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The EU gives up common sense for Lent

by Aaron McCormack on February 21, 2012

When even the normally gullible media are declaring that the Greek Bailout cannot work, then you know there is trouble ahead.

Let’s examine the countless ways that this deal cannot work…

1. The mathematics are fiction.  Greece cannot possibly meet the growth targets outlined in the plan. The plan says they will move from being an economy that is shrinking at a rate of about 7% to an economy growing at 3% within a couple of years – despite the huge austerity plan that will pull billions of euros from an already-slumping level of demand.

2. The austerity itself will never get pushed through to the degree outlined in the plan and the plan has no contingency or margin for error.  Even in cost cutting, which is more predictable and controllable then revenue raising, life never works as planned.

3. If the Greek economy did miraculously grow as the Troika predicts, and even if the Greek government did miraculously make the cuts asked for, a target Debt/GDP ratio by 2020 of 120% is still completely unsustainable.  The 120% figure has been chosen because it is the Debt/GDP ratio of Italy for 2010 (actually 118%).  If Greece had to get to a position where it was below 120% to be solvent, the EU would be admitting that Italy is insolvent – and they won’t do that.

4.  This deal still needs to be approved by the Greek parliament and a series of other EU national parliaments where they will be picking up the tab – or throwing good money after bad.

5.  The private sector “voluntary” haircut of around 70% (at NPV rates) has not been formally accepted by the private sector actors.  No doubt they will be strong-armed into this but their hedging instruments (the infamous CDO insurance) will not trigger.  Again, the market is not allowed to do its job.

6. Portugal and Ireland need to get mad and get even.  Why do Greeks get to give a haircut to bondholders, but these other peoples, who acted less recklessly in some ways, have to pay 100%?  There are already clear requirements for a second bailout in both Portugal and Ireland.

7.  There is doubt about the legality of ECB actions as part of this deal where they are performing unsanctioned bond swaps and forgoing interest.

It is hard to fathom how much more of the precious resources of Europe will continue to be thrown on the bonfires of this debt crisis.

How bad does it have to get? How obvious does it have to become from a sheer matter of mathematics that these bailouts cannot work?  The media are speaking up about this deal in terms that border on derision.  We can only hope that the people of Europe will help their leaders see sense this Lenten season.

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