With time running out, Greece reached a deal yesterday with European institutions that could start 130 billion euros (more than $170 billion) in bailout funds flowing. If that money isn’t on the way soon, Greece might default when its next bond refinancing takes place in late March. Despite all that money, however, little has really changed.
You could argue that progress toward saving Greece – and thereby postponing a global banking crisis – is one of the factors that boosted the U.S. stock market some 20% since October. But I’d attribute those gains instead to moderate improvements in the U.S. economy at a time when expectations were low and the stock market was depressed. In any event, Thursday’s deal with Greece was received with a yawn on Wall Street: The Dow closed with a gain of less than seven points.
Of course, saving Greece is important for financial markets around the world, not only for the Eurozone. And while it isn’t really possible to quantify the potential losses if things go wrong, one analytical firm guesstimates the following: A controlled Greek default would cost stocks 5% to 10% in the U.S., as well as in Europe. Two countries defaulting – Greece and Portugal, say – could result in 15% market declines. The total unraveling of the Eurozone could knock stocks down 30% or more.
So with so much at stake, why did the deal get such a tepid response? Three reasons:
The deal isn’t final. Greece may have reached a deal with the European Central Bank and other financial institutions, but there’s no guarantee that all 17 countries in the European currency zone will support the agreement. Moreover, private lenders who own Greek debt would have to agree to accept big losses. Because some of them have a kind of bond insurance, they might be better off with a default so that they would receive compensation. And finally, the Greek parliament has to vote on the deal – and some important Greek unions are planning to go on strike in opposition.
The deal won’t save Greece. The latest economic statistics show that the country is practically heading into a Depression, with double-digit declines in output. Austerity plans don’t necessarily work in such a situation because the economy can shrink faster than taxes rise, so that tax revenue actually declines overall. In addition, many of Greece’s problems are structural – including affluent people who avoid income tax and unnecessary workers on the public payroll. Bearing down harder on the people who do have productive jobs and pay their taxes will simply be demoralizing as well as unfair. Fixing the real problems will take time and cause economic and political chaos in the short run.
The real danger is that the contagion will spread. Fact is, the bankers gave up on Greece a while ago – debt is just too high and the economy is too lame. The true goal of current negotiations is to achieve containment. Greece can be dismissed as a special case, unless its problems start appearing elsewhere. The really scary thing is that Portugal may be poised to experience Greece’s problems. The weaker European countries’ debt is not yet as high as that of Greece, but if they continue down their present path, we’ll eventually see the financial equivalent of the movie Groundhog Day, as one after another they relive the Greek crisis all over again (except Germany and a few close friends, natürlich).
In a weird way, though, the greatest danger is that all the determined attempts to save the troubled Eurozone countries will succeed. Bailout plans – at least the ones that Germany will sign on to – require measures that at best will hobble economies for the better part of a decade. In the case of Greece, the deal essentially calls for austerity until 2020 to reduce debt to a still-hefty 120% of GDP. Eight years of misery to achieve an economy that is not catastrophic, but merely awful. That’s sure something to look forward to.