2010 February 06 Saturday
Will EU Stop Bankruptcy For Greece?

If investors stop buying Greek, Portuguese, or Spanish bonds then another financial contagion panic might be in the cards.

LONDON -- Governments in Athens, Madrid and Lisbon struggled on Friday to quell fears of a looming debt crisis in Europe that is pummeling the euro and rippling across global markets, as authorities vowed to impose fiscal austerity and plug their yawning budget deficits. The problem, however, is that investors don't appear to believe them.

On the one hand the French and German governments do not want a Greek loan default and probably will intervene to prevent it. On the other hand, they are reluctant to intervene and take pressure off the Greek government to cut spending and/or increase taxes. So we get to watch a game of chicken between Greece, France. Germany, and bond investors. Who will blink first?

What, me worry? Why are the markets getting worked up when Greece should be able to avoid bankruptcy for several months yet?

Senior officials at the major rating agencies on Friday played down the risk of an immediate debt crisis, saying even nations such as Greece have enough reserves to put off for months a day of financial reckoning.

Greece shows Americans our future.

With debt piling up to 113% of the economy, investors fear Greece won't pay its debts, in the form of government bonds — or will need a lifeline from other EU countries to meet its 54 billion euro ($74 billion) borrowing needs this year.

In spite of a long distinguished history of economic mismanagement continuing to this day Italy has failed to get the markets to take its rickety finances as seriously as those of Greece and Portugal. It seems unfair somehow. What do the Italians need to do to get attention?

Economy Minister Giulio Tremonti likes to remind Italy that it has "the third highest public debt in the world without having the world's third biggest economy".

Portugal, Italy, Greece, and Spain are now referred to in some financial circles as PIGS. The PIGS financial crisis. But not all analysts see their fates as so tightly bound together. What about contagion? Goldman Sachs says Greece stands above all others in financial recklessness. Ireland, Spain, Portugal, and Italy do not warrant the same degree of attention.

Ireland has made a “solid start” to consolidating its finances, Spain’s plans are “realistic and credible,” Portugal’s 2010 budget is “a beginning,” and Italy has “stronger balance sheets,” Nielsen said.

But Nouriel Roubini thinks Spain is still a competitor in the race to cause another financial crisis.

Spain has relatively low debt, but high unemployment and weak banks, and after the bursting of the housing bubble it can no longer rely on construction and inflated asset prices to propel growth.

These aspects, together with the larger size of the Spanish economy, had led Nouriel Roubini, a professor at New York University, to suggest this week that Spain is a bigger threat to the euro zone than Greece.

Writing in the New York Times Gretchen Morgenson assures us there's no way a financial contagion will spread off-planet. Your investments in asteroid mining operations and private sector Mars penal colonies are safe.

YOU know we’re in trouble when we’re told that the economic problems in Greece, Portugal and Spain, the most indebted countries in the euro zone, are likely to remain safely contained in those nations.

After all, we heard the same nonsense in 2007 from United States financial leaders talking about the subprime mortgage mess. Both Ben S. Bernanke, the chairman of the Federal Reserve Board, and Henry M. Paulson Jr., then the Treasury secretary, rolled out to reassure concerned investors that troubles in mortgage land wouldn’t permeate the rest of the economy.

As we all now know, mortgage woes were contained — to planet Earth. And so it may be with overleveraged nations in Europe.

Morgenson makes a number of good points about the failures of US policy makers in handling mortgages. I agree with her. The US government doesn't want to own up to the scale of the needed debt liquidation.

Share |      By Randall Parker at 2010 February 06 03:46 PM  Economics Sovereign Crises

A.Prole said at February 7, 2010 4:44 AM:

From the outset the Euro has had absolutely nothing whatsoever to do with economics (in fact the deflationary policies pursued by the main EU nations to prepare for the Euro engendered mass unemployment and stagnation - probably irreversibly - for decades across the EU), but it was purely a system to lever the Eurocrats ultimate goal - political union into place irreversibly and irrevocably.
This fact must always be born prominently in mind when considering the Euro.
Saying all that Greece should never have been allowed to join the system from the beginning.It only got in because the big Euro nations fudged the criteria for Greece - which was always dodgy - in order to claim another victory for their odious project.

Mirco said at February 9, 2010 7:41 PM:

Greece fudget the data to enter in the Euro-zone.
Italy is not the best candidate to speculation because the government have a large debt, not the private citizen.
Citizen, in Italy, have large personal savings, so they are not so vulnerable to economic shocks as other nations.
The US citizens have a large public debt and large personal debts. If the shit hit the fan, they will be in big troubles.

patrick said at February 10, 2010 8:06 PM:

Not sure how Spain and Portugal got into the Eurozone (except that they were doing far better economically at the time than they are now); Italy was essentially grandfathered in as one of the founding members of the EEC.

anonymous said at May 14, 2010 6:21 PM:

[ParaPundit deleted this comment because the commenter insisted on using the name "anonymous". Make your pseudonym unique or I'll delete the comment.]

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