The Situation
On April 22 Eurostat, the EU’s statistical arm, issued its first-ever report on the inner workings of the Greek government’s finances and clearly revealed what everyone had been suspecting for years: Greek government bookkeeping is horrible at best and criminal at worst. The new data clearly indicates not only would Greece have never qualified for eurozone membership in the first place, but also that Greek governments have continued to lie about the depth of their debt crisis even as they have sought EU financial assistance. The new information — which Eurostat cautions is not complete and will likely get worse — is that the Greek budget deficit for 2009 stood at 13.6 percent of GDP rather than the previously admitted 12.9 percent of GDP.
Bond yields on Greece debt immediately sharply increased April 21, hitting 11 percent for short term notes (Germany pays about 2 percent in comparison). In layman’s terms, investors no longer believe anything that the Greek government says, and any decisions by investors to loan Athens money will require promises of Olympian returns.
Greece can only afford these ever-mounting premiums for a short period of time, particularly as big tranches of debt roll over and have to be refinanced at these higher rates en masse. As such, STRATFOR views a default as inevitable — perhaps even imminent. Consequently, Greece has called upon the EU and IMF to activate their bailout mechanism.
The Process
The bailout will have two portions, one funded by the EU and the other by the IMF.
The EU part of the bailout is not ready, despite all the discussions and summits on the topic in recent weeks — in fact, the Europeans have not really figured out the terms yet. Despite all the drama of recent months on the issue, the bailout’s status can best be summed up as an agreement in theory rather than anything concrete. It will take a bare minimum of another week of talks to hammer out something functional, and that is assuming that everyone agrees on a general plan of action. Remember, there is no EU fund for this — bailouts technically are illegal under the Maastricht Treaty that created the euro — so each individual EU state will need to bring new money from its own recession-wracked economy to the table for this to work. The working estimate right now for the EU contribution is 30 billion euros.
The IMF portion of the bailout — another 15 billion euros — is simpler, as the IMF exists for situations precisely like this and has plenty of money on standby. However, the United States, which has veto power at the IMF, will not consider allowing the IMF portion of the bailout to proceed until the EU portion is committed. Regardless of domestic politics in the United States, Greece is not a banana republic. It is member of one of the world’s rich-country groupings, and the primary responsibility for assisting it lies with the European Union.
Moreover, while IMF loans may have considerably lower interest rates, they do not come without strings attached. The IMF will require more austerity than the Greeks already have put into place. This is not budget reduction at the margins, but cutting to — and through — the bone. The best comparison available is the IMF’s bailout of Latvia in 2009, which required 25-40 percent pay cuts for public employees. So again, we are looking at a minimum of a week of talks on the front end.
The Obstacles
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Greece itself. Greece has a very generous social welfare system, far more generous than Germany’s, so it will resist any more budget cuts. In many ways, this is an extension of the attitude that got Athens into trouble in the first place.
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Germany. Fresh from making years of budget cuts itself, Berlin does not want to pay for Greece to live the good life and will be pushing either for more austerity like the IMF, for deep EU/German control over the Greek finance ministry, or both.
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Legal complications. As mentioned before, this is all technically unconstitutional. There will be legal challenges (including, but not limited to, lawsuits) at national and EU levels, and some of this might require parliamentary approval as well. Should a single contributing state for whatever reason not belly up to the bar, the whole thing could unravel. (Why should Vienna pay if Madrid refuses to?) The ad hoc nature of this also presents problems: States will be asked to pay into the Greek kitty in proportion to their economic size based on their ongoing contributions to the EU budget. That will not sit well with states in recession and those that are normally net providers of EU funds but get relatively little back.
Break Points
The real kicker to all of this is that a bailout is not even certain. The German finance ministry has already laid out a six-step process for approving a bailout. First, Greece must officially ask (check). Second, the Europeans must examine if Greece really needs the help. Third, Greece must submit a restructuring plan to bring their budget back into balance. Fourth, the potential funders must approve this plan. Fifth, everything must be submitted to the European Council and the European Central Bank for approval. And sixth, this finalized proposal must then be approved by the German parliament. Put simply, all the sound and fury surrounding the Greek economy to this point has been the preamble. Only now are the Europeans – led by the Germans – getting down to brass tacks.
