Comment & Debate
On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively high-interest loans) be activated. And, on May 2nd, the European Union and IMF agreed to a $145 billion bailout for Greece, and a $975 billion ‘solidarity package’ designed to protect other Euro zone countries. The question remains whether this bailout is the right move, or whether default and national bankruptcy is superior? The article below breaks down the pros and cons. The debate comes after years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck in 2009 and 2010. This whisked away a curtain of partly manipulated statistics to reveal debt levels and deficits that exceeded limits set by the Eurozone, an economic and monetary organization comprised of 16 members of the European Union. The national debt in Greece, put at €300 billion ($413.6 billion), is bigger than the country’s economy, with some estimates predicting that it will reach 120 percent of gross domestic product (GDP) by the end of 2010. The country’s deficit –how much more it spends than it takes in — is 12.7 percent. Greece’s credit rating — the assessment of its ability to repay its debts — has been downgraded to the lowest in the Eurozone, meaning it will likely be viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise. The Greek government of Prime Minister George Papandreou, which inherited much of the financial burden when he took office late last year, has already scrapped most of its pre-election promises and must implement harsh and unpopular spending cuts. Greece is already in major breach of Eurozone rules on deficit management and with the financial markets betting the country will default on its debts, this reflects badly on the credibility of the euro. There are also fears that financial doubts will infect other nations at the low end of Europe’s economic scale, with Portugal and the Republic of Ireland coming under scrutiny.
“Problems in any euro area member country are bound to have strong negative spill-over effects for its partners.” [“How to deal with sovereign default in Europe:Towards a Euro(pean) Monetary Fund”, by Daniel Gros and Thomas Mayer, February 2010]
A Greek default would be disastrous, even more than the Lehman Brothers collapse. Greek is a nation, and a member of the euro zone. A default would be disastrous in the international economy. South Korea, a relatively remote trading partner with Greece, had a huge impact on the South Korean stock market. A confidence shakedown on the Greece bailout was thought to have caused the Dow’s 1000 points decrease. If the hint of a default could cause that much damage, how much carnage the default itself would bring?
“The short-term cost to the economy would be huge. Imagine the Greek government stopped paying interest on its debt tomorrow. It would still have a primary deficit – excluding interest payments – of more than 8% of national income, and it might not have anyone to borrow that money from. That could mean more austerity, not less, especially if the country remained in the euro. There would also be the collapse of the domestic banking system to consider, Greek banks being the largest holders of Greek sovereign debt. And that’s before you get even to the costs of contagion (or spread) for other countries, as investors wonder who will be next.”
“Had Greece defaulted on its loans German banks would have taken huge losses. That would have created a domino effect and a second world banking crisis. It’s a no win situation. All they have done is postpone the day of reckoning. The global economy is playing an old shell game. It’s days are numbered.”
“Rather than bail out Greece, the E.U. and IMF should allow it to default. This will hurt Greece’s creditors, but those entities assumed the risk when they loaned to a country long known for its profligate ways. If Greece does default, its economy may suffer in the short term. External credit will be scarce to non-existent, so Greece will have to live within it means. But however painful this adjustment may be, it is unavoidable if Greece wants to join the first rank of nations; current policies are unsustainable from every perspective, so the sooner Greece abandons them the better.”
“If Greece went bankrupt, it will clean up the system, (the) euro will go down for a while but then in my view, the euro will be a very strong currency.”
“The Euro’s largest player, the European Central Bank, has yielded to political demands and, amongst other things, will start purchasing sovereign bonds in the market. This transmits the danger of default from financially extended countries such as Greece, Portugal and Spain to the Euro zone all together. And the ECB has to finance it by successfully printing Euros, further weakening the currency. A feeble Euro will make exports more gung ho. But if the Euro goes too down, its rank as a reserve currency will deteriorate.”
“We are not only helping Greece but we stabilize the euro and thus help people in Germany.”
“The Greek crisis is simply that the Greek government is spending more Euros than it receives in tax payments, and private banks are balking at lending it more. Since the Greeks no longer have a national currency, they cannot debase it and pay off their creditors with cheapened drachmas. So, the Greek government is left with the choice of raising taxes, cutting spending, or some combination of the two that will satisfy its creditors. Now, would someone please tell me why and in what form this Greek financial crisis, serious as it is to the Greeks themselves, constitutes a threat to the Euro?”
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