7417 an americans view of the greek crisis year 2010 month 05 itemid 127

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An American’s View Of The Greek Crisis

Written by Matt Hougan

  
May 06, 2010 16:02 (CET)

I know that there’s no method in place to do so. But come on, you should be able to figure that out. How about implementing this rule: If you lie about your books and break European covenants on debt and spending, you’re out. That would do it.

Seems like Greece broke its promises, right? There should be consequences.

Besides, as you suggest in your blog, Paul, we all know how the Greek tragedy ends. Even if Germany takes a deep breath and agrees to the bailout package, and even if Papandreou manages to shove through harsh austerity measures amidst the rioting, chaos and tragic deaths in Greece, it’s clear as day that we end up right back where we are in another year or two.

Earlier this morning, you asked me how Greece looks to an American. Without being an expert, here’s what I see:

  • I don’t trust the Greek books. I’m guessing the hole is bigger than we are aware of, and the required bailout bigger than the US$140 billion being talked about today.
  • I don’t believe Greece can push through the austerity measures it truly needs to get its house in order. The population will not bear it. The measures passed so far do nothing to reduce Greece’s long-term debt, which is still scheduled to rise. They merely slow the pace. And I don’t blame the Greeks: the required concessions and adjustments are simply too large.
  • Meanwhile—and critically—it also seems painfully clear that Germany and other bailout nations will not bear a second Greek support package. The window is only open once for Greece.

So in the end I see the bailout package as good money being placed after bad. It merely postpones the inevitable, which is that Greece will exit the Euro, default and devalue, and go into an economic funk lasting 5-20 years.

All that said, I don’t share your sentiments that the Euro is doomed. I think the Euro conveys huge economic benefits to Europe, and the pressure to maintain or even expand the interconnectedness is significant. Eliminating the costs of hedging exchange rates and fees for currency conversion, as well as avoiding competitive devaluations, speculative activity, etc., are big benefits. I don’t have to regurgitate the pro-Euro arguments; I think they’re self-evident.

But then again, so are the anti-Euro arguments regarding state-level monetary policy.

In the end, the “who’s next?” witch hunt searching out the “next Greece” strikes me as speculative and half-hearted. The bond markets aren’t pricing in defaults by Portugal, Spain, Italy or other EU states, despite the fever of contagion-talk raging in the press. So I imagine that the Euro will survive, while Greece will revert to (a very cheap) drachma.

At least, that’s the way it looks from here.

 

 

 

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