by Mark Blyth
When Ireland went back into the markets in 2013 Irish unemployment stood at nearly 14 percent while youth unemployment stood at 27 percent. Since then Ireland has undergone a remarkable recovery, buoyed by high value added exports and rising wages, not budgetary austerity. Ireland is, as Steven Kinsella put it, a Beautiful Freak.
But what of Greece? What does Greece look like today? Well, not so good.
First of all, Greece did not and probably will not benefit from ECB QE, which helped Ireland a lot. Second, the IMF still regards Greece as insolvent. Second, unemployment stands at 21 percent for adults and 45 percent for youth. The economy, which used to be 2 percent of Eurozone GDP, has shrunk to about 1.6 percent. Meanwhile, and unlike Ireland, the punitive screws of pointless austerity are still being applied on the assumption that Greece can run a budget surplus longer and higher than any country ever has in the history of the OECD.
In such a world, why would anyone lend Greece money? As ever, the answer lies not in Greece, but in Frankfurt and beyond.
The world is awash with capital. Companies and governments are net savers. Populations are aging. Interest rates are on the floor. And yet promises to pay pensions and earn above average returns have been made and must be fulfilled. In this regard, the ECB, and its twin the ESM, has come to the rescue, again.
Buying new debts from a bankrupt country would usually be regarded as folly. But if Greece ever gets into trouble again, the ECB, acting through its agent the ESM, can step into action, buying up the mess, as it has done before. By demonstrating through its repeated actions that Greece will never be allowed to default, even at the cost of perpetual debt servitude, the ECB/ESM is more than underwriting this new issue, its guaranteeing it. The fact that it has to be paid back by a bankrupt country is therefore irrelevant.
Get ready then, for the chorus of ‘we are back in the markets – its all good.’ And when you hear it, remind those saying it of this fact. In a yield-hungry world issuing debt is easy. After all, Argentina just issued a 100- year bond, and they have defaulted 8 times in their history. In this low-return world, investors are desperate for yield, and that gives issuers an advantage. To the point that when an issue by a bankrupt is underwritten by the ECB and the ESM, you would be daft not to take it.
Quite how Greece is going to pay this back when it cannot under any reasonable scenario pay back what it already owes without massive debt relief remains a bit of a mystery.