Why the Greek Bailout Went So Wrong

Justin Fox in the New York Times:

In 2010, Greece was insolvent. The profligacy of Greek governments and the staggering laxity of lenders after the country joined the European common currency in 2001 had left it with huge debts that, in the aftermath of a global recession, it could no longer afford to service. Countries in such straits usually go through ad hoc bankruptcies known as sovereign debt crises, in which the currency is devalued and debts defaulted upon and/or written down. These can be messy, but they do at least allow for fresh starts.

Short of leaving the euro, a move with no precedent or procedure and a high risk of cascading chaos, this was not an option for Greece. So in May 2010, the European Commission, European Central Bank and International Monetary Fund stepped in with what was characterized as a 110 billion euro ($146 billion at the time) bailout.

It wasn’t so much a bailout of Greece, though, as of its lenders, notably the struggling big banks of France and Germany. Greece still owed an impossible amount of money, only now its main creditors were the “troika” of E.C., E.C.B. and I.M.F., which went on to impose harsh austerity measures. That austerity accelerated Greece’s economic decline, making repayment of its debts even less likely. More bailouts that weren’t exactly bailouts followed.

“Fiscal waterboarding” is the name that the University of Athens economist Yanis Varoufakis gave to this process, after the torture method that simulates near-drowning again and again. And just as intelligence experts generally don’t think waterboarding is an effective way to extract information, it is hard to find an outside economic or financial expert who thinks the troika’s Greece policy has been effective or sensible.

More here.