Well, we know where David Rosenberg stands on Greece and the bailout:
In my opinion, Greece is the same canary in the coal mine that Thailand was for
emerging Asia in 1997, which ultimately led to the Russian debt default and
demise of LTCM; the same canary in the coal mine that New Century Financial in
early 2007 proved to be in terms of being a leading indicator for the likes of
Bear Stearns and Lehman. So, the most dangerous thing to do now is to view
Greece as a one-off crisis that will be contained. Even with this new and
aggressive EU-IMF financing arrangement that has managed to trigger a wild
short covering rally yesterday, the risks are still high that the contagion spreads
to countries like Portugal, Spain, Italy and even the U.K., which has already
received some warnings from the major rating agencies and is gripped with
political gridlock in the aftermath of last week’s uncertain election results.
Rhetorically, this is good stuff, but this might be even more interesting is his analysis of austerity prospects in the PIIGS:
We did some in-depth analysis on how the economies of the “PIIGS” (Portugal,
Italy, Ireland, Greece and Spain) countries (and the rest of Europe) would fare if
deficit-to-GDP ratios were to revert back to the Maastricht criteria of 3%. The
adjustment will be painful for Europe in general, slicing off about 1% GDP growth
annually over the next three years, and very painful for the PIIGS specifically. If
these countries’ fiscal ratios were return to 3%, Ireland would see four
percentage points (ppts) shaved off nominal GDP annually over the next three
years, Greece 3.5ppts, Spain 2.8ppts, Portugal 2.2ppts and 0.8ppt for Italy.
It would not be a picnic for the rest of Europe, where many countries were running
deficits greater than 3% of GDP in 2009. We estimate that fiscal cuts will shave
about 1.5ppts off France’s nominal growth, 1.0ppt for Belgium, and 0.8ppt for the
Netherlands. Austria and Germany would only have to endure 0.2ppt and 0.1ppt
lower GDP growth, respectively, to bring their ratios back in line with targets.
Finland is the only country with a GDP deficit under 3% (using 2009 data). Note
that the starting point for our analysis was 2009 — the adjustment could be more
painful as deficit-to-GDP ratios look to have deteriorated further in 2010.
This may be the real problem. Even if you have the political will to cut spending (a HUGE “if”), you may not get anywhere, as demand evaporates, your economy goes into recession, and your debt widens further, as what happened in Ireland.
Don’t miss: Why California is the next Greece >