What happens when the Eurogroup decides to help Greece

From left to right: Mr Jean-Claude Juncker, Luxembourg Prime Minister and President of Eurogroup; Mr Olli Rehn, Vice President of the European Commission; Ms. Christine Lagarde, Managing Director of the IMF.

From left to right: Mr Jean-Claude Juncker, Luxembourg Prime Minister and President of Eurogroup; Mr Olli Rehn, Vice President of the European Commission; Ms. Christine Lagarde, Managing Director of the IMF.

Once more Eurozone and Greece made it. Using “creative accounting” they agreed that the over indebted country’s loan load will be drastically reduced after one…decade! Says the Eurogroup statement of 27 November 2012 on Greece: …in 2022 the debt to GDP (Gross Domestic Product) ratio will be substantially lower than 110%. But this is just a prediction. What about facts? Let’s follow them.

All along the last two and a half years Greece is under the “protection” of the troika of International Monetary Fund, the European Central Bank and the European Commission. Those three institutions theoretically are taking care of Greece’s financial problems, offer more loans and also dictate to the country’s government an economic policy mix of their choice including mainly draconian expenditure cuts. In this way ironically they managed to increase the country’s debt from 115% of the GDP in 2009, to 160% in November 2012. The reason was that the over the same period, Greece helped by troika, lost one quarter of its GDP. This is by far the largest ever recorded loss of income and product in a developed economy in peacetime.

In view of all that on Monday 26 November, IMF’s managing director Christine Lagarde, who thanks to Greece has gained de facto a permanent seat in the 17 ministers of Finance unit, the Eurogroup, stated bluntly that the Fund could not continue “helping” the country, by participating in the troika of auditors/lenders for the next four years, if the salvation programme didn’t foresee that the debt to GDP ratio would be around 120% in the year 2020.

For this target to be achieved however, the other 16 member states of Eurozone had to contribute more money. Hearing this Angela Merkel exorcised the prospect, visioning the face of the average German while voting in the next election.

What was left then to keep all sides happy was nothing else but “creative accounting”. And if this was to be proved not enough, they could also take recourse to “macroeconomics revisited”. Let’s see the details.

As everybody knows the debt to GDP ratio is a fraction. To reduce its value mathematically, there are only two ways. You either decrease the numerator or increase the denominator. In the numerator however there is only debt and so far Germany has also excluded the option of a haircut on official loans. The country’s voters wouldn’t like this either. Then, only the denominator is left to be “reshaped”, plus some minor parts of the numerator, like the interest rate and the grace period of loans, old and new. After all those tricks were tried the unholy debt to GDP ratio of Greece projected in the year 2020, obstinately remained above 120%. Dead end? Yes! But everybody sitting around the Eurogroup negotiation table in the early hours of Tuesday 27 November was sure, that if there was no decision for the Greek knot, next morning markets were about to crucify them all, Lagarde included.

So it took a bit more financial engineering and a lot of promises from Greece’s 16 Eurogroup partners, that they will do whatever it takes to reduce the country’s debt to GDP ratio to levels even below 110% before the year 2022. God be their witness. What was a surprise came to be that the IMF believed them and Lagarde stated happily that the Fund will continue “helping” Greece. If the hangman waits outside one admits everything. Remember Galileo Galilei? Reality however is always out there and nobody can avoid it. Wait and see what will happen, when the next instalment of aid to Athens will be due. The three troika guys will be biting their tongues. Why? Because if the kind of the new aid will be like the one the country received over the past two and a half years, it will be necessary the same discussion to be resumed again from point zero. And this towards the second quarter of 2013! Recession will again destroy any positive prospects.

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