This is the key to the eurozone mess: will Greece be able to shore up its finances and balance its budget by cutting spending and raising revenue, or not?
The answer today is: apparently not:
Greece’s budget deficit for the first nine months of 2011 widened 15.1% from a year earlier, as revenues continued to fall despite the government’s austerity cuts to spending. …
Net revenue in the January-September period this year fell to €34.9 billion, down 4.2% from a year earlier. … Ordinary budget spending for the nine-month period this year was up 7% at €52.4 billion …
The state budget reflects only Greece’s central government operations. It doesn’t include general government accounts, which comprise local government and social security fund accounts, a portion of military spending and other national accounts.
The Germans and the French are struggling to work out a compromise to rescue Greece, and perhaps the other PIIGS, that will be accepted by all eurozone members as well as the Greek government:
“We are determined to do what is necessary to guarantee the recapitalization of our banks,” Ms. Merkel said. “We will make proposals in a comprehensive package that will enable closer cooperation between euro-zone countries,” she said, reiterating her view that it would be necessary to make changes to European Union treaties to allow greater European control over nations’ budget discipline.
I think you can believe the first sentence in the above paragraph, but not the last one. The treaty changes will take forever and require member countries to give up some sovereignty over their budgets and spending. I doubt it will happen soon enough. That leaves us with the likelihood that Germany and France will bailout their banks (as we did in 2008 and 2009) and that Greece will default. Read that paragraph again and understand that bailouts assume some default by Greece on their debts held by German and French banks: otherwise no bailout would be necessary. All they can hope for is some kind of debt restructuring with Greece that will some day allow the Germans and French to recoup some of their losses.
The European Financial Stability Facility, or EFSF, which the Europeans are trying to put together, would be able to lend up to €440 billion ($589 billion) to protect banks and buy sovereign debt. The bonds will be guaranteed mainly by Germany and France. All the other countries’ participation in the fund will be minimal and are just window dressing for German and French taxpayers. Slovakia’s share (they finally approved the fund) of the guarantee is €7.7 billion; Germany’s is €211 billion. How it works is that the EFSF will issue bonds of €440 billion and they will be guaranteed by member countries. But in order to get the deal done, the market is saying they had to over-guarantee the bonds to the tune of €726 billion.
This plan doesn’t have much going for it but it is the only plan they have. Maybe Merkel and Sarkozy will come up with a miracle. But I think the scenario will be that Greece will default, there will be a workout of some kind on their debt by their creditor banks, and the creditor banks will get massive infusions from EFSF, their governments, the IMF, and the ECB. Maybe Greece pulls out of the eurozone.
Greece will then continue to slide into a depression. Spain, Portugal, maybe Italy, maybe Ireland, will face dire consequences since their problems are collectively much bigger than Greece’s. These other PIIGS will be forced to bailout their banks with help from the ECB. That will take huge amounts of new euros. Which means that the ECB will be these sovereigns’ lender of last resort and we will see inflation in the eurozone, perhaps high inflation. This will be combined with a recession in much of the EU as they undergo massive deleveraging. Then they need to re-think their monetary system (euro) that didn’t make any sense to begin with.
It’s not going to be pretty but it is unavoidable—the debt level is unsupportable.