Now that even the IMF has admitted Greece has an unsustainable debt problem with a debt-to-GDP ratio which will soon cross 200% after its third bailout (even if it leaves open the question what the IMF thinks about Japan’s debt “sustainability”) we wonder what the IMF thinks when looking at Greece’s net government liabilities, which as SocGen’s Albert Edwards reminds us are rapidly approaching 1000%.
Which incidentally means that Greece is only marginally better than the USA, whose comparable net liability is a little over 500%, while its other nearest comparable is none other than France, whose next president may will be “Madame Frexit” and whose biggest headache will be how to resolve government promises to creditors and retirees that are five times greater than the country’s GDP.
Still, surely those “in control” are fully aware of all this, and are taking measures to contain it once the Greek debt fiasco spills over beyond Greek borders and returns to the European periphery or, worse, slips into the most unstable core nation of all: France.
Here are Albert Edwards thoughts on how this particular crisis would play out, considering it was none other than France that did not push for a bigger debt haircut for Greece:
I was not in any way surprised that Germany was able to gather a huge number of allies to its camp, with its traditional fiscally conservatively minded allies such as Finland, Holland and Austria, as well as many central European governments. I was not even surprised that other countries previously crushed by austerity, Spain, Ireland etc., were firmly in the Germany camp too. But I was really surprised that French authorities did not stand up to say what was happening was unacceptable, unsustainable, and indeed unfair, and that they would have no part of it.
France instead facilitated a resolution of the impasse, acting as ‘good cop’ to Germany’s ‘bad cop’ routine and helping the Greeks to draft their proposals. The Wall Street Journal quotes one German official “The French smoothed the way so that the Greeks could walk, and then we pushed a bit.” Many critics of the deal would instead say the Greeks have indeed been walked to the edge – the edge of a cliff – and then pushed a bit.
The reason why I am surprised that France went along with this extreme and humiliating austerity programme – and the effective removal of sovereignty forced on Greece – is simply its own self-interest, for France could itself end up in the firing line. The problem France will surely find further down the road is that its own debt dynamics and sustainability is also highly questionable. Estimates we have used before with calculations for the present value of unfunded liabilities (as a % of GDP) show that actually it is not Spain or Italy that have the worst long-term debt sustainability issues; it is the US and France, and then next in line, surprisingly, Germany (see chart below).
Although on a much smaller scale to the problems faced by Greece, unfunded government liabilities elsewhere are still a genuine problem. We are not talking here about the on-balance sheet government debt to income ratios – although on that basis Italy’s situation looks dire. But dire though Italy’s situation is, once you add in the off-balance sheet liabilities, which are only now coming onto the balance sheet as populations rapidly age, it is even worse for the US, France, Germany and the UK, in that order.
A combination of inflation, defaulting on pension and medical promises, and severe fiscal retrenchment is the likely response. But, for the US and the UK, we have had a glimpse of where this will end – QE, devaluation and the printing press. Within the eurozone, the vision of austerity as a remedy to fiscal excess, as shown in the Greek settlement, shows that austerity and ‘reform’ will be the likely route imposed from above. Germany has huge overseas assets accumulated via persistently large current account surpluses to call on to pay its unfunded bills. Germany had net overseas assets of around 50% of GDP last time I looked, whereas France does not have this huge well of assets, and indeed is a net debtor by around 20% of GDP. Hence it was France’s own perilous fiscal situation that left me most surprised that they did not make a strong stand that the Greek ‘agreement’ was wholly unacceptable.
We disagree, and find it far less surprising: ultimately Hollande’s sole focus was to preserve near-term stability (and his job) at any cost, if only until the 2017 French elections, which he is guaranteed to lose. Even if the French fiscal and solvency situation deteriorates dramatically over the next two years (and it will because as we showed in June, France has now had 80 consecutive months of record unemployment as a result of yet another socialist economic failure), by the time the world wakes up it will be someone else’s problem, most likely that of Marine Le Pen, at which point the only way to resolve the French “problem” will by through the printing of French Francs (something Greece will likely have been doing for a while using its own currency the Drachma following its own inevitable exit from the European monetary prison).
Because one look at the chart above and everything should be clear: there may be stability now, but once the current generation of workers retires and realizes its entitlements and retirement benefits were a big fat lie, it will have two choices: violence or printing. We tend to think it will choose the latter.
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