Greek Crisis Will Require €500 Billion ($700) in 2010-2020 – And it Won’t Be Enough

Brussels has failed to contain the Greek debt crisis, which is deteriorating rapidly. The first two bailout rounds, which amount to EUR 220 billion ($305 billion), will not suffice. In the next decade, Greece will require more than EUR 250 billion ($350 billion).

In the past two years, Greece has witnessed many demonstrations. But during the past week, the scale and militancy has reached a new level. In downtown Athens, the Parliament building on Syntagma Square was circled massively by the All Workers Militant Front, which is affiliated with the Greek Communist Party.

The strike was timed to coincide with a vote on yet more austerity and union-busting measures aimed at appeasing demands from the “Troika” – the European Central Bank (ECB), the European Union (EU) and the International Monetary Fund (IMF) – which threatened not to release the latest $11 billion ($15 billion) installment of the second-round bailout package if the measures were not passed.

The two-day general strike paralyzed Greece as violent attacks by police and anarchists caused injuries, arrests and one death.

Despite the fire and the smoke, the Greek Parliament did approve the austerity measures that fueled the protests. The measures will sharply cut public and private pay (even up to 50%) and pensions, force the privatization of public enterprises, and undermine collective bargaining agreements in the interests of labor flexibility.

These measures come on top of already painful, previously enacted austerity and privatization measures.

So is this, finally, the end of the Greek debt crisis? The simple answer is no; not even close. In effect, if the Troika sticks to its current policy approach, the Greek nightmare may escalate.

 

In 10 years, Greece will need another EUR 250 billion

In May 2010, the eurozone supported Greece with EUR 110 billion; now Athens hopes to stay afloat with another bailout round of EUR 109 billion. But neither will suffice.

For two years, I, along with others, have spoken for debt restructuring in Greece.

For two years, the European Central Bank (ECB) and most euro leaders shunned all talk about Greek debt restructuring. When the idea has been presented to ECB chief Jean-Claude Trichet, he has simply walked out.

And yet, recently the euro leaders did conclude that Greece probably needs a 21% debt reduction. By now, the consensus figure is close to 50% (and the right figure probably 60%-75%).

In return for the eurozone support, Greek Prime Minister George Papandreou and Finance Minister Evangelos Venizelos have struggled to implement painful, yet necessary structural reforms.

For all practical purposes, the Greek government is trying to achieve in two to three years the kind of privatization that normally requires a decade. But the government is losing ground, time is running out and social turmoil is deepening.

Neither the first nor the second bailout rounds – altogether some EUR 220 billion ($305 billion) – will contain the Greek debt crisis.

In the next decade, Greece will need at least another EUR 250 billion ($350 billion) or more. With current measures, it will not have access to capital markets until the early 2020s.  And that’s the benign scenario.

 

Worse ahead

In the past two weeks or so, the Troika has finally realized that all previous assumptions used for the Greek debt sustainability analysis have been wishful fantasies.

What is now certain is that, after a 5.5% contraction in the ongoing year, the Greek recovery will be substantially slower than anticipated. Second, privatization proceeds will be significantly lower than expected, from 1.5% of GDP in 2012 to 2-2.5% in the next few years. Third, Greek access to market financing is unlikely to be restored until in 2021.

In the coming years, Greece’s debt as of GDP will continue to climb and peak at 190% of GDP in 2013. Unfortunately, the debt dynamics is more likely to deteriorate than to recover.

If primary balances prove lower than expected, or if there are shortfalls with privatization receipts, or permanent growth and interest rates shocks, the Greek debt burden will be unsustainable.

Most importantly, Greece is not the only euro economy close to insolvency.