According to economist Carl B. Weinberg (via the New York Times) a Greek default is "imminent." Other commentators suggest a default as soon as Tuesday. The credit default swap market also points to an imminent default, as shown at right by the soaring cost of purchasing protection on Greek debt.Events in Europe moved rapidly this weekend. First, the meeting of the finance ministers of the Eurozone accomplished nothing except a delay of the next tranche of the Greek bailout until October at earliest, and then only if the Greeks impose further austerity in a bid to get their budget deficit in the promised range. Second, the Greek Prime Minister cancelled a trip to the US (to meet with the IMF) and returned to Athens for an emergency cabinet meeting. Third, the emergency cabinet meeting ended earlier today with no new austerity measures announced.
This catastrophe will climax very soon. The bailout sentenced the Greeks to a fiscal contraction that led to economic contraction that fed further deficits through impaired revenues and higher expenditures. Expansionary fiscal contraction failed--austerity as a solution to high sovereign debt now lies thoroughly discredited. They cannot meet the deficit reduction targets required for the next tranche, even if the Greek people would go along which I doubt. The IMF and the Germans do not appear willing to modify the conditions to paying the next tranche. At some point the hole is too big and neither realistic Greek austerity nor realistic Eurozone resources can be mustered to fill it. Politically, averting a default may be impossible until the Greeks and other Europeans see the costs of a default. In short, leaders are as paralyzed now as they were on the eve of the Lehman catastrophe. Greece may be too big to save.
The consequences of this reality are deeply negative. Gordon Brown suggests the 1930s beckon. Will Hutton thinks capitalism itself is going down the tubes. Some suggest Armageddon. Simon Johnson, the former Chief Economist of the IMF, states that any "further adverse consequences will precipitate a run on Italy." If the contagion reaches Italy the losses would be so massive that banks would then topple like nine pins. So it is hard to overstate how ugly this could get.
This default scare seems to be happening too much lately. However, this seems to be much worse than when the US was in fear of default. As citizens how are we to listen to our leaders talk about people spending on credit cards and accumulating so much debt they default when our country is doing the same?
ReplyDeleteIt appears that the default was somewhat avoided, but perhaps they should have been allowed to default? Admittedly, defaults hurt the lenders, but bailouts have the added problem of enabling the initial problems that may have led to default. This may be an overly simplistic example, but if I loan money to a borrower whose lifestyle leads to inability to repay, giving the borrower more funds to sustain the lifestyle doesn't fix the problem. I recognize that austerity measures will be taken, but how long will they last?
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