If an agreement is reached between Greece and its creditors to secure Friday's IMF payment and free the last bailout funds for immediate use, count on it being be hailed as a major breakthrough by one and all. Equities will cheer, the euro will soar and credit markets will breathe a huge sigh of relief.
In reality the terms that the Europeans impose on Athens are almost irrelevant. The 7.2 billion euros of rescue cash that are the focus of so much discussion are only about half of what Greece owes in interest and amortization payments through the end of the year. Even if Athens can avoid using every euro of revenue for operating expenses and can roll over other obligations, Greece could very well require more European money before the end of December.
The Europeans can pretend that Greece is a solvent nation on its way to rejoining the world financial community. They and Athens know better. Behind all of Prime Minister Alexis Tsipras' rhetoric and maneuvering is the desire to force the ECB, the IMF and the euro zone to this fact.
Europe and its institutions are lending Greece money so that she can make loan payments to the same European institutions holding Greek sovereign debt. Berlin and Paris will dictate terms to Athens and appear necessarily tough before their electorates but all understand that Greece will not keep the terms of any agreement because it cannot do so.
Geek debt of 320 billion euros is equal to 180 percent of GDP. The economy has shrunk 25 percent since 2009 and it will continue to contract, the austerity conditions of the rescue packages guarantee it.
If Prime Minister Tsipras promised that the economy would generate a primary budget surplus before interest payments of 2-3 percent a year as is preferred in Berlin, and in reality the agreed level will probably be around 1 percent, it would still take around fifty years for Greek public sector debt to fall to a level considered sustainable by the EU bureaucrats in Brussels. What political agreement lasts fifty years?
Financial and economic logic dictate that Greece's debt will be written off and that the lenders and ultimately German and European taxpayers will take the hit. The only realistic discussion is what amount of debt will be forgiven and when. If that is not the conversation that Greece and its creditors are having this week, it is one they will have, and probably sooner rather than later.
Chief Market Strategist
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