Poor Greece, the fat lady ain't singing yet

As with the opera not being over until the Fat Lady has sung about her youth, beauty and slenderness the Greek debt saga is not going to end until the one important decision is taken - how much debt should Greece repay? We've been making this point for a number of years now in a number of venues. There is just this one question that must be answered:

Policymakers were still in disagreement this weekend over assumptions about Greece’s long-term growth trajectory, and the ability of the country to maintain a sizeable primary surplus over the medium term.

Countries such as Germany believe stronger growth in Greece will remove the need for debt relief, with the country’s expansion alone enough to reduce its debt burden to sustainable levels.

However, the International Monetary Fund has called for more conservative estimates of growth and primary surpluses, insisting that it will not join Greece’s €86bn (£74bn)  third bail-out package unless there was meaningful debt relief.

A simple truth about our universe is that debts which cannot be repaid will not be repaid. Thus putting rather a large weight upon the definition of "cannot." Which is where the disagreement is here.

The IMF thinks that Greece can run a primary budget surplus (the primary meaning before interest and debt repayment, the implication being this is the amount that can be used to pay down debt) of 1.5% of GDP for some decades. Run that forward and that means Greece can repay some portion but not all of the current debt. 

Everyone else is a politician and a politician quite aware of the fact that they've lent their voters' funds to Greece. And they'd just hate for said electorate to find out that they've lost that money by so lending it. So they've cut the interest rate to near nothing (a few basis points over the ECB's current QE influenced very low rates on much of it) and extended repayment out towards the end of the century. Losing money through opportunity cost, inflation and interest not paid is less politically painful than cutting the capital sum. Even the dimmest voter on the Chemnitz Omnibus would cotton on to the loss if there was a reduction in the outstanding sum.

But this still leaves them coming up short - unless Greece runs a primary surplus of 3.5% of GDP. So, that's the demand. Not what can Greece achieve, but what must Greece achieve to save political positions? 

Which is where the problem is. No democratic system can run a primary surplus of that size over time. It can be done for a year or two but sending that much of the economy off to foreigners just isn't going to happen over the long term. The only person we know of who did manage it was Ceausescu in Romania and they machine gunned him and his wife in the end.

The IMF is correct here but then this is Europe, political desires do so often seem to win out over economic reality. But that's why the whole thing is still rumbling on after all of these years. And it will continue to do so too. Until that basic truth is recognised by all, debts that cannot be repaid will not.