February 22nd, 2012
NewsRescue- The bailout package being imposed on Greece-on the edge, is literally hopeless. This according to a leaked memo for European top officials obtained by Peter Spiegel of FT. The memo clearly expressed notable risks due to the extent of the Greece debt. The possibility for Greece to come out of debt in coming years, with the bailout measures were not demonstrable within the frame of the current proposal, the memo stated. Senior lenders like the IMF would have re-payment priority and this will discourage small lenders from buying Greece’s bonds in the future to relieve the debt.
It further stated that the devaluation of Greece’s economy will lead to an exaggerated debt to GDP ratio, a ‘debt trajectory’ as the memo called it, that will result in a 2020 160 percent of GDP debt. We can squarely conclude that Greece is in a mess, and the European Union can not get it out of it. What in the near future can we anticipate for the rest of European nations, like Portugal, France and Spain in tow for economic failure? It appears the riots and chaos that erupted in Greece last weekend is just a preview of how 2012 will be.
The story according to the BusinessInsider runs below:
At least Europe is no longer in denial about the effects of austerity in Greece, and the ability for the country to improve its economic situation via drastic cuts.
Peter Spiegel at FT has obtained a confidential 10-page memo distributed to senior officials in Europe over the last week, which lays out the truth:
It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.
“Prolonged financial support on appropriate terms by the official sector may be necessary,” the report said.
What’s more — and this Spiegel puts in a follow-up blog post — all the economic assumptions being used are too rosy, further rendering prospects of a successful bailout unlikely.
He also has some excerpts from the note, including reasonable downside expectations if things don’t go swimmingly:
Under the tailored scenario described above, the debt ratio would peak at 178 percent of GDP in 2015. Once growth did recover, fiscal policy achieved its target, and privatization picked up, the debt would begin to slowly decline. Debt to GDP would fall to around 160 percent of GDP by 2020, well above the target of about 120 percent of GDP set by European leaders. Financing needs through 2020 would amount to perhaps €245 billion. Under the assumption that stronger growth could follow on the eventual elimination of the competitiveness gap, the debt ratio would slowly converge to that in the baseline, but likely only in the late 2020s. With debt ratios so high in the next decade, smaller shocks would produce unsustainable dynamics, leaving the program highly accident-prone.
Again, basically what it shows is that European leaders can’t deny what everyone sees as obvious: That everything undertaken so far is destroying the Greek economy, and that further reforms will only make it worse.