Is Greece Back From Its Near Death Experience?

WASHINGTON – So Greece is back? We are told that the very first attempt to sell new Greek debt went spectacularly well. Eager investors were lining up and –surprise– there is hardly any risk premium. Greek ten 10 year bonds not too long ago came with a choking 40% interest. Now it is less than 6%. This is a real miracle.

Is Greece really back?

What do you know. Contrary to all dire prognostications, the Greeks performed a true miracle. Left for dead just a couple of years ago, the feisty Greeks pulled themselves together. They cut spending, reformed the bureaucracy, raised taxes, invested in imaginative new enterprises and now they are showing the world what a determined people can achieve.

Not so

It would be really amazing if any of this were true. Leaving aside the hundreds of permutations of various bail out plans, the reality is that Greece, while no longer facing immediate death, is still on a semi-permanent respirator provided by its creditors. It is alive only because of massive foreign help.

Sure enough, kicking and screaming, the Greeks have been forced to take some painful medicine. But they have done so under constant protest, claiming that “austerity” was unjustly imposed on them by a modern version of Nazi Germany and other assorted evil doers.

Alive, but still in terrible shape

Today, even after all the money they got, (the Greek bail out cost 240 billion euros, or $ 333 billion), the Greek national debt remains gigantic. The economy is still in an awful state, and there is no sign of any renewed competitiveness.

Well, but if it is indeed so, how do we explain the remarkable success of the recent Greek bonds sale?

Very simple.

“Too big to fail”

The bond markets have noticed that even a miserable basket case like Greece falls under the “too big to fail” category. Europe, the European Central Bank and the International Monetary Fund collectively decided that the possible negative ripple effects of a Greek default were too big. They were afraid that the entire Euro area might suffer. And so they decided to spend huge amounts of money to save (undeserving) Greece from certain death.

Let’s be clear. This was a political decision. And, if you believe  that pouring good money into a semi-hopeless economy is a good thing, as long as this pushes away potentially bigger storm clouds, the rescue operation worked quite well.

Stable but not fixed

Greece today is stable. It is not fixed, but there is no fear of default. But this is not because of renewed Greek strength. This is because the other Europeans have shown, credibly, that they will do anything to avoid the default of any Euro area country, even a basket case like Greece.

The bond markets have observed all this and have concluded that now a patched up Greece is a safe investment, simply because the new Greek bonds benefit from an implicit ECB guarantee.

Politically guaranteed Greek bonds

Think about it. Why buy super safe German bonds with a puny yield (1.5%) when you can get a (smaller but still substantial) interest rate premium (5%) buying lower grade but politically guaranteed Greek bonds?

So much for the Greek bond sale as an indicator of any real Greek fiscal health. As for the Greek economy, only the Greeks can fix it; and –I am afraid– they do not even know where to begin.

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