Greece's bailout will push it further into debt – and crisis.
Nikolas Giakoumidis/AP Photo
“People of Europe: Rise Up,” says their banner.
Greek communists are usually a reliable bastion of error and darkness. Their ideas are appalling. Their proposals are absurd. The only thing they are not wrong about is their opinion of the ruling classes – whom they regard as morons.
But this time it’s different. Leftist mobs, now throwing missiles at policemen in Athens, have the high ground. They just need to work on their aim.
The latest dollop of financial grease was announced two weeks ago. At a cost of 110 billion euros, Europe will pretend to protect Greece from its creditors and the Hellenes will pretend to put their financial affairs in order. Instead, the Greek affair will slide into a larger crisis. As we explained last week, all of modern macro-finance can be understood as an attempt to push problems into the future and onto people who were not to blame for causing them. Now we see the formula at work in Europe.
Greeks borrowed money they couldn’t reasonably expect to pay back. Foreign bankers – largely French and German – hoped to earn outsized yields by taking a risk on Greek debt. A just ruler would let them all collapse, and give them the boot on the way down. Instead, the knaves enjoyed their loot. And, under the terms of the bailout, the fools are supposed to get their money after all; it will be squeezed out of taxpayers all over Europe.
The plans of the ruling classes are not merely unjust. They are unworkable. Over the next three years, Greece will add $50 billion in deficits, stabilizing the debt at 150% of GDP. It will also need to come up with $70 billion to pay off debt that matures over the next two years. That is more than the amount offered in the bailout. Which means, Greece will have to borrow more money as early as next year, probably triggering another crisis. Plus, there are the other weak sisters and spendthrift brothers in the European family. Bailing them all out could cost as much as 1 trillion euros.
But the real problem is much deeper. It is philosophical as well as mathematical. Too much debt, like too much dying, is not a transitional state. It’s a final state. And once the soul has left the body, there is no point in trying to keep the husk alive. Similarly, when a debt cannot be repaid, there’s no use pretending. When you cannot keep up with the interest on a debt, it is added to the principle. The debt grows, becoming evermore unmanageable. It’s better to admit the error as soon as possible and start organizing the details of your financial funeral.
At present, the Greeks owe an amount about equal to 120% of GDP. Thanks to the bailout, it is scheduled to go up. The plan on the table stops the debt growth only after it has increased by another 30% of GDP.
There is the problem right there. Today, the poor Greeks stagger. What is going to happen when they have an even heavier load? The meddlers hallucinate that they’ll get up, smash a plate and dance a mazurka. They even imagine that lenders – who required as much as 18% yield on 2-year notes when Zorba was still on his feet – will ask for only a fraction of that after his back has been broken.
Let us make believe that this were possible. Say, Greece is able to borrow in the future at just 8% interest. At 150% of GDP, this puts the annual cost of interest (assuming all the debt were at 8%) at about 12% of GDP. In other words, 1 out of every 8 euros of output would have to be put to the task of paying the carrying cost of accumulated debt. Greece only collects about 5% of GDP in income tax revenues – not even half of what is needed to pay the interest. It’s supposed to collect another 4% in taxes. Already, as much as 30% of the Greek economy has gone ‘black’ to escape taxation; imagine how crowded it gets underground when taxpayers realize that every penny they pay in income tax is used to protect foreign bankers from their foolish speculations. And imagine what happens when, instead of adding 10% to GDP by borrowing, the Greeks subtract 10% to pay back the debt.
Last week, schools, airports, hospitals and other services in Greece were shut down. A riot drew blood. Fifty-one percent of the Greeks said they will not go along with the austerity program. The others will turn against it once they see how it works. They were used to having their cake and eating it too. Now, they will neither have it nor eat it.
Rise up, ye Greeks! You have nothing to lose but the chains of debt! This is what revolutions are for.
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