IMF Attempts To Glue EU Back Together

From Bloomberg:

European Finance Chiefs Seek to Close Greek Gap Amid IMF Spat

European finance ministers aim to stitch together Greece’s next aid payment this week as a sputtering euro-area economy and a spat with the International Monetary Fund cloud efforts to resolve the debt crisis.
The finance chiefs are due to meet in Brussels tomorrow for the second time in a week after they agreed seven days ago to keep Greece’s bailout aid flowing. In addition to a disagreement between the European Union and IMF over softening Greece’s debt target, the ministers will attempt to re-engineer the current bailout without asking taxpayers to put up more money.

IMF Target

The IMF target is for a reduction of Greece’s debt to 120 percent of gross domestic product by 2020, from a projected peak of 190 percent of GDP in 2014. An agreement on what qualifies as sustainable debt in Greece is required to plug a finance gap of as much as 32.6 billion euros ($42 billion).
Greece will probably need another aid package for the period after 2014, European Central Bank Board Member Joerg Asmussen said in an interview with German broadcaster ZDF yesterday.
Even though European leaders have pledged to do all they can to avert a Greek exit from the single currency, they’ve refused to return to parliaments for more funding. Finnish Premier Jyrki Katainen, speaking on YLE Radio Suomi at the weekend, again rejected further funds to Greece.
Debt Restructuring
Greece, which has already undergone the biggest sovereign restructuring in history after private investors forgave more than 100 billion euros of debt in March, may need another write- off after the government enacts economic reforms, European Central Bank Governing Council member Jens Weidmann said at an event in Berlin on Nov. 16.

 My view:

The Greek crisis, and hence the European crisis, is far from being resolved.

There are three items (highlighted) in the article that need to be considered.

Firstly, even if the Greeks were to reduce their debt from 190 percent of GDP to 120 percent (from sale of assets and further austerity), they would still be in a situation that is mathematically impossible to escape.

No country in economic history in my research has ever recovered from a debt level of even 90 or 100 percent of GDP.

Although it could be theoretically possible for a country to pay this level of debt if it had its own currency (they don't, they are stuck with the Euro), most would not as the tax base does not support this level under any circumstance.  Therefore the only alternative would be a straight default or massive money printing.

In both cases, the bond market would lock the country out of the sovereign debt market; instantly in the first case, and quite quickly in the second case as inflation rocketed out of control.

Argentina is probably the best recent example of this.

The Greek situation is even worse underneath the surface of this ugly debt to GDP number.

The Greeks also have a massive trade deficit with other countries!

You can not run a budget deficit and trade deficit for very long, because of this zero sum equation.

The equation is:

Domestic Private sector financial balance + Government fiscal balance - Trade deficit/surplus = 0

So to ensure the economy is completely destroyed, make sure to run a government deficit and trade deficit!

Secondly, the Eurozone doesn't want Greece to leave because it will create massive moral hazard for other troubled nations (Portugal, Italy, Spain, France) who have unpayable debts.

But Germany doesn't want to keep pouring money into the Greek bottomless pit either.

What a conundrum.

Third, even though private investors forgave/wrote off the largest amount of debt in history, it still is not enough!

In my estimate, another $350 billion Euros needs to be written off to put Greece into a sustainable debt position.

The EU leaders will never agree to a write off of that size.

So this leaves only one solution for the Greeks.


Yes, dear reader, the only way to put the Greek Humpty Dumpty back together again is to; default on the debt, dump the Euro, resurrect the Drachma, and start exporting Greek products to bring in foreign currency.


  1. Great post PW. Indeed a " Greek Debt Jubilee " Why the Pig-men are trying to band-aid this situation is beyond any normal thinking mans train of thought.

    History will not be kind to us going forward, the future people of the world will look back at these days and wonder why so many let so few destroy them and they did nothing about it.

    Be well

  2. You hit the nail on the head, PW. Greece is being prevented a "way out" of its mess so as not to cause a stampede for the euro-exit. Oh well, I guess this will just mean rebellion, revolution and even outright war as the only possible mechanism for escape, not just for Greece, but for the others.


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