After a marathon overnight negotiating session, European leaders agreed early Tuesday morning on a €130 billion bailout package for Greece which, pending approval by several European legislative bodies, prevents it from missing debt payments due March 20.

To be clear, Greece’s economy remains in terrible shape for now and the foreseeable future, but this deal prevented it from going into a disorderly default, meaning, Greece would not have enough money to pay all its bills and it would pay them on an unpredictable basis. Obviously, the European central banks who are the major holders of Greek debt wanted to avoid this, so they got Greece to agree to all kinds of invasiveness, in addition to previously agreed-upon austerity programs, in exchange for buckets of largely Nordic cash to facilitate paying down some of the debt and restructuring other, as well as giving Greek banks some funds with which to operate.

As much as I would love to further discuss sovereign debt restructuring, the following, directly from the Eurogroup’s report, is the big news. I’ll let the official language speak for itself:

To this end, we deem essential a further strengthening of Greece's institutional capacity. We therefore invite the Commission to significantly strengthen its Task Force for Greece, in particular through an enhanced and permanent presence on the ground in Greece, in order to bolster its capacity to provide and coordinate technical assistance.

Euro area Member States stand ready to provide experts to be integrated into the Task Force. The Eurogroup also welcomes the stronger on site-monitoring capacity by the Commission to work in close and continuous cooperation with the Greek government in order to assist the Troika* in assessing the conformity of measures that will be taken by the Greek government, thereby ensuring the timely and full implementation of the programme.

The Eurogroup also welcomes Greece's intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece's debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter's debt service directly to a segregated account of Greece's paying agent.

Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible.”

(*The Troika consists of the European Union, European Central Bank, and International Monetary Fund, who are, not coincidentally, major holders of Greek bonds.)

To summarize, in exchange for this €130 billion bailout, Greece has to a) give Euro monitors a permanent ground presence in Greece, b) establish a separate account for the direct deposit of debt payments, overseen by Euro monitors, and c) codify this arrangement by effectively giving its bondholders a first lien on the Greek economy.

To summarize even more concisely, Greece is no longer an economically independent country. It is now effectively a subsidiary of the Troika. To use a timely analogy, Troika is Bain Capital and Greece is one of their problem portfolio companies. This is the part of my column in which I plead with Mitt Romney, once again, to consider a post in Athens. It's the ultimate turnaround job for the ultimate (self-admitted) turnaround guy. No comment on his choice of "Turnaround" as the title of his book.

Anyway, at the same time a cabal of international bankers (probably the first time this term was actually used in accordance with what it actually means instead of you know who) were negotiating bailout terms in Brussels, many of us here were enjoying the Presidents Day holiday. We can wonder what the Founding Fathers might think about the current events in Europe, or we can just read a direct quote from one Benjamin Franklin:

“They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”

It seems to me like Greece is giving up what many of us would consider an essential economic liberty, sovereign control of government expenditures, in exchange for temporary economic safety in the form of avoiding a disorderly default and remaining in the Eurozone for now.

For Greece to meet its requirement set forth in Tuesday’s agreement and achieve a target debt-to-GDP ratio of 120%, its economy would have to do this (chart by Felix Salmon).

As a condition of the bailout, Greece is set to undergo a major austerity program that will cut direct government spending and eliminate jobs and salaries, and thus reduce consumer expenditures as well.

In addition, while Greek bonds held by European central banks were protected (with only interest profits being passed on to Greece), private investors are being pushed (and likely will be forced) to take a 53.5% haircut (discount) on the face value of their bonds, and having their maturities extended out to 2042 with extremely low, far from market, interest rates. Also, any new debt will be junior (or second in payment priority) to its massive amount of existing debt. In English, this means Greece has about as good a chance of attracting new private investors as Bernard L. Madoff Investment Securities LLC.

It seems to me that reducing government and personal spending and basically closing the door for private investment in Greek securities is no way to achieve GDP growth. Even Greece’s one industry that might benefit from an economic downturn, tourism, would definitely suffer from any kind of violence or instability that Greece’s new economic regime (a wholly-owned subsidiary of the Troika) might precipitate. Also, Greece not controlling its own currency, which it could devalue and use attract tourists with €5 hotel rooms cancels out another Pyrrhic advantage of economic failure.

So what happens if/when this current bailout deal proves not to be enough, Greece’s economy fails to grow as planned, and Greece, living check to check, comes up against bills it can’t pay once again?

The other Euro economies would have to choke back vomit before approving another bailout package, and we could be certain that the strings attached to any new money would put such things as the “first (lien) amendment” to shame. Greece would have to make further cuts and likely surrender some highly meaningful assets. Selling certain Aegean islands to a buyer such as Turkey probably would not be off the table. Yes, this would be a grotesque affront to many Greeks, but once a government has allowed foreign entities to place claims on its treasury, it’s hard to say that letting go of some rocky outposts crosses a line.

Or, Europe can stop punishing future generations of Greeks for the sins of their legislators, and allow its economy to fly again by shedding the rotten cocoon of unpayable debt.

Adding hundreds of billions of Euros in debt to a shrinking economy, and making it so that this debt, by law, has to be paid before all else, only makes the situation seem even more hopeless for Greeks who may, in better times, be inclined to set out and start a business. Nothing is going to put this institutional overreach into crystal clear focus for the electorate like the inevitability of government workers in Athens missing checks so that German bondholders can get paid. Greece is now, for all intents and purposes, a colony.

It is hard to blame the taxpayers of Germany and the Netherlands who want serious oversight on how a notoriously inefficient (I’m being nice) ministry of finance spends "their" money, but this is dangerous precedent for Greece. This deal transfers some economic ownership of Greece’s treasury to foreign entities and only delays, not averts, the eventual day of reckoning in which Greece’s debts will have to be written off anyway.

Beggars can’t be choosers, and Greece’s political leaders had to accept any deal that would allow them to pay their debts. However, Greece will never fully recover until it pays off its overwhelming senior debt, which is rising as Greece’s economy shrinks, making it that much more daunting.

Greece is not just a subsidiary of the Troika. It is, in a way, its indentured servant. An indentured servant that can’t purchase his freedom because his ability to earn money is crippled by the crushing debt that makes up his indenture. A Sisyphean Greek bailout may be poetic, but it is cruel, and it is counterproductive.

Europe needs to stop throwing good money after bad policy and either forgive a large part of Greece’s debt or let it go through an orderly default, buttressing it enough to keep it in the Eurozone, while using its funds that would go toward the theoretical third Greek bailout to protect and backstop other vulnerable Euro economies like Portugal and Italy. Greece can never be economically solvent with its current debt structure, and it is certainly not economically sovereign with its current political structure. Benjamin Franklin might say they deserve neither, but it wasn’t Greeks who made that choice.

Greece gets to choose soon enough.  It has a legislative election in April, and its voters might not accept its incumbent leadership’s (to be fair, somewhat coerced) Sophie’s (or Sophocles’) Choice between solvency and sovereignty, and decide to vote in populist candidates vociferously opposed to the bailout plan. We will have to wait and see what the Oracle says about the vote, but no supernatural ability is required to know that the current arrangement is unrealistic in any universe.

 

Reach Staff Columnist Matt Pressberg here.