In memory of Dr. Andreas Höfert

Debunking the new Greek mythology

A bad case of Eurozone crisis fatigue seems to have struck politicians and the public alike. The situation has become so complex that we prefer to believe in a few comfortingly simple myths, rather than facing what’s really going on.

While traveling in Germany for client events this week, I was astonished by the schizophrenia of German Interior Minister Hans-Peter Friedrich, who was urging Greece to exit the Eurozone but joined his peers in voting for the new Greek rescue plan. Yet I found the candor of German Finance Minister Wolfgang Schäuble just as unsettling, as he raised the specter of another bailout before the German parliament had even managed to vote on the present one.

I personally have never witnessed such a divergence between what officials are saying, and what they are actually thinking. Politicians fall back on convenient fictions to make the situation seem more manageable, but these myths have to be debunked if we are ever to find a lasting solution to the Eurozone crisis. I think the following would make a good place to start.

The Greeks will get an envelope with 130 billion euros in aid: 12,000 euros for every Greek. Not true. While the price tag of the plan is 130 billion euros, the average Greek on the street – who just experienced an income reduction of up to 50% – won’t see a cent of it. Thirty billion will be used to buy collateral to secure new Greek bonds, 50 billion will be used to stabilize Greek banks, and 50 billion will go into an escrow account to pay interest on Greek debt.

Greece is no longer headed for default. Not true. Greece will default, and soon. It needs 90% of its private creditors to accept major losses in order to meet the debt-reduction targets agreed with Eurozone finance ministers. Greece knows it is unlikely to secure this level of acceptance, so it recently added retroactive “collective action clauses” to some of its bonds. This will ultimately allow it to force the 53.5% haircut and debt swap onto unwilling creditors. This is a default.

This plan is the last one. Not true. Even if executed flawlessly – and that in itself looks unlikely – this plan allows Greece to survive until 2014 at best. No one knows what will happen afterwards. Greece’s debt will sink to 120.5% of its GDP by 2020. Hard to say. I would be surprised if this were true by then. We economists already have a pretty hard time forecasting the next six months, which makes it an exercise in futility to forecast what will be happening in eight years.

Greece will stay in the Eurozone. Maybe, for now. However, I remain very skeptical that the Greek population will think that saving face is really worth all the sacrifices being demanded of them – not only now, but also for at least the next decade. The European Central Bank is not monetizing the debt. Half true. The ECB is not directly monetizing debt, but its Long Term Refinancing Operations aim to facilitate European financial intermediaries’ purchase of European sovereign debt. Hence, the ECB has in essence embarked on a quantitative easing program. Until politicians face some hard truths about the complexity and intractability of the Eurozone crisis, their repeated claims that the crisis is solved will remain the biggest myth of all.