The PJ Tatler

Will the Greek Debt Deal Succeed? According to a Confidential Memo, Probably Not.

It’s uncertain whether the arrangement between European finance ministers and Greece can stand the test of time, but some of those close to the negotiations have suggested that its likelihood of success is remote.  That’s what Peter Spiegel of Financial Times learned when he obtained a confidential memorandum outlining some of the pitfalls in the deal.

Writing about the fortuitous discovery for Business Insider, Joe Weisenthal says,

“At least Europe is no longer in denial about the effects of austerity in Greece, and the ability for the country to improve its economic situation via drastic cuts.

Peter Spiegel at FT has obtained a confidential 10-page memo distributed to senior officials in Europe over the last week, which lays out the truth:

It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

‘Prolonged financial support on appropriate terms by the official sector may be necessary,’ the report said.

What’s more — and this Spiegel puts in a follow-up blog post — all the economic assumptions being used are too rosy, further rendering prospects of a successful bailout unlikely.”

The memorandum may have been “confidential,” but its content comes as no surprise to anyone who has followed the negotiations closely.  In fact, you can make a very strong argument that European leaders are still in denial about the situation because the Greek deal is shaky and other European countries including Spain, Portugal, and Ireland are waiting in line to secure similar financing for their failed socialist economies.  Hedge fund manager Dennis Gartman believes that the Greek arrangement will last only until a new government is elected, and he’s not alone.  Writing for American Thinker, Rick Moran paints a bleak but realistic picture of what’s likely to happen:

“I think the bondholders will balk and the Greek voters will throw out the entire government in elections next month. The new government, however long it might take to form, may be elected on a promise of not going through with the harsh austerity measures dictated by the EU. Or perhaps more likely, politicians will balk at passing the necessary enabling legislation for the austerity program to take effect. This will cause that government to fall and a cycle will begin that will destabilize what is left of Greek democracy.

A probable future: Greece will default, exit the euro, and begin a slow, painful process of recovery. The efforts of the EU and IMF will now be toward containing the Greek collapse so that it doesn’t begin a domino effect that will cause Portugal, Ireland, and perhaps Spain to follow in Greece’s wake. Technically, the EU has the mechanisms in place to do that – a trillion euros (on paper) that can be used to buck up banks and flood the bond markets with ECB backed paper that might stem any run that starts on European banks with heavy exposure to Greek debt.”

Whatever comes about, this much is certain: The cost of dismantling failed social programs in Europe will be much higher than European leaders anticipated.  With Greece’s unemployment rate approaching 20% and increasing rapidly, European leaders should hope and pray that their arrangement works because if it doesn’t, more violent protests are bound to take place.  Moreover, the unemployment rates in Spain and Portugal are 25% and 14%, respectively, and rising fast, and Ireland’s unemployment rate is hovering at about 15%.  That’s all the more reason to be pessimistic about the European Union.

People in the United States need to understand what’s taking place in Europe because our experiment with socialism is failing just as surely as theirs is.  Thankfully, we still have time to solve our problem before things explode, but not much.  The 2012 presidential election is crucial because in all likelihood it will determine whether we go the way of Greece or if we have the courage and common sense to scale back social programs to rational levels.

Neil Snyder is a chaired professor emeritus at the University of Virginia.  His blog, SnyderTalk.com, is posted daily.