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Greece Faces The Endgame, Alone

Europe seems to have made up its mind about one piece of its financial crisis: the leading EU countries now believe that the euro and the European economy will both survive a disorderly Greek default that drives the country out of the euro.

Greece’s threat to the euro area has always been financial.  Its economy is too small to affect the health of the zone as a whole; the fear was that a Greek default would push banks (who had bought a lot of Greek bonds with the blessing of European bank regulators) into insolvency and cause a wider financial crisis.  Thanks to generous ECB bank funding, with more available in a second round of near-free money, the banking system now looks able to withstand a Greek default.

Nobody’s afraid of a Greek default anymore, except the Greeks, and nobody but the Greeks much cares if the Greeks leave the euro. The other European countries aren’t going to throw Greece under the bus, but they aren’t going to break a sweat trying to save it from itself.

That seems to be the read from the last day’s events: the Greeks finally signed up to a new round of economic measures, and their “European partners” turned it down flat. In the old days, when Europe feared a Greek meltdown, there would have been lots of comforting noise in Brussels hoping to soothe global markets amid promises of an eventual resolution.

There’s no mood music playing this time; Europe is waiting for Greece to make up its mind, and can live with the situation either way.

Apparently, it’s the hour of tough love. Or at least of tough something.

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  • Otiose8

    When the ECB three year loan program to Euro banks calmed the markets, that signaled a turning point on further ‘bailouts’ for Greece. Now that there is a workable liquidity bridge to get Euro banks over the initial repurcussions of the loan write-offs caused by a Greek default, soothing rationalizations justifying a refusal on the bailout will be easy to come by. Actually not a refusal – a ‘yes, but….’. At this point it really doesn’t matter what the Greeks agree to key agents in the process will easily find new hurdles that ultimately the Greeks can’t or won’t meet (e.g cut pensions before funds are released). Greek promises of future political actions will not be enough.

  • Jim.

    So they’ve spent the time they’ve bought to isolate themselves? If so, good strategy.

    Now to isolate from Italy, a harder problem.

  • Mark Michael

    The public noises about the whole eurozone and its euro coming apart, a global “contagion” resulting has to be understood (partly) as the exaggerated cries of a special interest trying to get a handout. Who would that be? The banks, the wealthy investors, hedge funds who bought and owned that dodgy Greek debt. They wanted to be bailed out, and figured a little fearmongering would help make the sale.

    This is why our chattering class elite – the punditry – should take the trouble to learn the basics of economics and banking. Then they wouldn’t get taken in by this kind of dishonest, self-centered lobbying! Greece’s GDP is maybe 5% of the EU’s total GDP. Yes, their debt seems outsized compared to the Greek GDP, but in a default or “restructuring” it wouldn’t all go to zero: they’d figure out some discounted terms for it.

    It isn’t just the banks & private sector investors that are involved, but the politicians are also a big, big part of the problem. They’re always “spending other people’s money” – tax dollars – and are tempted to look out for their own electability rather than the long-term best good for their citizens. The EU pols were trying to avoid their national banks from taking hits on the Greek debt they held, and then seeing those banks constrict loans in their countries. That would cause a recession and their defeat in the next election. Can’t have that, now.

    The problem is, there’s no easy way out once you get this far down the “debt hole.” The Keynesians who promise them you can spend your way out of that “hole” are just (frankly!) selling 21st Century snake oil. The sad thing is so many of our so-called “elite” still buy that snake oil.

    The macroeconomists who want to be considered for high posts in government simply refuse to bluntly and directly refute the Keynesian prescriptions. At least that’s all I can figure out what’s going on with them. If you “trash” the roles of the central banks, the congressmen and senators that pushed subprime mortgages they aren’t likely to ask you to be in the next administration. They’d worry you’d be a loose cannon who might turn on them if they wanted to use taxpayers’ dollars for vote buying.

  • Luke Lea

    I notice Ben Bernanke doesn’t seem too worried about the Greek debt crisis. At least in his speeches. That’s a good sign.

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