End Game in Greece

Following yesterday's announcement that the budget deficit was higher than expected, Greece has rapidly been progressing towards the denouement.  Greek debt yields started rising "almost vertically" yesterday, and rumor has it that no one will sell default insurance on the stuff.  As yields dipped into the double digits, BusinessWeek noted that they were approaching "Pakistan levels"--i.e. the kinds of yields we see on Pakistani debt, which got an IMF bailout in 2008.

There is no longer any realistic possibility that Greece will be able to soothe debt markets with the mere possibility of assistance, bringing its interest payments down to a level where the country can reasonably (or even maniacally) hope to austerity-package its way out of this crisis.  Given that Greece has a big chunk of debt to roll over in May (and an even bigger chunk to roll over by the end of 2011), the writing was on the wall.  This morning, Greece formally announced that it would be tapping the European aid package put together over the last month, as well as any IMF assistance package, which is expected to be finalized next week.

Markets are pricing in the expectation of at least some debt restructuring, and well they might.  The loan packages will abate any liquidity problems that Greece is having, but they won't fix the structural solvency problem--and even a pretty austere austerity package is going to make distressingly modest inroads.  With the kind of debt-to-GDP ratio Greece is sporting--about 110%--it will take either years of misery, or some smokin' economic growth, to really get that debt load under control unless the investors take some kind of haircut.  Unfortunately, the kind of austerity that Greece is facing tends to depress economic output, not spur it to new heights.  And the country's money supply is lashed to a European Central Bank primarily concerned with setting inflation-busting interest rates for the nation's healthier eurobrethren.

So these are some grim times for Greece.  On the other hand, some of the initiatives--particularly some of the corruption-fighting and transparency moves--may herald a serious and permanent improvement in Greek economic and political institutions--which in turn might mean stronger, more stable growth later.  It's always darkest just before dawn.