The 300 Billion Euro Greek Problem

Greece will have to raise 12 billion euros in the next two months to relieve its sovereign debt obligations and cover deficits. That is a relatively small part of the 54 billion euros it will need to raise in 2010. A backstop 30 billion euro “guarantee” from other nations in the European Union should help Greece to raise the capital as should a 15 billion euro support package that the IMF promises to offer if needed.

Greece may be able to raise the money that it needs in the first half of the year with these supports and may even get reasonable interest rates around 5%. But, the total amount of Greece’s national debt is 300 billion euros, so the nation’s longer term financial health is still in harm’s way.

The Economist pointed out that the appetite for long-term support of Greece is weak in many of Europe’s largest nations. “In these recessionary times, German public opinion is strongly opposed to anything amounting to a handout for Greece,” the magazine writes

The Greek debt problem is exacerbated by several problems. The first is that, even at 5% internet, the debt service on Greece’s obligations will likely grow as it has to refinance more debt over time. The cost of what the nation will pay for interest alone will balloon as time passes and Greece is unable to pay principle on its sovereign obligations.

The next trouble has been well-described. Many workers in Greece are violently opposed to pay cuts and are willing to strike in the face of reductions. The trouble with Greek finances is as much cultural and political as it is financial. Greek society appears to be one in which belt-tightening is not only unpopular but also impossible. Long labor stoppages only add to the rate as which Greek GDP and industrial production fall.

Greece also has had trouble keeping it books. The estimates of its budget deficit have been wrong several times and the nations does not seem to have a good fix on its expenditures. That, in and of itself. is a challenge when the government tries to work on cost reduction.

The Greek debt problem goes well beyond an exercise in balancing of books. Even with a plan in place, Greece probably can not carry it out.

Douglas A. McIntyre