Leaked memo confirms that Greek bailout is hot air, Greece is doomed
Well austerity measures didn't work. Greece is still tanking. So maybe we should try some austerity measures? You know, we have to punish these Greeks for taking advantage of the credit we offered them at low rates. Hmm. That didn't work. I know, let's try some more austerity, but this time we'll call it a bailout!
--The Powers That Be
Leaked Memo Spells Out Extent of Greek Doom
The official news today is agreement on a new bailout package for Greece. The real news today is the leaking of a memo prepared for Eurozone finance ministers that lays out exactly how unlikely this plan is to work.
Greece can't pay its bills. But even if Greece was relieved from the obligation to service its outstanding stock of debt, it still couldn't pay its remaining expenses. It can't devalue to try to boost its tourist sector. Instead, the rest of the Eurozone is heading into recession which hurts Greece's main shot at export earnings. Draconian as the austerity that Germany, the Netherlands, and Finland are insisting on as a condition of their charity accepting the charity is the only way to avoid an even more draconian round of austerity. This austerity will, however, only further crush the Greek economy and make it less likely that debts will be paid. You can think of the problem here as one of credibility or lack of strong institutions. The correct solution is something like "here are our very generous terms for the short term, and in exchange you'll do the following for us over an extended time horizon." The probem is that the Germans (etc.) have no reason to trust that the Greek political system will deliver on said promises. Their leverage exists in the short-term, so they want to use it in the short-term even though the timing is very bad. Don't expect to see this story resolved any time soon.
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