November 30, 2022

News Cymru

Two sides to every headline

3 Reasons The Greek Government Should Not Get A Bailout Extension

The mainstream media, the EU politicians & the markets seem completely oblivious to reality of what is going on in Greece and the consequences of an extension to the Troika bailout terms.

First of all let us outline what the “Memorandum” (the terms imposed by the Troika (IMF/EU/ECB) in return for loaning the Greek government money in the form of the bailouts).

The Memorandum is supposed to ease the country’s transition from a big government to a smaller government.

That is it. No more, no less.

Moving on to the reasons why the Greek government should not get a bailout

1. More Debt

The problem in Greece is that the government’s debt is unsustainable, ie the Greek government is unable to service its interest payments.

Extending the terms of the bailout will increase the amount of debt the government has. Not only are the current debt levels already to large to service, not only was the debt burden less and the GDP greater in 2008 and the government could still not service its debt.

Extending the terms of the bailout will increase the government’s debt burden over 2008 levels while decreasing the GDP of the country by over 25% of 2008 GDP levels.

In short, an extension of the bailout terms are guaranteed to put the Greek government in an even more dire situation than it is in today.

Samaras, the Greek prime minister is trying to say this is a desirable outcome

2. End Result Is The Same

There is no reason to believe that shrinking government over 2 years is better than shrinking government instantly. Shrinking government to sustainable levels now or reducing the government to sustainable levels in 2 years time, it does not matter, the result is the same. The difference of shrinking government immediately is that the government will have less debt.

To request an extension to the bailout terms is economic suicide. There is not a single plus point to taking 2 years to shrink the Greek government.

If the goal of the memorandum leads to such a stable and strong position, which is what is being claimed by everyone involved including Germany, it makes absolutely no sense to delay enacting all the conditions of the memorandum immediately. If you are ill and you have a drug that is supposed to cure you, why on earth would you want to delay taking it?

Again, asking for an extension will only lead to a further deterioration of the patient for zero benefit and no reason.

3. Collapsing Economy

The Greek economy is disintegrating due to increasing taxes. The Greek economy is not imploding due to reduced government spending on wasteful policies and practices. The Greek government has cut wages and pensions. Wages and pensions are the 2 most efficient ways the government can spend tax payer money.

There is no sign the Greek government is going to follow a different tack. To save the 11 billion Euro a year, the plan entails greater cuts in wages and greater cuts in pensions.

This is not the answer. The Greek government needs to cut departments not wages and pensions. Cut the labour bill while maintaining the same size workforce is a sure-fire way to implode the economy especially when done in conjunction with tax increases.

Given that the Greek economy is guaranteed (in my opinion) to shrink by at least another 10% over the next 3 years, should the extension be granted, the debt to GDP ratio of the Greek government is going to reach stratospheric levels, easily over 200% of GDP.

Why anyone, especially an alleged capitalist Prime Minster would want to continue with these policies, policies that increase government debt while decreasing government revenue is unexplainable.

Summary

An extension to the bailout terms is guaranteed to cause and create the following

1. Increased government debt

2. An increased government debt to GDP ratio (highly likely to be over 200%)

3. Smaller GDP, very likely to be 10% smaller from today’s levels and very likely to be over 30% from 2008 levels.

4. A more unsustainable debt load

In short, an extension is guaranteed to lead the Greek economy into an even deeper hole than it is already in. The memorandum needs to be implemented immediately, today, there is no logical argument for suggesting that the country will benefit by extending the terms. An extension to the terms can only damage the Greek economy.

What can Greeks do to combat the suicidal policies of the Greek government? The most obvious course of action would be for the private sector to move to 3 or 4 day weeks choking the government of tax revenue.

Who gains from an extension to the bailout terms?

Certainly not Greek or European taxpayers. A 2 year extension will mean the Greek government being loaned a further 32 billion Euro ( assuming there are 4 tranches a year of 4 billion Euros).

The only party to gain from an extension will be the parties receiving the bailout money ie the parties that lent the government recklessly in the first place. It is a huge moral hazard for private parties to lend governments unserviceable debts and for innocent taxpayers to then pick up the slack for the mistakes made by these private companies and the government.

Such actions reward lenders for burying borrowers with unsustainable debt loads as they now know taxpayers will back-stop their losses through increased taxes. In a word, taxpayers bailout out government debt to private creditors is fascism.

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