Will European bailout actually help Greece debt crisis? Maybe not.
Details of Greece's plan to wipe out its crippling debt -- with the aid of $56 billion from its reluctant European neighbors who are choosing to not get dragged down with the overspending little nation -- suggest that although Greece's debt could be quickly alleviated, the bailout could lead to worse problems.
According to the latest numbers from Greece and the European Commission, if the rescue plan is implemented right away, here's what it will do to Greece's deficit-to-GDP ratio, which is more that four times what the European Union allows:
2009: 13.6 percent
2010: 8.7 percent (though this number could end up higher)
2011: 5.6 percent
2012: 2.8 percent
Okay. That looks good. That gets Greece's balance sheet back in first-world order, which means it will be able to borrow money at reasonable rates and sell its own bonds at competitive rates.
However, take a look at what will happen to government spending as a percentage of GDP if the plan is put in place:
2009: 50.2 percent
2010: 50.6 percent
2011: 49.1 percent
2012: 47.8 percent
And take a look at what the projected revenue-to-GDP numbers look like:
2009: 36.9 percent
2010: 41.9 percent
2011: 43.5 percent
2012: 45 percent
How do you raise government revenue? New and higher taxes. You may argue that Greece's GDP will rise under the bailout plan -- and it will -- but the economy will actually contract at a 2.3 percent rate this year, the data show, and the blue sky shows only a modest 1.9 percent growth in 2012. The answer is probably new taxes.
And what happens when you cut government spending? Entitlement programs go away. Greece is an entitlement nation. I told you earlier today that most Greeks retire at 61. A sense of entitlement has been baked into this nation for decades. You don't change that overnight. When you do, you get riots of the sort we've seen in the nation.
These are the sort of strict provisions that will come with a European bailout, which German Chancellor Angela Merkel spoke of earlier today. Combining higher taxes with sustained cuts in services and entitlement programs that are viewed as a birthright is a socially explosive mix.
While I'm at it, let me toss a little more gasoline on this fire. Look at the unemployment-rate projection under the bailout plan:
2009: 9.5 percent
2010: 9.9 percent
2011: 10.5 percent
2012: 10.5 percent
So, to recap: The bailout plan will quickly wipe away Greece's debt problem, but quite likely will lead to further social unrest, as it will cut entitlement programs, raise taxes and actually cause unemployment to grow. London's Telegraph says the bailout will buy Greece only one year.
The sad truth is, Greece has done such a poor job managing its economy for so long, there are few choices left than what's being offered. At the worst, the bailout program could create perpetual turmoil in the streets of Greece, which would kill one of its greatest assets: tourism. The best Athens can hope for now is a peaceful deflation until it can become a working nation again.
Follow me on Twitter at @theticker.
April 23, 2010; 4:55 PM ET
Categories: Deficit/debt , The Ticker | Tags: Angela Merkel, Chancellor of Germany, Debt, European Commission, Greece, Gross domestic product, International Monetary Fund, Money, greece debt crisis
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