Indebted Greece and the world according to Dr. Doom

Neil Macdonald on indebted Greece and the promise of George Papandreou.

Was sitting at a sidewalk bar in Greenwich Village Sunday night when Nouriel Roubini, probably the most famous economist in the world at the moment, slipped into a chair at the next table.

Roubini is the man who predicted the subprime mortgage meltdown here in the U.S. three years before it happened. He clearly takes a savage pride in the sobriquet his generally grim outlook has earned him: Dr. Doom.

I told him I had just interviewed Greek Prime Minister George Papandreou, which seemed to perk up the doctor: "Hmm. What'd he say?"

Well, that Greece is going to pay all its debts and that any talk of default, or the more polite term, "restructuring," is ridiculous, and that the country is going to clean up its finances, and that it will be painful but ultimately everything will be fine.

I can't quote Roubini's response exactly, because I was eating, too, not taking notes.

But he practically snorted in the middle of a mouthful of mozzarella and tomatoes, and pointed out that Papandreou has to say these things, even if he has no intention of making good on Greece's debt. Which Roubini says Greece can't do in any event.

"Restructuring," predicted Dr. Doom. "I'll be writing about it next week."

Patriotic duty

And there it is. Affable, calm, projecting honesty and transparency, Papandreou is on a mission to convince the world's bankers and, importantly, the G20 of something most economists think impossible.

Greece's Prime Minister George Papandreou is seen in May 2010 after Greek lawmakers approved the government's 30 billion euro ($40 billion) austerity bill. (Thierry Roge/Reuters)

"We will honour our obligations to our creditors," the prime minister told me, "and that's what we're doing."

The thing is, he intends to do this by disrupting a way of life: He's going to make tax-evading Greeks pay up; he is going to drastically reduce the country's bloated public service, cutting their pay by as much as a fifth; and he is going to force those who remain to work until 65, instead of slipping away to a pensioned retirement in their 50s.

He's also jacked up sales taxes.

In Greece, just the announcement of these measures has provoked violent riots. A bank was firebombed last month, killing three people.

But Papandreou insists his country is ready to take the pain.

Greeks, he says, "realize that they have a patriotic duty. We have to be credible again. We have to show determination that we are ready to make some sacrifices, and we've done so."

Cooked the books

To his credit, Papandreou has also put an end to the official lies.

Late last year, for example, he came clean about the national deficit, which his political predecessors had originally reported at 3.7 per cent. It was of course a great deal higher and Greece will actually overspend this year by 13.6 per cent.

As Desmond Lachman, a former senior official with the International Monetary Fund, put it: "Greece was cooking the books for years, and cooked the books to gain entry to the eurozone."

That's as may be, says Papandreou, although he does insist Greece was admitted to the European Union "on merit."

But when asked directly what exactly the difference is between how, say, Enron misled its investors and what Greece did to mislead the international bond markets, he takes no issue with the comparison.

In fact, he says, some of the former officials and politicians responsible may eventually meet the same fate as the Enron swindlers.

"It is a case which we are going to be examining in our parliament. There are responsibilities, there may be legal ramifications for those who actually did this to our country."

Compounding interest

Papandreou is so humble, so optimistic, and so obviously committed to rescuing the reputation and finances of his beloved homeland that you want him to succeed.

He comes across as almost vulnerable. There is none of the condescending self-regard world leaders so often bring to a discussion. His staff and the diplomats representing him in New York clearly adore him.

Supporters of the Greek Communist Party shout slogans during a rally against the government's austerity measures in Athens in May 2010. About 2,000 Greeks marched on parliament and unions organized a nationawide strike. (John Kolesidis/Reuters)

He is also getting good press, including an almost fawning profile in the New York Times recently.

But reality is unsentimental. Compound interest is relentless and its arithmetic is irreducible, as Paul Martin, Canada's deficit slayer, liked to say.

Martin, like Roubini, predicts Greece will restructure, ultimately forcing its investors to take less.

A few weeks ago, Martin told me Greece is already at the tipping point, where just servicing your debt begins to eat you alive.

Papandreou is well aware that Martin once successfully pulled off a Canadian version of what he's attempting to do now. ("Would you advise that I speak with him?" he asked politely.)

But Greece is now far past the point where Martin found himself in the mid-1990s.

Lachman, for one, notes that American debt-rating agencies have downgraded Greece's status dramatically and that one is advising Greek bondholders not to expect more than 40 cents on the dollar in the long run.

The IMF itself predicts that, even if the austerity measures go as planned, Greece's debt will grow from 115 per cent of GDP to 145 per cent in three years. Which means even heavier borrowing just to make interest payments.

"There is no amount of austerity that will permit Greece to even meet its operating expenses," says Peter Morici, a macroeconomist at the University of Maryland. "Debt will grow until the system collapses around it."

He would say that

Papandreou struggles valiantly against what he regards as Cassandras.

Greece has a dynamic economy, he says. The largest shipping industry in the world. A hardworking population. He wants to talk about his country's potential for wind energy.

Furthermore, he says, why should anyone believe the Wall Street ratings agencies? They actually helped create the American financial crisis by rating subprime garbage securities as triple-A.

He also muses that these ratings agencies may have a self-interested agenda in attacking "not just Greece, but Europe," in that they still work for investment banks, many of which are betting heavily that Greece will fail.

These are good points and he sounds reassuringly stalwart when he vows, over and over again, that Greece will never restructure: "Absolutely not. That was a decision we have made. That was an option. We took it off the table."

But then, as the British like to observe, he would say that, wouldn't he?