Greece: “Trapped in a Dark Endless Tunnel”

The Globe and Mail, March 26, 2012. © Copyright 2012 The Globe and Mail Inc. All Rights Reserved.

Remember Greece? The financial crisis there might be dimming in the minds of many investors ever since the euro zone found the necessary money to bail out the country and creditors agreed to a debt restructuring. However, not everyone believes that everything is well.

Take C. J. Polychroniou, a research associate and policy fellow at Levy Economics Institute of Bard College: He argues in a new policy paper [One-Pager No. 28] that Greece is about to become a “zombie debtor” and, in a “doomsday scenario,” will be forced to leave the euro zone. In other words, everyone’s greatest fears are about to be revisited.

“The bond swap is a temporary fix and will not pull Greece out of its debt spiral,” he said in a one-page release. Part of the problem is that the latest bailout by the euro zone comes with harsh austerity measures, and these measures are going to undermine Greece’s economic growth and its ability to meet debt payments.

“The most optimistic projections suggest that Greece will return to a budget surplus by 2015,” Mr. Polychroniou said.

“However, even then, the predicted primary surplus of €20-billion won’t cover more than 30 per cent of the cost of carrying its debt. . . . In sum, Greece is not only bankrupt but also remains trapped in a dark, endless tunnel.”

If he’s right, global stock markets could be in for a round of turbulence. Europe’s sovereign-debt crisis has weighed heavily on stocks, off and on, over the past two years. Most recently, the crisis helped drag the S&P 500 down nearly 19 per cent from last July to the end of September.

Since then, a combination of European action in holding off a messy Greek default and upbeat U.S. economic news have driven stocks to four-year highs.