Simon Johnson serves up a grim but realistic report:
…Every 1 percentage point rise in interest rates means Greece needs to send an additional 1.2 percent of GDP abroad to those bondholders.
What if Greek interest rates rise to, say, 10% – a modest premium for a country which has the highest external public debt/GDP ratio in the world, which continues (under the so-called “austerity” program) to refinance even the interest on that debt without actually paying a centime out of its own pocket, and which is struggling to establish any sustained backing from the rest of Europe? Greece would need to send a total of 12% of GDP abroad per year, once they rollover the existing stock of debt to these new rates (nearly half of Greek debt will roll over within 3 years).
This is simply impossible and unheard of for any long period of history. German reparation payments were 2.4 percent of GNP during 1925-32, and in the years immediately after 1982, the net transfer of resources from Latin America was 3.5 percent of GDP (a fifth of its export earnings). Neither of these were good experiences.
On top of all this Greece’s debt, even under the IMF’s mild assumptions, is on a non-convergent path even with the perceived “austerity” measures. Bubble math is easy. Hide all the names and just look at the numbers. If debt looks like it will explode as a percent of GDP, then a spectacular collapse is in the cards.
Addendum: Paul Krugman comments.
It is beyond obvious that rolling global sovereign defaults are coming.
Get the F*** out of overpriced equities now. . .
In the past 60 years, hundreds of reports about Argentina’s succession of fiscal crises have argued that the country’s total collapse was around the corner. Over 99% of those reports were useless because they failed to discuss seriously why total collapse was never going to happen. Each report was just fear mongering to argue for the author’s particular solution. The worse were written by economists that wanted to blame foreigners, especially foreign financiers, for the country’s problems. Economists that know nothing about politics have nothing to contribute to the solution of any crises, in particular fiscal crises. These reports are not realistic, they are nonsense.
“Greece’s Weakness is its Strength…” http://ub0.cc/NN/8s
Krugman has repeatedly used the high debt levels following various wars as proof that high debt levels can be sustained without major difficulty. However, he continues to ignore the fact that the nature and cause of the debt has as much to do with its sustainability as does its size.
It is one thing to get bond holders to hold your debt when it is caused by major event such as a war or natural disaster, where costs will clearly decline after the event is over and the nation’s fiscal situation is forecast to improve over time. It’s quite another to convince bond holders to hold your debt when it’s caused by a rapidly growing entitlement system which only shows signs of getting worse and where no clear path to solvency can be found.
When WWII ended, the U.S. held big debt, but once the expense of war ended, the government could easily pay off the debt because it was still small in comparison to GDP, had fewer liabilities, and could raise excess funds easily or simply outgrow the debt.
Krugman claims that it’s ‘not about wars’ because Britain took more than a decade to reduce its WWI debt to reasonable levels, but the time it took to reduce the debt is not the relevant measure. A high debt/GDP ratio can be maintained so long as the trajectory is down, and economic forecasts show constant improvement over time. Britain took a long time to pay down its debt, but it showed improvement year over year during the entire period.
For a modern welfare state going bankrupt because of out-of-control entitlement spending, this is not the case. When the debt is growing annually with no end in sight, bond holders are always watching for signs that it’s time to bail. They make stick around for a while as higher interest rates compensate for risk, but at some point they’re going to cut and run, and the game ends. As Greece is demonstrating today.
Without question the economics of information is Hayek’s most important innovation, and he was simply way out in front of everybody and anybody on it. While he did it partly inspired by and as an adjunct to the socialist calculation debate, its implications and usefulness go far beyond that, which is why his influence in this area is actually increasing rather than decreasing, in contrast to Friedman, whose influence is rapidly declining with each passing day.
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