Friday, July 8, 2011

Get Money to the Greek

The International Monetary Fund just approved the 5th tranche of it's bailout package for Greece. The total bill comes out to 110 billion Euros and a whole boatload of new rules for the embattled country. Most of these are the standard "austerity measures" that everyone seems to be chattering about. But really, aside from creditor sentiment, the immediate employment of such measures has no bearing on Greece's current fiasco. In plain English, they need money. They need to pay off creditors and assure the world that they're solvent. Their previously loose policies and, let's be frank here, lying about their budget situation only served to exacerbate the amount of debt and to keep that hidden for longer. Now that the proverbial cat is out of the bag, it might seem prudent to raise the sort of money the IMF has and to hand it over to the Greeks. Unfortunately, it's not enough.

I don't mean they need more money. I mean it's too late. In 2010, Greek debt was over 140% of GDP. That's a big number on an absolute and relative scale. Let's put it this way, they're selling airports. You really need money if you're selling airports. Here's where the austerity measures kinda matter. If Greece was a magical country that could instantaneously and seamlessly implement these policies, then the bailout would work. However, this is not the case (obviously). The bailout will reduce the debt, no doubt, but unfortunately some old policies will remain in place for a little bit, and the debt will not continue to decrease at a fast enough rate to prevent default. The graph below illustrates this point.



The bailout is fairly easy to understand. It's a lump sum decrease. However, the part that follows might be problematic. As the country eases into new programs, it may have a hard time decreasing debt consistently. If there was to be a Greek default, it would happen then, I believe.

But here's the silver lining: this bailout is good. Why? In short, putting off the inevitable (or almost inevitable), is the correct strategy. A Greek default right now would cause Portugal to default too, and that ever so present "contagion effect" would appear. Of course, this is assuming Portugal is no longer a default possibility when Greece eventually does go under. That assumption may not be so great, but that's a whole other story. And you thought the U.S. had debt troubles?

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