Remember May 2010? That was month of the first Greek debt bailout by the European Union, the International Monetary Fund, and the European Central Bank. $145 billion over three years.
July 2011 saw another bailout. Then there was the October 2011 50% write down of Greek debt. February 2012 another bailout. And then in August 2015 came what is, so far, the last and most recent bailout. (In the midst of all that there was the October 2011 50% write down of Greek debt.)
At the time of each one of these deals, critics, and I’d put myself in this camp, warned that the bailout and the accompanying austerity program that the Greek government agreed to in order to win the bailout funds didn’t fix the underlying problems in the structure of the single currency union. Each amount to kicking the problem down the road in the hope that someday it would solve itself or go away or something.
Well, it looks like we’ve, again, reached the point in the road where the problem wound up after that earlier kick. And this time it’s harder than ever to see how the European Union and the European Central Bank can kick the problem down the road again.
What we’ve got now is very clear evidence that the bailouts plus austerity solutions haven’t worked in Greece. Since the summer of 2012 Greek government debt has climbed to 183% of GDP from 159%. The economic austerity program imposed on Greece as the price for the bailout that kept the lights on and the doors open has caused the economy to contract. Rather than growing its way out of the debt crisis, the Greek economy has shrunk its way deeper into the hole.
And the evidence also very clearly says that this round in the debt crisis, like previous rounds, isn’t limited to Greece. If you’ll remember back to those days of yesteryear, the fear was that what were then called the peripheral EuroZone countries (Portugal and Ireland, for example) plus, maybe, Italy and Spain were headed to their own debt crisis. The current numbers put Italy in the same tight spot as Greece, unfortunately. Because the Italian economy has been struggling to post any growth in the years since 2012, Italian government debt as a percentage of GDP has climbed just as in Greece if not to as great a degree. Government debt in 2012 was equal to 123% of GDP. Now it has climbed to 133%.
As you might expect, the yield on Greek and Italian government bonds has been climbing along with investors’ worries. The yield on the 10-year Italian government bond has almost doubled since last fall to 2.16% today, February 9. The yield on the 10-year Greek government bond has climbed to 7.6% today from 6.7% back in the fall of 2015. For comparison the yield on the German 10-year bond is just 0.31%.
The European Central Bank’s policy of buying government and corporate bonds in order to push down interest rates and weaken the euro so that EuroZone exports would soar has worked pretty well for the export-oriented German economy. The German economy is projected to have expanded by 1.9% in 2016, slightly above the 1.8% growth in the U.S. economy. That compares to projected GDP growth of just 0.8% in Italy for 2016. The Greek economy is projected to have contracted by 0.3% in 2016.
The International Monetary Fund is objecting to kicking the problem down the road again. The fund has said that it doesn’t see the current plan for Greece being sustainable and is balking at kicking in more money unless creditors–which at this point means the European Central Bank and national central banks–write down the value of Greek debt. That’s forbidden territory as far as the German government is concerned. The German government is equally opposed to extending the current asset buying program at the European Central Bank and I think it’s safe to assume that the German government would be even more strongly opposed to expanding that program or to backing any rabbit that European Central Bank president Mario Draghi might be able to pull out of a very depleted bag of tricks.
The political situation has only worsened since the European Union and the European Central Bank last kicked the problem down the road. With elections in the Netherlands and France looming, and with anti-euro far-right parties leading in the polls in both countries, establishment politicians don’t have a lot of appetite for anything that might strike voters as a bailout for the Greeks or even the Italians. The U.S. election has replaced an administration that was supportive to the European Union project with one that has proposed sending an outspoken critic of the European Union as its ambassador to Brussels and which has already charged the European Union (or Germany at least) with currency manipulation.
After watching the three or is it four bailouts for Greece, I do have a bedrock faith in the ability of the European Union and the European Central Bank to again postpone the day of reckoning. But this will get nastier before any new stopgap solution is passed (while the Brexit talks complicate everything) and the available days for kicking the problem down the road are fewer than ever.
I think it’s safe to add turmoil in the EuroZone to your list of worries in the coming months.