Assuming that the $146 billion bailout of Greece goes ahead as planned, investors can forget about a Greek crisis for about three years.
And start to focus on Spain. The debt problem there looks like it’s developing along exactly the same path as the Greek debt crisis. I’d call the current stage denial of the size of the problem: On Friday Spanish finance minister Elena Salgado announced a new austerity plan that would save $21 million a year by cutting 32 senior jobs in government and eliminating 29 public agencies. Not exactly impressive for a government facing a $140 billion annual deficit. (Spain’s economy is about one-tenth the size of the U.S. economy so that deficit is equal to about $1 trillion in U.S. terms.)
It’s by no means certain that the bailout plan agreed to by European Union leaders over the weekend will go through. The biggest source of uncertainty, as it has been through the crisis, is Germany. It looks like Angela Merkel’s government has the votes to get the plan through the German parliament but the measure faces a constitutional challenge in the country’s supreme court, and there is a possibility, albeit small, that the court could stay Germany’s contribution to the bailout, until it rules on the issue. It’s doubtful that the court would decide to throw the European Union into crisis—the Supreme Court follows the election results, as Finley Peter Dunne’s Mr. Dooley commented about the U.S. court more than a century ago, so let’s assume the deal goes through.
The bailout package from the IMF (International Monetary Fund) and the European Union would essentially remove Greece from the public financial markets for three years. With the Greek government able to borrow from the bailout fund at 5% interest—not exactly a bargain—Greece doesn’t have to worry about refinancing its debt—including the first installment on May 19—this year or next and probably not until 2012 or 2013. By that time, or before I’m sure the leaders of the European Union hope, the Greek government will have demonstrated its fiscal discipline and be ready to return to the public financial markets.
I doubt that the future will unfold quite so neatly. To meet the targets under the budget plan drawn up by the Greek government, the IMF, and the European Union, Greece is going to have to live with a sinking economy and falling standards of living for a long, long time. Standard & Poor’s calculates that the Greek economy won’t recover to its 2009 level of GDP until 2017.
I don’t see any Greek government surviving that long a period of pain. And with the budget plan set to send Greece into an even deeper recession than it is in currently, I just don’t see how Greece can escape its current debt load without an eventual default.
The $146 billion bailout just pushes off the deadline for that default.
But that leaves the world’s investors free to move on to the Spanish crisis.
The annual deficit is bigger. The country’s dependence on external financing much, much larger. Its politics more intractable with the national government facing 20% unemployment and thinly veiled hostility from some of the more important regional governments. And its politicians even more feckless. Prime Minister Jose Luis Zapatero continues to insist that the worst of the crisis is over even as the crisis gets worse.
And, of course, there’s the little problem of the Greek precedent. Having bailed out Greece, can the European Union not bailout Spain? The argument has been that Greece couldn’t be allowed to default because it would endanger, if not destroy, the euro. It’s not clear to me that this argument was actually true in the case of Greece, but it almost certainly is in the case of Spain. The Spanish economy is some four times larger than the Greek economy and big Spanish banks, unlike the biggest Greek banks, are deeply embedded in European financial markets.
However, if a $146 billion bailout for Greece was big enough to create serious political problems in Germany and France, then a Spanish bailout estimated at $500 to $600 billion is big enough to be politically suicidal for any sitting government in those countries.
In the Greek crisis, European Union leaders dithered so long before coming up with their plan that they made the crisis worse. I expect the same in the Spanish crisis.