Greece Falls Into 'Death Spiral': Rising Debt, No Growth

cnbc ^ | Monday, 3 Oct 2011 | None

[MontaniSemperLiberi]

Drowning in red ink, Greece has nowhere to turn to revive the economic growth that might put its debt on a sustainable trajectory, reassure angry foreign creditors and offer hope to its recession-weary citizens.

Instead, the country finds itself in a vicious circle—a death spiral, some would say—in which it is borrowing ever more to keep up on its existing debts, crushing growth in the process and thereby worsening its all-important ratio of debt-to-gross domestic product.

Springing the debt trap would not be a miracle cure either: a manageable level of borrowing is a necessary but not a sufficient condition for Greece to start restoring competitiveness and resume growth after three years of economic contraction.

"If there was a deus ex machina tomorrow and you halved Greece's debt-to-GDP ratio overnight, there'd obviously be a huge benefit in terms of cash flow," said George Magnus, senior economic adviser to UBS in London.

"So you can alleviate the financial stress on Greece quite quickly and effectively, but I don't think that in and of itself means the economy is going to grow," he said.

New figures dramatize Athens's bind. As recently as July, the International Monetary Fund was forecasting that Greece would eke out 0.6 percent growth next year. Just 10 weeks later, it reckons the economy will in fact shrink 2.5 percent in 2012 after a 5.5 percent slump this year.

With tax revenues shrinking as the economy shrivels, debt is likely to rise to an eye-watering 173 percent of GDP in 2012 from 162 percent this year.

To illustrate the speed of the deterioration, the IMF based its May 2010 bailout of Greece on forecasts that gross debt would peak in 2012 at 149 percent of GDP.

[MontaniSemperLiberi]

Greece's debt could not have gotten so high except that they don't print their own money. They could raise interest rates and find additional euro's all across Europe. If that wasn't enough, their creditors would give them a bit more.

Even with that opportunity the game is up. Their debt increases all on it's own. It's gone exponential.

[ClearCase_guy]

[ken21]

over 40% work for the government.

[mylife]

All the Asian Markets are down again tonight.
Look out..

[Patrick1]

This just in, socialism doesn’t work.

[lurk]

A nation of addicts is about to run out of crack cocaine.

[MontaniSemperLiberi]

50 million Americans are retired on Social Security and don’t work for the government.

[the invisib1e hand]

Drowning in red ink, [INSERT NATION HERE] has nowhere to turn to revive the economic growth that might put its debt on a sustainable trajectory, reassure angry foreign creditors and offer hope to its recession-weary citizens.

"Death spiral." Now there's an interesting term. Sort of what one might expect to happen to a culture of death.

[kingu]

Greece Debt spending is 10% of GDP, the real economic standard is down 12.3%, meaning Greece is yet another country in a prolonged economic depression. That level of deficit spending is never sustainable, and the problems are incredible - you might get away with it for a single year, but you then add to the core government commitments of spending - covering that deficit spending plus the interest on that debt. Two years, and you’re cutting out social programs just to service the debt. Four years, and you’re drowning in debt.

The choice is difficult, but real - If Greece tomorrow tore up all the debt, they’d still be in heaps of economic trouble, as they’re adding to their deficit in huge numbers each and every day. All that would happen with debt forgiveness is the need for it to be repeated over and over again.

[ClearCase_guy]

That would be Greece on the Left.

[King_Corey]

If we don’t clean house (White and otherwise) we will be here very very soon.

We ran out of fun money a long time ago. Will we learn this lesson? Sad to think that this is people’s lives going down the toilet.

[ElectronVolt]

I remember discussing this with a friend a couple years ago saying Greece would fall into a death spiral (we can call it "Charybdis" to sound more classical) and that we'd follow. The problem is that people will not acknowledge the depth of the problem and will support no serious action to fix the debt. Eventually the economy tanks (I mean really tanks!), and the dying economy makes the problem worse. When Greece falls and then other European countries fall, it'll push us over the brink and we'll tear down Asia.

On the bright side, once we hit bottom, there is no where to go but up. Until then, work on your foraging, gardening, and home defense skills.

[ken21]

let’s put’em to work!

/s

[GeronL]

I hear they haven’t fired a single government employee.... when do they try “austerity”??

[ChildOfThe60s]

If Greece tomorrow tore up all the debt, they’d still be in heaps of economic trouble, as they’re adding to their deficit in huge numbers each and every day. All that would happen with debt forgiveness is the need for it to be repeated over and over again.

Precisely. I have been trying to explain that to some people. It is mathematically impossible to bail out Greece as long as spending exceeds real and potential revenue. And it is a guarantee that isn't going to change.

[RetiredArmy]

Coming to America soon. We are on the edge. When do we step off, next stimulus package?

[ctdonath2]

Nice.

[ctdonath2]

Try this on ‘em:

Total US+European debt is $23,000 per person. Each individual did not agree to the debt, and gets nothing for it...but your name is on the bill, due process is over, and the repo man is coming. What to do? Ink or lead?

[RayChuang88]

I think the IMF and ECB now only have once choice: write off around 40-50% of the Greek sovereign debt and immediately start a four to six month process to get Greece out of the Eurozone, including time to have Greece go back on the drachma as their own currency. That country was already in poor financial shape to start with before entering the Eurozone, and getting out will allow the ECB and IMF to concentrate on saving Spain and Italy, two countries that under the right reform can produce their way out of their debt problems.

[MontaniSemperLiberi]

And Germany on the right.