The day after the rescue

Still the Land of Extend and Pretend? What Being Back in the Markets Actually Means for Greece Going Forward

Mark Blyth
The devil, as they say in English, lies in the details. Being ‘back in the markets’, ‘turning a page,’ even declaring ‘the end of the Greek Crisis’ have all become commonplace expressions over the past few weeks. But what does this substantively mean? It means that an economy that has shrunk by around 25% saw, due to that shrinkage, its debts go up by about the same amount, despite near 100 billion Euro in debt being wiped off in 2012. Current outstanding Greek debt stands at 343 billion Euro. It now needs to pay a large chunk of that back to get back to where it was in 2008, with 109% debt to GDP.
The years of the Greek crisis (2010-2018) were the years that former finance minister Yanis Varoufakis famously described as the years of ‘extend and pretend.’ The EU would extend more credit (debt) to Greece that Greece would pretend to pay back. While most of the bailout cash prior to 2013 went through Greece back to Northern Banks, after 2013 most of the Debt was held by an opaqueprivate financial institution housed in Luxemburg called the European Stability Mechanism (ESM). It’s the debts held by the ESM, and the loans disbursed by the ESM, that have been the focus of the new game of extend and pretend that is called variously ‘debt-relief’ and Greece ‘being back in the markets.’
 
Consider the following. The ESM lent 86 Billion Euro to Greece between August 2015 and July 2018. The final tranche of these loans will not be paid back until 2060, with payments beginning in 2034. This ten year deferral of payments along with an interest rate reduction to an average of 1.62% across issues is the much heralded debt relief agreement of June 21st 2018.
 
All things considered, and given real ‘go to the market’ alternatives if you have Greece’s bond rating, this is not a bad deal – on paper. These measures, plus the final bailout cash being added to cash reserves, means that Greece will actually not have to return to the markets for funding for almost two years. Given this, the ‘return to the markets’ comes with some pretty large airbags, all of which makes buying Greek debt more attractive, hence recent bond rating upgrades. So, we are extending, but what are we still pretending?
 
First, this entire deal is predicated upon running a primary budget surplus (more taxes in than spending out), excluding debt payments, of 3.5 percent a year for another 5 years and then running about a 2 percent surplus until 2060. This is simply never going to happen. No country in history, let alone one with Greece’s still shoddy tax collection and damaged growth prospects, has run sustained surpluses for such a period.
 
It assumes that Greece’s growth prospects are basically better than everyone else in Europe and that such an upswing will be sustained for 40 years. Obvious things that could upset such assumptions range from (long term) ever-increasing climate-induced migration flows to (short-term) the hemorrhaging of capital from Dollar-long emerging markets in Greece’s neighborhood such as Turkey. 5 year projections in economics are a risky proposition. 40 year projections are fantasy objects.
 
Second, let’s deal with Greece as it actually is. Greece’s population has fallen from 11.12 million in 2010 to 10.74 million today. 300,000 people, most of them skilled, have left the labor market. That means that not only do you have fewer taxpayers to pay back that 86 billion on loans, the ones you have are lower income earners.
 
Today there are 3,840,000 Greek workers. Let’s assume a bit of return from ex-pats and make that 4 million. That gives each taxpayer 21,500 Euros of debt to pay off, starting in ten years. At an average maturity of 32 years, each worker will have to pay 671 Euro per year, for forty years, just to pay back the ESM debt, which would still only get debt down to 109 percent of GDP, where Greece was before the crisis.
 
Reducing the debt stock this way, in an aged economy of low wages and low productivity, is tantamount to saying to every young Greek entering the labor market in 2034 (assuming youth unemployment every gets below its current 40% level) with average low skilled wages at around 800 Euros a month, that they will be required to hand over around 15% of their post-tax income for every year of their working lives to pay back this ‘good deal’ that they got from the ESM.
 
People with assets struggle to understand the rise of populism. Here’s an easy way to think about it. If you have assets, default is a disaster. If I you are one of these future Greek taxpayers, default is my nirvana. Given this, you can extend all you like, and even pretend that you will get the money back – eventually. But do remember, it is a pretense.


Mark Blyth is a Professor of International Political Economy in the Department of Political Science at Brown University and a Faculty Fellow at Brown’s Watson Institute for International Studies. He is the author of several books, including Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (Cambridge: Cambridge University Press 2002, Austerity: The History of a Dangerous Idea (Oxford University Press 2013, and The Future of the Euro (with Matthias Matthijs) (Oxford University Press 2015).

2018-08-18 02:33:01
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