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Greek Debt – a matter of simple mathematics

by Aaron McCormack on February 7, 2012

Unfortunately there is no way to square the circle with Greek Debt.

Whilst it is quite possible that Ireland could end up in debt servitude for a very long time without catastrophe, the Greek situation is so severe so as to be unmanageable.

Whatever deal is cobbled together – assuming it is approved by the Greek cabinet and parliament – will surely contain some elements of fiction to make the mathematics work.

This happened in Ireland – and although the Troika have applauded Ireland for sticking to their austerity measures the growth rates in the Irish economy are so far off original predictions that some observers believe that a new bailout is inevitable.  If Europe is still in “extend and pretend” mode, I have no doubt that such a deal could be reached too!

But Ireland is a picnic compared to Greece in terms of basic sovereign finances.

It is clear that the austerity being demanded from the Greeks in return for a deal is so severe so as to make even the technocrat government think twice about agreeing to them.  I believe that their nervousness is not a simple matter of apprehension as to how it will play with the volatile Greek public – rather I believe that they are worried about the destimulative effects of those cuts.

This is where we get back to the mathematics.  Assuming the Greeks get some part of their debt forgiven, and assuming that they get a decent interest rate, their economy will still need to grow at a fair clip to be able to recover, not just tread water.  If you remove a huge amount of public spending, the economy will shrink.

I don’t think this can be done.  I cannot see a set of decisions that can make this work.

That doesn’t mean that a deal won’t be announced to great fanfare.  Europe is well capable of that.  But, like the last Greek deal that didn’t work, the devil is in the detail.  We will find, before long, that this solution has not worked either.

UPDATE WEDNESDAY 8th FEB – Reports from Athens and the Wall Street Journal say that the new deal with Greece is targeting a “reduction of Debt/GDP ratio from 160% today to a more sustainable 120% by 2020” (my emphasis).  Back to mathematics….all the best economists agree that once debt/GDP reaches 100% in a country, it will hurt long term prospects.  Basically the interest payments start to take away from the core functions of government and the resultant tax burden slows things down.  A negative spiral results.  If this is the target of the new troika deal with the Greeks then even a most basic analysis should find that it doesn’t work.  It will be fascinating to see how the “markets” react, given all the money and supposed talent they have on hand to look at these matters.

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