Greek Default Averted . . . for Now

Can a Greek bailout work?  If by work, we mean prevent the country from defaulting when it's time to roll over its debt this month, then yes, it can and will work.  But over the long run?  I don't see how it can, barring some sort of miraculous global boom in olives and Greek cruises.

As others have pointed out, Greece has a primary deficit of over 8%.  Which is to say that even if you make the debt payments go away, the country is only taking in enough tax revenue to cover 91% of its spending.  Given how poor Greek tax compliance is, this means that austerity plans will literally have to be on the table no matter what happens:  if they default, they won't be able to borrow any more money, and will have to run at least neutral; and if they don't default, they will have to cut deeply in order to make their debt payments.

And the Greek population is, to put it mildly, not down with that.

A nationwide general strike paralyzed Greece on Wednesday as protests against the government's recently announced austerity measures turned violent, with an apparent firebomb attack on a central Athens bank killing three people.

Wednesday's 24-hour strike is seen as a key test of the government's ability to shepherd through tough austerity measures in exchange for a €110 billion ($143 billion) bailout loan from the European Union and the International Monetary Fund.

The strike coincided with protests that brought out tens of thousands of Greeks, one of the country's largest protests in years. Angry youths rampaged through the center of Athens, torching several businesses and smashing shop windows.

So default doesn't fix their problems, and a small but enthusiastic minority of the population apparently thinks violence prevents budget cuts.  Where does that leave Greece?

Withdrawal from the euro, that's where.  This too will not be painless--it's simply default by a different name.  Which means no more borrowing.  But withdrawal from the euro at least allows the government to make its exports (and tourist industry) competitive again, and frees the country from an excessively tight monetary policy designed for richer countries that aren't mired in recession.  Default or not, staying in the euro almost certainly means slow growth, which will make the pain of fiscal adjustment even more painful.

Obviously, this could be prevented with sufficient transfers--but I don't see sufficient transfers forthcoming.  Even if the other euro zone nations wanted to, it's not clear that they have the money.  And they sure as hell don't have the money to bail out Greece . . . and Portugal . . . and Spain . . . and maybe Italy and Ireland too . . . which is where this path is heading.

What this seems to be showing is that you cannot layer rich-world monetary policy on top of countries that don't have the social, political or economic institutions to support it.  The experiment failed in Argentina, and it's failing just as spectacularly here.  Importing monetary policy from another country temporarily gives you more credibility with the marketplace--but it also puts you in grave danger of this kind of dramatic mismatch between your needs and those of wealthier countries with more robust economic institutions.