Leaked Memo Spells Out Extent of Greek Doom

The official news today is agreement on a new bailout package for Greece. The real news today is the leaking of a memo prepared for Eurozone finance ministers that lays out exactly how unlikely this plan is to work.

Greece can’t pay its bills. But even if Greece was relieved from the obligation to service its outstanding stock of debt, it still couldn’t pay its remaining expenses. It can’t devalue to try to boost its tourist sector. Instead, the rest of the Eurozone is heading into recession which hurts Greece’s main shot at export earnings. Draconian as the austerity that Germany, the Netherlands, and Finland are insisting on as a condition of their charity accepting the charity is the only way to avoid an even more draconian round of austerity. This austerity will, however, only further crush the Greek economy and make it less likely that debts will be paid. You can think of the problem here as one of credibility or lack of strong institutions. The correct solution is something like “here are our very generous terms for the short term, and in exchange you’ll do the following for us over an extended time horizon.” The probem is that the Germans (etc.) have no reason to trust that the Greek political system will deliver on said promises. Their leverage exists in the short-term, so they want to use it in the short-term even though the timing is very bad. Don’t expect to see this story resolved any time soon.

Here from the memo is the Chart Of Despair:

The “baseline” scenario here is in fact quite optimistic. Even the pessimistic scenario forecasts real GDP contraction of just 1 percent in 2013 for an economy that’s currently in freefall. It’s easy to sketch out a more pessimistic scenario. Imagine that austerity measures not only have their own usual short-term bite on growth, but that each round of cuts continues to prompt rounds of protests, strikes, and rioting that further degrade the country’s economic potential and tend to scare off tourists. Imagine that wealthy Greeks respond to this disorder by redoubling their efforts to spirit assets out of the country and its banking system. Imagine that Greece’s most educated citizens start trying to flee the increasingly desperate situation. Any smart country would be looking right now at the importation of skilled Greek professionals as a very winning economic strategy.