No way out for Greece

European sentiment towards saving Greece soured over the weekend, and the debate was no longer focused on what measures should be adopted to rescue the debt-laden country.

Instead, the questioning moved to whether Greece's problems were even capable of being solved.

Part of this shift in sentiment undoubtedly reflected disappointment following the summit of European Union leaders in Brussels last week.

Instead of announcing a detailed plan to rescue Greece, there was a statement pledging to support the country, but which neglected to detail what this support might entail.

The Greek disappointment was evident. No sooner had the Greek Prime Minister, George Papandreou, returned to Athens than he vented his frustration with his EU 'saviours'.

In a televised address to his cabinet, Papandreou claimed Greece had become "a laboratory animal in the battle between Europe and the markets”.

And he blasted his fellow EU members for sending "mixed messages about our country…that have created a psychology of looming collapse.”

His outburst will do little to win him the support he needs from German chancellor, Angela Merkel, who is stubbornly insisting that Greece implements stringent budget cuts before it gets any financial assistance.

And even the French were taken aback. French newspaper, Le Monde, reported that Papandreou's outburst had "surprised” Brussels, but that it was likely to be carefully calculated to appeal to his home audience.

Greece has taken umbrage at the lacklustre EU response to its plight and the suggestion that it might face further austerity in March if its existing plans fail to produce results.

The Greek press has also protested vigorously against the EU's decision to bring in the IMF to ensure the Greek government scrupulously adheres to its budget cuts, claiming that such a move amounts to setting a wolf among the sheep.

At the same time, there is fierce opposition in Germany to bailing out the profligate members of the eurozone, and Merkel's tough position on Greece has huge popular support.

Germany's charitable inclinations are unlikely to be spurred by the latest figures that showed the eurozone's economic recovery stumbled in the final three months of 2009.

Gross domestic product in the region rose by a meagre 0.1 per cent in the quarter, compared with the previous quarter.

The French economy posted a strong 0.6 per cent rise in the quarter, but this was not enough to offset zero growth in the German economy, and declines in Italy and Spain.

Greece, meanwhile, posted a dismal 0.8 per cent drop in GDP in the quarter.

Greece's poor economic performance in the quarter has fuelled doubts as to whether its government can possibly meet its ambitious deficit reduction program.

Such severe cuts in government spending will likely plunge Greece into a deep recession. As the economy falters, tax receipts will dwindle. Meanwhile, governments will face more pressures to spend on social programs such as unemployment benefits.

And even if Greece does manage to slash its budget deficit, it faces an even more intractable problem. It is simply not competitive within the EU, and as a result, its imports far outweigh its exports.

Because it cannot adjust its exchange rate, Greece will have to endure years of falling costs – including falling wages – if it is to regain competitiveness.

But this deflation will further weaken Greek economic activity, and make it harder for the government to make progress in terms of cutting its budget deficit as a proportion of GDP.

Societe Generale global strategist, Albert Edwards, argues there is little that can be done to help Greece.

"My own view is that there is little 'help' that can be offered by the other eurozone nations other than temporary confidence-lifting 'sticking plasters' before the ultimate denouement: the break-up of the eurozone,” he wrote in his latest note.

But in case you thought the problem was confined to Greece, Edwards has some grim news.

He points out that in the wake of the financial crisis, the private sector started a rapid process of paying back debt and deleveraging.

This process risked plunging the world into depression. Governments then stepped up their spending, and printed money to maintain the illusion of economic prosperity.

As a result, he warns, governments around the globe have amassed far too much debt.

"And here is the topic that will dominate over all pundit round table discussions in the next weeks: the entire world is insolvent, although some are more insolvent than others”.

Edwards calculates Greek total liabilities (including on and off balance sheet debts) to GDP is running at 800 per cent. The same ratio for the European Union stands at 470 per cent, while the US is over 500 per cent.

"There is no way out but default”, is the dire prognosis from this long-term bear.