Mountains of Debt in Greece…And In China
WASHINGTON – There is nothing promising in the outcome of the “European Tour” taken by Greek Prime Minister Alexis Tsipras and Yanis Varoufakis, his Finance Minister. Winning an election on the basis of a populist plan to resist Brussels’ mean spirited austerity is one thing, negotiating real debt relief when you are poor and weak is quite another.
Greece is ruined
We could discuss all sorts of possible options. But I see no workable solution that will satisfy both Greece and its creditors. The fact is that Greece is ruined. In part because of its idiotic policies, and in part because of counterproductive EU-imposed medicine, Greek output declined by 25% in the years since the troika-engineered (EU-IMF-ECB) rescue. As its GDP sank, its debt to (real) GDP ballooned. It is now at 175% of GDP. This is far worse than Italy at 130%.
Now you tell me how can a small, non competitive, unproductive economy get out of this mess. And keep in mind that Greece is surviving only thanks to the bailout provided mostly by its EU “partners”. That’s $ 286 billion obtained at favorable conditions, in exchange for a promise to implement structural reforms that would reduce public spending, privatize assets, and more.
No more austerity?
However, now the Syriza leaders want to stop, and in fact reverse, the EU-imposed austerity. They want to increase public jobs, (all this implies increased public spending), give everybody in Greece a raise, and renegotiate the terms of their gigantic loans.
This is impossible. But it is also unrealistic for the rest of Europe to believe that the Greeks –with this government in charge– will be disciplined and pay back little by little all what they owe, according to plan.
Greece will never pay back
Greece will never pay back this debt. Especially since now its elected leaders tell the people that it is not really the nation’s fault. Greece was somehow tricked by rapacious foreigners. It is all a big conspiracy, you see.
The fact is that Greece is essentially bankrupt. The bailout obtained from its EU partners has now become an inflammatory political issue. It is impossible that this anti-austerity, far left, populist government will forget all its campaign promises and enforce the existing –extremely unpopular– agreements.
Will Greece literally go bankrupt? Will it be forced to get out of the Eurozone? Will it voluntarily leave? I have no idea. But I find it hard to believe that this far left government in Athens and the rest of Europe will find a mutually acceptable, workable agreement that will allow creditors to be paid and the Greeks to be happy.
China is worse
Well, if Greece is bad news, give a look at China. Its fantastic GDP growth in the last few years was driven in large measure by an unprecedented construction boom financed entirely by debt. And this building frenzy, totally disconnected from real demand, led to “ghost cities” with no people, empty shopping malls, and plenty of under utilized infrastructure. This is “malinvestment” on a colossal scale. Yes, it made GDP go up. But none of this is real.
As bad as Greece is, China is certainly far worse. In only 14 years, China accumulated $ 26 trillion in new debt in order to get mostly fake growth. As David Stockman observes in his Contra Corner, (China’s Monumental Debt Trap—-Why It Will Rock The Global Economy, February 5, 2015), China’s GDP doubled since 2007. Its growth expanded by $ 5 trillion in just 7 years. Yes, but in order to get there, it increased its debt by $ 21 trillion. In other words, for every $ 1 dollar of new growth, China added $ 4 of new debt.
This is not going to end well. Here is how Stockman sees it:
“In any event, China’s $10 trillion of GDP is exactly at the Greek bulge stage. It’s not replicable and sustainable unless the bosses in Beijing truly do intend to pave the entire country.”
“In fact, the Chinese economy is addicted to construction, and its rulers can’t seem to let go—-even as they recognize they are heading straight toward the wall. At the present time, nearly 50% of GDP is accounted for by fixed asset investment—–that is, housing, commercial real estate, industry and public infrastructure. This ratio is so far off the historical and comparative charts as to be in a freakish class all of its own. Even during the peak “take-off” phase of economic development in Japan and South Korea this ratio never exceeded 30% and did not dwell there for long, either.” [bold added]
“So China is caught in a monumental debt trap. Its rulers fear social upheaval unless they keep pumping GDP—and the associated rise of jobs, incomes and financial asset values—-with more credit and construction. Even then, they know better and have therefore hop-scotched from credit restraint to credit curtailment almost on alternate days of the week.”
“But now the edifice is beginning to roll over. Housing prices are falling and new footage put under construction has dropped by 30% over the last three months—something which has not even remotely happened during the last 15 years. At the same time, the consequent cooling of demand for construction materials and equipment is evident in China’s faltering industrial production numbers and the global commodity deflation that has resulted from its vast excess capacity in steel, shipbuilding, cement, aluminum, copper fabrication and all the rest.”
Economic growth is a political mandate
Yes, the trap is that China’s unelected leaders need to deliver sustained economic growth in order to legitimize themselves. But since it is impossible to generate genuine 7% growth (let alone the 10% we were used to see in China) year after year, they faked it. Local governments borrowed in order to finance more jobs-creating construction. The unprecedented construction boom in turn generated a boom in steel, cement, copper, you name it.
How long can this crazy act last?