Washington Post
February 21, 2012
Let's begin with Option A. Late last night, the euro zone signed and sealed a $170 billion bailout for Greece. The terms are tough on Greece, who will have to reach incredibly austere targets and put up with monitors in Athens and keep an escrow account filled with three months of debt payments at all times. They're tough on bondholders, who are taking a haircut in excess of 50 percent -- at this point, it's more like they're getting a bit of their head sheared off. They're tough on European lenders and central banks, who will be reducing the interest rate they charge on debt to Greece. The terms are, frankly, tough on everybody. Perhaps too tough.
Which brings us to Option B. The Financial Times reports that on Monday night, analysts from the European Central Bank, the International Monetary Fund, and the European Commission handed euro-zone officials a 12-page, "strictly confidential" memo outlining exactly why the bailout wouldn't work. "The analysis suggests that the medicine being fed to Greece – trying to drive down wages and costs through austerity measures to make the Greek economy more competitive internationally – will lead to higher debt levels in the near term that may never be overcome."
The baseline the euro-zone ministers are using -- Greece's economy shrinks a mere 4 percent this year, is flat next year, and is growing by 3 percent in 2015 -- is so optimistic as to appear absurd. But even under those assumption, the report suggests this bailout won't solve Greece's problems. Turns out the optimistic assumptions are concealing other, even more optimistic assumptions about the debt payments Greece will need to make in order to hit its targets. And if reality doesn't align with the ardent hopes of the optimists? In that case, the memo says, the numbers look really, really bad.
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