek debt had grown to about $490 billion, but the European Central Bank, the International Monetary Fund, and the European Union (often called the troika) let the Greeks default on 25% of it, a loss of roughly $137 billion to private bondholders. Then the troika gave the Greeks another, even larger bailout of $220 billion that all sides said should last until 2020. How much of that $220 billion is left? Just $14 billion, barely enough to get the Greeks past the German elections in September. Few things in finance are more likely than a request from the Greeks for a third bailout.
The trend is not good. Consider:
Bailout 1: $143 billion
Default 1: $137 billion
Bailout 2: $220 billion
Total: $500 billion
Nearly half a trillion dollars has gone down the Greek drain in three years—the three years during which the Greeks were supposed to restructure their economy and return to the private capital markets. In those three years, the Greek GDP has shrunk from $320 billion in 2010 to about $250 billion in 2013, a drop of nearly 25%. Unemployment has gone up, from 10% in 2010 to 25% in 2013. These numbers are just about the same as the numbers for the U.S. in the worst year of the Great Depression.
Unfortunately, Greece is not the only problem country in Europe. Ireland and Portugal have national debts at 120% of GDP, and they continue to run big budget deficits. There's little chance they will be off bailouts and back to the bond market by Christmas. A second bailout is on the horizon for both countries.
Italy has a national debt of 132% of GDP, a continuing budget deficit, and a divided government. Its bond rating is two notches above junk, but somehow its 10-year bond rates are just 4.2% (versus U.S. rates of 2.7%). The inconsistency may be explained by some kind of sub rosa purchasing of Italian bonds by the European Central Bank.
Spain has a national debt that is in control, a budget deficit that is not in control, and a real-estate bubble that is about to pop. Spanish real estate tripled when U.S. real estate was doubling. What happened to our real-estate prices and our banks has only just begun to play out in Spain.
Thus far, ECB Chairman Mario Draghi has postponed a euro-zone crisis by printing bailout and bond money as fast as he can. When it becomes obvious to investors in Europe that this can't continue, money will flee to safer places. To get that money back, the ECB will have to allow interest rates to rise—a lot. That is what governments have to do when their debts become unsustainable. As everyone knows and nobody remembers until it's too late, bond prices fall when rates rise.
Even the bonds that survive the crisis will be cut in value. The principal losses and the losses from default could total $4 trillion, or even more if the Europeans continue to put off their days of reckoning.
WHAT SHOULD HAVE the Europeans been doing the past three years to truly solve their problems? They should have been working harder, marketing aggressively, and innovating more. If they cut their cushy six-week vacations to the two-week U.S. standard, they would be working 50 weeks instead of 46 weeks. Simple math (50/46= 1.087) suggests they could potentially be growing their economies at better than 8% per year versus 1%. Of course, you have to be working on what the world wants to buy.
That's marketing. Compare Korea and similarly sized Spain. Korea sells cellphones, cars, ships, and electronic chips to the world, while Spain sells—what? Finally, the Europeans need to innovate as they once did during the first and second Industrial Revolutions. Sincé World War II, they missed the arrival of the computer, lasers, the Internet, fiber optics, oil/gas fracking, cellphones, and just about everything else.
WILLIAM THAYER is an author and financial analyst living in San Diego.
Unfortunately, Greece is not the only problem country in Europe. Ireland and Portugal have national debts at 120% of GDP, and they continue to run big budget deficits. There's little chance they will be off bailouts and back to the bond market by Christmas. A second bailout is on the horizon for both countries.
Italy has a national debt of 132% of GDP, a continuing budget deficit, and a divided government. Its bond rating is two notches above junk, but somehow its 10-year bond rates are just 4.2% (versus U.S. rates of 2.7%). The inconsistency may be explained by some kind of sub rosa purchasing of Italian bonds by the European Central Bank.
Spain has a national debt that is in control, a budget deficit that is not in control, and a real-estate bubble that is about to pop. Spanish real estate tripled when U.S. real estate was doubling. What happened to our real-estate prices and our banks has only just begun to play out in Spain.
Thus far, ECB Chairman Mario Draghi has postponed a euro-zone crisis by printing bailout and bond money as fast as he can. When it becomes obvious to investors in Europe that this can't continue, money will flee to safer places. To get that money back, the ECB will have to allow interest rates to rise—a lot. That is what governments have to do when their debts become unsustainable. As everyone knows and nobody remembers until it's too late, bond prices fall when rates rise.
Even the bonds that survive the crisis will be cut in value. The principal losses and the losses from default could total $4 trillion, or even more if the Europeans continue to put off their days of reckoning.
WHAT SHOULD HAVE the Europeans been doing the past three years to truly solve their problems? They should have been working harder, marketing aggressively, and innovating more. If they cut their cushy six-week vacations to the two-week U.S. standard, they would be working 50 weeks instead of 46 weeks. Simple math (50/46= 1.087) suggests they could potentially be growing their economies at better than 8% per year versus 1%. Of course, you have to be working on what the world wants to buy.
That's marketing. Compare Korea and similarly sized Spain. Korea sells cellphones, cars, ships, and electronic chips to the world, while Spain sells—what? Finally, the Europeans need to innovate as they once did during the first and second Industrial Revolutions. Sincé World War II, they missed the arrival of the computer, lasers, the Internet, fiber optics, oil/gas fracking, cellphones, and just about everything else.
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