A Blindfold and a Cigarette for Greece

02/08/2012 12:32 pm EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

The debt restructuring on offer would inflict further economic damage while stripping Athens of its remaining leverage, writes MoneyShow.com senior editor Igor Greenwald.

Another day, another deadline missed, another chorus of European complaints about those lazy, no good, procrastinating Greeks.

“A day wasted in failing to tackle Greece’s administrative, budget, and competitive problems is a bad day,” a German parliamentary leader told Bloomberg today.

But can we really blame Greece for dawdling on Germany’s prescribed path toward the latest “bailout?”

Let’s cast a quick glance backward on the road Greece has already traveled under European tutelage.

Two years ago, it had €330 billion in public debt, amounting to an unsustainable 130% of the gross domestic product. Had Greece defaulted there and then, it would have had an economy at least 10% larger than today’s to cushion the resulting misery. Now 10% poorer (at least), the Greeks have seen their debt increase 10% in the interim, as the depression mandated by its creditors drains government revenue.

Hence current demands from abroad for what would be the fifth austerity package in the last two years, in exchange for an insufficient debt restructuring. Greece is being forced to slash the minimum wage 20% and lay off thousands of civil servants with no alternative employment prospects.

The conceit that this will do much to set Greece back on course for future solvency is laughable. At best, the restructuring will paper over the evident damage done by Germany’s damaging diktat. More likely, it will drive Greece to default later this year.

Except that Germany and France have that eventuality covered. Under the proposed terms of the latest €130 billion bailout, much of the money would be kept in an escrow account with debt payments prioritized, so that Greece could continue to be squeezed until it can’t pay any more without consequence to Europe’s banking system.

No wonder Greek politicians are finding all sorts of excuses for delay. In exchange for avoiding a default next month, they would be signing away all of their remaining leverage with Europe.

The Socialist party that embarked Greece on this dead-end path is down to support of 8% in the polls. The leading conservative party is at 31% ahead of elections set for April, which shows how many Greeks are disenchanted with politicians of all stripes, and explains why those in the current coalition government are leery of additional austerity.

Meanwhile, Berlin and Paris press the demands so hard one wonders whether they’re not really trying to nudge Athens into a default. Whatever aid they actually have to pour into the hopeless Greek economy is money down the drain, at this point. It’s money that could be more effectively deployed to backstop Italian and Spanish bonds, which are the battleground that really matters.

So there are powerful incentives on both sides to change course and kill the painstakingly negotiated compromise, if only a U-turn at this late stage wasn’t likely to prove so embarrassing and immediately painful. Those incentives will only grow with time as the consequences of destructive austerity pile up.

By the time the tipping point arrives, the pain deferred today will have to be endured with interest.

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