Euro debt trouble: Another Greek bailout
MOSCOW, RUSSIA, July 23, 2011 – “Stock markets and the euro rallied on Thursday after European leaders moved closer to hammering out a new rescue plan... to stimulate the Greek economy,” wrote the British Guardian yesterday.
To put it in simple terms: Greece is going to get bailed out once again.
The plan, however, has a couple of fatal flaws.
To begin with, most of the Eurozone countries are deeply indebted themselves. Public debt averages more than 85 percent of GDP across the Eurozone. Several of the nations – such as Spain, Italy and Ireland – are teetering on the verge of default.
This means that the Eurozone does not really have money for any bailouts. Neither is there much room for borrowing as nervous creditors are beginning to demand higher interests rates. To save Greece, the European Central Bank will have to print money in the end.
Paying creditors with freshly-minded money may seem like a clever way out. The problem is that the influx of the new cash will expand the money supply and further debase the already fragile currency. As a result, people in Europe will get less for their buck.
The second problem is that Greece will never repay the new loans that are coming its way. This is because Greece is a country that is simply incapable of adhering to fiscal discipline, if history is anything to go by.
According to a recent book by Carmen Reinhart and Kenneth Rogoff, Greece has reneged on its debts five times since gaining independence in 1829. Reviewing the book in the Wall Street Journal, Matthew writes that Greece “has existed in a 'perpetual state of default' since its independence... having spent 50.6% of those years in default or rescheduling.”
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This is the worst record in Europe hands down.
The Land of Hellas will eventually default, which is what Greece always does when it finds itself under fiscal duress. Defaults are simply the traditional Greek way of dealing with its obligations.
Bailing out Greece now will only postpone the inevitable. A highly-placed trader by the name of Will Hedden is quoted by the Guardian as saying, “the Greece problem has not really gone away, just been brushed aside."
Hedden gets it right. We will surely hear of Greece yet again. After all, it got a massive 110 billion euro bailout in May 2010, which, we were told, would fix things once and for all. And here we go again.
The only way to solve the Greek sovereign debt problem is to cut the country loose from the Eurozone. This much should be quite obvious.
Sarkozy and Merkel, the architects of the latest bailout which is worth 159 billion euros, undoubtedly know this.
So why do they keep pouring money down the fiscal black hole that is the Land of Hellas?
As in most cases, we can find the answer if we follow the money trail. Guess who holds large portions of Greek government debt? It is banks and and pension funds in Germany and France. If Greece defaults, many of them will go down with it.
Hence the Greek bailout is really a bailout of German and French financial institutions. Too bad, that it is only a temporary fix, since the Greek debt problem is not going away. It will rear its ugly head soon.
When it comes to making tough choices, Europe's politicians – just like those in the US – prefer to kick the can down the road.
It would be much wiser for the EU to let Greece go and take the loses now than to do it down the line when the unavoidable default will bring much more pain.
When that happens, the Eurozone will have lost untold billion in bailouts that were in vain. The heavily indebted and devalued euro may itself not survive the strain.
We are in for some interesting times.
-
To put it in simple terms: Greece is going to get bailed out once again.
The plan, however, has a couple of fatal flaws.
To begin with, most of the Eurozone countries are deeply indebted themselves. Public debt averages more than 85 percent of GDP across the Eurozone. Several of the nations – such as Spain, Italy and Ireland – are teetering on the verge of default.
This means that the Eurozone does not really have money for any bailouts. Neither is there much room for borrowing as nervous creditors are beginning to demand higher interests rates. To save Greece, the European Central Bank will have to print money in the end.
Paying creditors with freshly-minded money may seem like a clever way out. The problem is that the influx of the new cash will expand the money supply and further debase the already fragile currency. As a result, people in Europe will get less for their buck.
The second problem is that Greece will never repay the new loans that are coming its way. This is because Greece is a country that is simply incapable of adhering to fiscal discipline, if history is anything to go by.
According to a recent book by Carmen Reinhart and Kenneth Rogoff, Greece has reneged on its debts five times since gaining independence in 1829. Reviewing the book in the Wall Street Journal, Matthew writes that Greece “has existed in a 'perpetual state of default' since its independence... having spent 50.6% of those years in default or rescheduling.”
----
This is the worst record in Europe hands down.
The Land of Hellas will eventually default, which is what Greece always does when it finds itself under fiscal duress. Defaults are simply the traditional Greek way of dealing with its obligations.
Euros!
Hedden gets it right. We will surely hear of Greece yet again. After all, it got a massive 110 billion euro bailout in May 2010, which, we were told, would fix things once and for all. And here we go again.
The only way to solve the Greek sovereign debt problem is to cut the country loose from the Eurozone. This much should be quite obvious.
Sarkozy and Merkel, the architects of the latest bailout which is worth 159 billion euros, undoubtedly know this.
So why do they keep pouring money down the fiscal black hole that is the Land of Hellas?
As in most cases, we can find the answer if we follow the money trail. Guess who holds large portions of Greek government debt? It is banks and and pension funds in Germany and France. If Greece defaults, many of them will go down with it.
Hence the Greek bailout is really a bailout of German and French financial institutions. Too bad, that it is only a temporary fix, since the Greek debt problem is not going away. It will rear its ugly head soon.
When it comes to making tough choices, Europe's politicians – just like those in the US – prefer to kick the can down the road.
It would be much wiser for the EU to let Greece go and take the loses now than to do it down the line when the unavoidable default will bring much more pain.
When that happens, the Eurozone will have lost untold billion in bailouts that were in vain. The heavily indebted and devalued euro may itself not survive the strain.
We are in for some interesting times.
-
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