Wolfgang Munchau may be a German (and therefore potentially biased on the Greek debt question) but he is also a highly respected financial journalist writing regularly for the FT these days. This is what he wrote last Saturday:
‘I am willing to risk two predictions. The first is that Greece will not default this year. The second is that Greece will default. The Greek government has demonstrated that it can still borrow at a rate of about 6 per cent but if you do the maths on the public debt dynamics, as I did recently, it would be hard to arrive at any other scenario than an eventual default.’
I’ve done a similar calculation for the UK – and the US – and I concur with Munchau’s view completely: if you take the real potential for growth and then siphon off a certain amount over time for debt repayment, only the most draconian public spending cuts would allow an escape from the vicious spiral upwards to insolvency.
I hated maths at school (an undiagnosed numerical dyslexia) but my Northern English upbringing nailed the multiplication factor of debt into my mind anyway. This means I am able to analyse its tendency for organic growth while ignoring the the wise-assed protestations that I ‘don’t understand how it works’.
But it actually works very simply like this: if you don’t throttle huge debt in the early part of the term, it will strangle you. This is because after a certain time-window (dependent upon ability to repay and interest rate being charged) the level of debt outstanding rises exponentially rather than as a simple multiple. It’s a bit like starting off a rabbit farm with three mating couples: tumble the numbers, and short of an invasion of rabid foxes, after five years you will have 440,000 rabbits.
Greece and its travails are nothing more or less than a dry run for Spain, Portugal, Ireland and the UK. Forget the differences in economic performance: without early attention to massive debt, the end result will be exactly the same.
As predicted here in February, not only are the major credit ratings agencies downgrading one Greek bank after another on an almost daily basis, the market at large is leading even this charge by ignoring ‘central’ interest rate levels. Instead, the market’s cry is “take it or leave it”.
I very seriously doubt if Cameron has a handle on the maths, although I increasingly suspect Osborne does. Perhaps that’s why he looks like a terrified chihuahua every time the subject comes up – because with the polls moving in the Right direction, Wee George knows this is about to be his personal problem.