The latest Greek bailout has Euro zone leaders acting like the March Hare from Alice in Wonderland

Today has some of the elements of groundhog day as we see yet another bailout for Greece although these days the mainstream media uses the word “rescue” much more rarely. One strong element of such meetings is bombast and hyperbole from policians and as I like to operate in an equal opportunities fashion let me quote the words of the UK Chancellor George Osborne.

Greece had no alternative

Developments last night were very encouraging

In fact of course neither statement has any basis in reality. Only on Monday of last week I explained how there not only was an alternative but that it was and indeed is preferable to the ongong farce and tragedy being inflicted on Greece. And as I shall demonstrate below there is nothing “encouraging” in this deal as it has relied on fantasy to theoretically achieve a self- imposed target which is irrelevant and of no help to Greece.

On the subject of the media I watched some of the BBC’s Newsnight and after wondering if the BBC was attempting to make a 180 degree U-turn on the Euro project, Greece’s former Finance Minister Mr.Papaconstantinou uttered a rather chilling phrase when he called the Euro a “one-way ticket”. So much for elctions and democracy then…

The self-imposed target of 120% of GDP

Let us analyse this emperor with no clothes. Is there any significance in having a national debt which is 120% of your economic output as measured by Gross Domestic Product? The answer is simply no. There has been some analysis which establishes 100% as a measure and I can see some point in that both psychologically and mathematically.

The Euro zone,however, has two problems with using 100% as a measure. Firstly for Greece it looks unachievable without a very heavy dose of default. The other is that Italy has a national debt to GDP ratio of around 120% and if Greece aimed for a lower target there would be obvious repercussions for Italy. So there is a strong element of realpolitik here rather than economics.

Why would you aim to do it in 2020? After all Greece is in crisis now

This part is easy. Two factors coincide. Firstly politicians can indulge in their favourite sport of can-kicking as few to none of them will be in power in 2020! Secondly it allows them to use all sorts of assumptions in their calculations that because they are in the future they rarely get challenged. I have pointed out many times on this blog that future economic forecasts over the period of the credit crunch have been outrageously optimistic in the UK,US and Europe. They do it to make the debt burden look smaller. Yesterday someone who I do not often agree with David Blanchflower agreed with this point.

How have things gone with past efforts at this?

From the latest documemtation leaked to Reuters and the Financial Times.

a number of developments have pointed to a need to revise the DSA. The 2011 outturn was worse than expected, both in terms of growth and the fiscal deficit; the macroeconomic outlook has deteriorated significantly, due to events in Europe; the fiscal outlook has deteriorated due to the economy and due to delays in developing fiscal-structural reforms;

In other words when fantasy has a dose of reality it collapses.

Last night’s further dose of fantasy Greece’s future economic growth

To get anywhere near the target established above the Euro zone had the problem that somehow it needed to “improve” the numbers. It started mildly by assuming an economic contraction of 4.3% this year and a flat outcome in 2013 although already it is probably too mild. The current figures point to a worse outcome for 2012 and if there is any evidence for a turn-around in 2013 I hope they will present it. But then we see the dark-side of such analysis as look at Greece go!

2.3%; 2.9%;2.8%;2.8%;2.6%;2.5%;2.2%

You may have spotted that they over-egged the early numbers and then cut them back! If we look forwards we see that they expect economic growth in 2030 to be 1.4% which begs a question of why it will be better in the next decade.

The treatment of debt interest is maybe even worse

This section will read a little like the Mad Hatters Tea Party. In this the Euro zone or March Hare is forecasting that Greece will be able to issue new debt at just below 4% in the eraly part of the next decade and then just above it. Alice meanwhile will be pointing out that the one-year bond yield is over 600%, the two -year is over 195% and the ten-year is 34%.

Should he have a burst of sense the March Hare might blurt out that the “temporary rescue” for Greece shows no signs of having an end. Indeed prospective investors in Greek bonds may be unable to tear their eyes from this section of the proposed plan.

which essentially implies that any new debt will be junior to all existing debt

Is there anybody out there who wants to be a holder of second-class Greek government bonds? 

The Private-Sector Involvement or debt haircut scheme

As evening moved to night the early hours and then morning,sleep deprivation made the March Hare flutter before Eurogroup members eyes once more. His words shown below suddenly seemed reasonable.

Those investors who did not accept a 21% debt haircut will be keen to accept a 53.5% one!

Of course they will! Meanwhile back in reality I expect plenty of trouble from this. I hope that the new forecasts for Greek public expenditure allowed for expensive legal bills.

Official debt haircuts

These are noticeable in the main by their absence and I am reminded of the words of George Orwell

All animals are equal, but some animals are more equal than others

And if I may mix my literary allusions the March Hare is back again as the European Central Bank which bought Greek bonds at 80 which are currently worth 20 will share its “profits” with Greece. I kid you not! Does that mean that buying at 20 and selling at 80 creates a loss? Perhaps the March Hare can explain….

Just to be clear the ECB does have income from the coupon or interest-payments on the Greek debt that it holds. However this is far smaller than the capital losses described above and even worse is another “round-tripping” exercise. Greece is receiving bailout money from the Euro zone to help it pay the interest which this part of it is being paid back to the Euro zone representative the ECB. Yes taxpayers do not only subsidise the activities of private-banks these days they also do the same for central banks.

Whatever the cost you must protect the banks

Estimated bank recapitalization needs have increased . The Blackrock diagnostic exercise, the PSI exercise (including its likely accounting treatment), and refined estimates of resolution costs (as opposed to recapitalization costs) have pointed to higher needs than assumed at the time of the Fifth program review (50 billion versus 40 billion previously). Recoveries, through the sale of bank equity, are not expected to be materially higher in the medium-term.

You may note the last sentence too.

Meanwhile the Greek economy continues to struggle

I reported last week on the latest Balance of Payments numbers for Greece. The Bank of Greece has updated them and added in oil imports and exports as well as shipping.

In December 2011 the current account balance showed a deficit of €2.2 billion, up by €354 million or 19.4% year-on-year.

Not inspiring to say the least although fortunately the hopefully more reliable full year figures were better.

In 2011, the current account deficit fell by €1.9 billion or 8.3% year-on-year, to €21.1 billion.

The trouble is that for all the economic pain that Greece is suffering from this seems an awfully thin improvement. And it was accompanied by this from the Greek statistics agency.

The decrease of the New Orders Index in Industry by 9.4% in December 2011, compared with December 2010, was due to the annual changes of the indices of the markets as following: 

The New Orders Index in Industry for the domestic market decreased by 30.2%. 

The New Orders Index in Industry for the non-domestic market increased by 5.1%.

It would appear that collapse is not too strong a word for what has happened to domestic orders. The underlying index for new orders where 2005=100 is now at 75 and for the domestic market alone it is 52.8.

After reading this you might like to cast your eyes upwards to the latest Eurogroup economic growth estimates for Greece.


It would appear that there is to be no halt to the economic vandalism that is currently being inflicted on Greece. Another 3.3 billion Euros of public-spending cuts will be piled on an economy which is spiralling downwards in 2012. So we can expect more of the vicious circle of austerity leading to economic decline meaning more austerity is needed and repeat.

It will not be too long before bailout number three is required and as the amounts spiral it is quite plain that not starting the process with a debt haircut was a fatal error in methodology.


This entry was posted in Banks, Euro zone Crisis, General Economics, Greek Financial Crisis, Quantitative Easing and Extraordinary Monetary Measures. Bookmark the permalink.
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  • Cfk

    Mr Darling on R4 today: 
    “The second thing, which isn’t a problem that is just going to bedevil Greece, but it’s also affecting the other more weak economies in Europe, and that is, where are the policies that are going to get growth? Because if you don’t get growth you don’t get the income to get down your borrowing and therefore your debt, and I think that is a real problem now, because the eurozone, ever since last December, with this ridiculous treaty they have locked themselves into, are almost going to inflict perpetual deflation, and further cuts, further suppressing of growth, and that points me to the fact that I suspect Greece will be back at the table at some point, and if the eurozone isn’t very fortunate, other countries will be back as well, and that is highly unsatisfactory.”

    Apart from the fact that the crazy Greek fiasco continues unabated, this is a rare admission from a UK politician that the standard plan is to overspend versus income, borrow and rely on future growth to pay off resulting debt (plus inflation of course, that is never mentioned). It seems pretty clear to me that our finance ministers shove as much of current spending into the future as they possibly can, hoping that future growth will cover their profligacy. In effect, they are spending future growth and more (financing costs) so that we can experience the benefits of their current spending, often wasted (see MoD). No wonder that they are desperate for growth at any price. We have already spent it.

    How often do you see a politician admitting that this is the plan?

  • The_forbin_project

    well so long as the pie is growing then the bankers and the Rich that support them can cream off more wealth to themselves.

    The wealth of the middle classes has fallen for decades now hidden by debt – on credit cards or housing , actually both.

    Debt is not wealth! Debt can be used to finance a project to product wealth but that relies on a ROI .

    Back ground – all commodities are rising in price since 2005 and any surpluses are taken by Chi-india – look it up

    upshot is that there will be no growth to finance debt and no growth for the bankers and Rich to play smoke n mirrors with

    question ?  can a modern western economy really work in a era of no growth ( yet alone contraction – lets call it that instead of the newspeak “negative growth” !! )

    answers please


    PS: so how much did you say this will all cost ?  more than all China’s made in the past ten years??


  • Rmulberge

    I am simply amazed, I expected that the EZ ministers would grant the latest bailout funds but i would have thought that, given the time they have been kicking the can around, that they might have come up with some plausible explanation as to how Greece is to get itself out from the awful situation it is in. Not a word, or not one that I can believe even half of. No prospect of growth, the threat of returning for more ‘concessions’, more ignominy heaped on the ordinary Greek people, who in all honesty cannot be held responsible for the mess their politicians have created.
    I suppose my question is: when you add up the cost of the two bailouts so far, plus the haircuts on the bonds (340 bn Euros allegedly) and factor in the likely costs of future bailouts; would it not have been cheaper to write off the whole debt two years ago?

  • Pips

    To see the abject poverty and misery to be inflicted on Greece in the coming years by European politicians and bankers to support their ideology and wallet, it is debatable whether they should be charged with crimes against humanity.
    It wouldn’t surprise me to see, in a few years, charity adverts on TV from the Red Cross or Christian Aid or some such begging for donations for homeless and starving families in Greece as they do now for countries in east Africa.

  • Nemesisforpredators

    Great idea to compare this farce with the March Hare and Alice.
    Nevertheless the ultimate question, touched on by Pips, is where is the legitimacy of what is being inflicted undemocratically on Greece and for sure is being prepared for the other countries in similar circumstances?
    We really need to know if this is criminal behaviour. Can anyone help us to understand this issue? And what should be done to stop it?

  • Andy Zarse

    I was a tadge confused when I heard the news this morning. It seems Greece owed Eu107Bn and it’s been written off and replaced by Eu130Bn more. So a smaller debt that cannot be serviced is replaced by a larger one that can, on account of the growth it will bring despite swinging austerity, depression, stagflation and inefficiency. I mentioned this to a colleague, but fortunately he correctly pointed out that the financial geniuses had yanked the iron out of the fire as this time it was all different. Well thank goodness, I knew those EU wizards would come good…

  • Anonymous

    Hi Cfk

    I think Alistair Darling was an honourable Chancellor at a difficult time. In my opinion the “too big to fail” strategy for banks was wrong but there was no major political party suggesting a different tack. The outright flaw was paying 50p for shares in RBS which were worth 42p.

    So maybe he was being honourable again in a way…

    In my opinion our political class had two main flaws in the run-up to the credit crunch.

    1. They assumed the boom would last for ever and were encouraged by the economics profession with ideas of trend economic growth.

    2. They in the main believe that economic advancement comes from their spending of someone elses money.This happens in spite or perhaps because these days most politicians only have experience of politics…

    Both together make a dangerous mix.

  • JW

    Hi Shaun,
    Through the looking glass, the holders of English-law bonds are probably going to be paid in full because Greece can’t force a 66% CAC on them. So rather than get into endless legalities they will pay 100%. This could cost £20bn out of the $130bn, its possible no-one factored this in.
    Of course with Portugal having much greater %age English Law Bonds this couldn’t be contemplated, cost far too much.
    Oh dear oh dear……

  • Anonymous

    Hi Forbin

    To answer your main question I think that in a flat economy a modern economy would borrow from the future for as long as it could and so it might last longer than it might appear but the collapse would be more severe. One thing I have learnt over the years is that these things are often slow to happen.

    However a shrinking economy,Greece for example, would speed the process up considerably.

  • Anonymous

    Hi Rmulberge and welcome to my part of the blogosphere.

    Should the Euro zone persist with its self-defeating strategy it is not only possible but likely that they will deploy larger funds than Greece’s national debt.

    If you factor in the contagion too that has developed as a result it would definitely have been cheaper to take the debt over

  • Anonymous

    Hi Nemesis

    I agree that democracy is under attack and that it is failing in some areas. As I wrote in the article I was disturbed by Mr.Papaconstantinou’s statement that the Euro was “a one-way ticket”.

    What about the principle that future Parliaments have primacy over existing ones?

    My suggestion as a way forward with the MPC in the UK is to regain control by electing individuals with specific defined mandates rather than general ones.

  • Anonymous

    “So a smaller debt that cannot be serviced is replaced by a larger one that can,”

    The March Hare could not have put it better….

  • Fergus Meiklejohn

    I suppose a proper default would leave Greece unable to borrow any money on the markets for a considerable time, which would mean that in the medium term at least she would have to always balance her budget.  Wouldn’t this also lead to considerable economic contraction?

  • Anonymous

    Shaun, I agree with you that the latest plan from the Eurozone Finance ministers is even more chaotic than the event (Greece’s Debt Bailout) that they are trying to address. Your March Hare / Alice in Wonderland analogy is likely to be apt. The way the rules for sovereign bonds are being manipulated can only succeed in doing one thing – future EZ government issues are junk to private investors. Have I missed something ? What next from Mr Hare’s hat?

    Whose head is going to be removed by the Queen of Hearts. Do we have to wait until the next G20 Tea Party in March!!! ?

  • David Lilley


    I love to read your articles but I sometimes have to be your nemisis.

    May I just be indulgent for a minute.

    Lamb wrote the book on hydrodynamics that is still current 150 years later. Newton wrote the book on light. Mill wrote the book on two subjects that are still curent teaching today. Smith wrote the book on economics.

    Others have made comment on economics and even gained Nobel prizes but for the most part they have offered fairy dust. I have read two recently and they were jokers. The last is a current professor at the LSE.

    Mr. McCaurber was a better economist than Keynes. If we should turn to the Keynsian multiplier when we have 17% unemployment then why didn’t we use it when we had 15% unemployment. If it worked we would always have 100% employment. Subsidising a highway and a dam didn’t fix the first great contraction. WW2 and fighting for your life fixed it.

    Greece employed the magicians, Goldman, to lie their way into the EZ. And in 2009 the incoming socialist party found that the conservatives had been lying through their teeth and the deficit was not 3% but more like 9% and the Greek tragedy became public. They were enjoying a lifestyle that was funded by massive debt. Their choice, their responsibility. They hadn’t read Dickens. They begged for a fiver to get them through a bad patch. They got 110b Euro and made little change to their profligary, tax avoidance and corruption. They handed out sob stories bigger than Haiti (lets mismanage and they will right off our debt again and again). But if they had distributed the first 110 b to every citizen they would each have won the Pools and received 10,000 Euro each.

    Their problem is a big state. They have a very efficient private sector that cannot support a massive public sector. A bit like the UK where a public sector worker get 43% more than a private sector worker doing the same work but theirs is even more inefficient than ours.

    Thanks to their bad management they come back for a second bailout taking their scrounging to 50% of the EFSF and yet all the bets are that they will be back for more in 6 months.

    My charter would be:

    1. Fund NGOs to feed those ignored by the state.
    2. Prohibit further debt sales.
    3. Pay the 14.5b debt maturity with a loan to Greece.
    4. Give them more money in return for a business plan. That is, money to invest in the business plan and not money to excuse them from bad management. A Haiti lifestyle is not an option.

    Further. There is such nonsense spoken about democracy. Democracy is a place where there is debate and scrutiny in a talking shop. Debate and scrutiny usually means that the best laws are passed. It is also the only form of government where the ruling party can be replaced without the need for violence. Democracy was absent in the UK when Labour had a massive majority. There was no need for Labour MPs to attend Parliamentiary debate and take part in scrutiny. They just attended for the vote. Typically none attended the debate of finance bills, the most important bills.

    11m Greeks but not a single Democratus with an understanding of their great heratage. And obviously none who had read Dickens.

  • Davebalkwill

    Merkozy in Wonderland? With Angela as the Red Queen and Nicholas as the Mad Hatter? Hmm…may have legs (especially Sarky as the MH), but Apocalypse Later may be more apt.

    While EU enforcers strut as the dust settles on this latest deal (if it ever does – highly unlikely), it all counts for diddlysquat. Why? One word: Implimentation. It ain’t going to happen – the law enforcers on the streets in Greece are already sympathetic with those protesting, and the elephant in the room (the military) have never shown any aversion in the past to the odd coup when the generals’ best interests are threatened. For post-election in Greece (or before) a line from Apocalypse Now springs to mind:

    “Get your heads down and your people back – this is gonna be a big one”.

    As an aside, I am confused about one thing. Lucas Papedemos was head of the Greek national bank and directly oversaw Greek entry to the €. He was instrumental in fiddling/cooking the Greek accounts (along with vampire squid assistance) to gain them access to the pot of gold at the end of the rainbow – fact. (Err, that was before he got appointed to the VP position at the ECB as a
    reward for his complicity in a fraud of such gargantuan proportions it makes Nick Leeson look like a saint.

    My question is: Why is it, given his vast experience, he is now seemingly incapapable of making all Greece’s fiscal woes disappear under the carpet as he was so competent in doing a decade ago?

  • Nemesisforpredators

    Thanks much Dave for your insider info. Where did you find it? And what is more why is Papademos, with all that on his CV and how many others like him, not in jail?

  • Anonymous

    Hi Shaun

    Euro sovereign bond issuance – new credit protection and new gobbledigook : ESBPF

  • Nemesisforpredators

    All respect to your respect for democracy. But democracy is where in this fraudulent process? Being whipped out from under our eyes and we’re not reacting. Consequence : we are in the actual process of losing our democratic control of our own affairs. Hitler used similar strategy. So did Bush. One day your excellent blog will be censored out of existence if this goes on unchecked.

  • Davebalkwill

    Why isn’t he in jail? Good question, but money is power is money in a corrupt country, and Greece is no different from any other of that ilk…

    As to sources, nothing but applied logic – he was in charge of overseeing the move from the Drachma to the Euro (as detailed on Wikipedia), and we all know the Greeks were using a dodgy abacus for calculating fiscal status to comply with their access requirements. Papademos was the abacus slider-in-chief.

    An interesting read about how a lot of things tie together (nothing libelous, I hasten to add) :

  • Anonymous

    If Greece defaulted while remaining in the Euro, yes, she would have to balance her budget. In fact the proposed “escrow” arrangement forces her to do this anyway, really.

    If Greece defaulted and left the Euro, she would be shut out of international markets and also from all EU assistance. She would however be a currency issuer, so could print money to meet domestic needs. There would be a serious risk of hyperinflation from that and sharp devaluation of the drachma.

    Whichever option is chosen, further contraction of the Greek economy is inevitable.

  • JW

     The important point you missed is that the ‘Greeks’ you describe were are a very small percentage of the population , the same individuals who enjoyed backhanders from the German and French bankers who flocked to Greece. Indeed one of them who employed the vampire squid is now running the country again. All the ‘bailout’ money is bailing out the banks. The Greek population is seeing none of it.
    Having said all that there does appear to be some support for the ‘new order’ in Greek society as some see it as the only way to stop endemic corruption. Roughly the same perecentage that supported German occupation in WW2.

  • Apivdismenos

    the problem is that no one in greece ever raised that question! Everyday on the tv panels the so called ”experts” parade but none ever wonders what the f*** these bloody politicians are talking about….for christ sakes people are starving, abandoning their children, you have no idea all the misery the greek people have to endure because of their corrupt politicians

  • Anonymous

    Hi Shire

    You had me going for a minute then I remembered that this is the Euro zone and March Hare rules apply. Accordingly you deal with problems of leverage by creating yet more leverage and by offering partial insurance!

  • Anonymous

    Hi David

    If you want a Dickensian metaphor for the Euro Zone’s response to its crisis may I suggest the Circumlocution Office from Little Dorrit. It was manned by the Barnacles…

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  • Anonymous

    The kettle is on.
    The Queen of Hearts is ready for the next Tea Party.

    KoH (No relation)

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