Greek Fire, Part 53

Felix Salmon weighs in on the Greek bailout, and why it will do nothing to put out the unquenchable Greek Fire:

Oh, and in case you forgot, this whole plan is also contingent on a bunch of things which are outside the Troika’s control, including a successful bond exchange. The terms of the deal, for Greek bondholders, are tough: there’s a nominal haircut of 53.5%, which means that you get 46.5 cents of new debt for every dollar of existing bonds that you hold. The new debt will be a mixture of EFSF obligations and new Greek bonds; the new Greek debt will pay just 3% interest through 2020, and 3.75% until maturity in 2042.

The plan assumes that 95% of bondholders will accept this deal, which seems optimistic to me. Bondholders are by their nature a fractious and contrarian bunch, and Greece is not saying that it’s going to default on holdouts. As a result, bondholders have to guess what might happen if they fail to tender into the exchange: they might get defaulted on and receive nothing; they might get paid out in full; or they might get defaulted on while being offered, for the second time, the same exchange they’re being offered right now. Some of them, especially the ones holding English-law bonds, might well be tempted to hold on to at least some of their bonds, just to see what happens.

More to the point, the plan assumes that Greece’s politicians will stick to what they’ve agreed, and start selling off huge chunks of their country’s patrimony while at the same time imposing enormous budget cuts. Needless to say, there is no indication that Greece’s politicians are willing or able to do this, nor that Greece’s population will put up with such a thing. It could easily all fall apart within months; the chances of it gliding to success and a 120% debt-to-GDP ratio in 2020 have got to be de minimis.

So at most the EU has bought several months, possibly even into next year.  That's the best-case scenario.  the worst-case scenario is of course a massive uprising in Greece, the collapse of the government, and then Somebody Will Have To Do Something.  I'm not even sure if that collapse thing can be prevented at this point.  Portugal is teetering on insolvency, Spain is about to go ballistic with 20%+ unemployment, Ireland's economy is dead, the UK is being killed by austerity, and France and Germany are about out of options.

But most of all, Greece is now fully behind a brutal austerity regime.  The Greek people are the factor now, and how long their patience is.  I don't think it will last much longer.  They will eventually take to the streets in massive numbers and say "No more."  There will come a time when the Greek government will go down.

It may take Europe with it.  And that may take us down with them.