2010 February 12 Friday
Europe Might Bail Out Greece After All

German chancellor Angela Merkel really does not want to bail out the spendthrift Greeks. But fear of a larger debt crisis that would engulf the PIGS (Portugal, Italy, Greece, Spain) and possibly some eastern European countries like Estonia or Latvia have caused Germany to reconsider. Still at the moment all we've gotten is a big joint statement saying basically that Greece needs to be helped.

George Papandreou told Le Monde that it was important that the eurozone countries acted together to address the crisis. Papandreou said he expected fellow European leaders to support his efforts to cut Greece's debt, which is expected to hit 120% of GDP this year.

Britain, though, had already ruled out contributing to any rescue. The chancellor, Alistair Darling, said there was no plan to use UK taxpayers' money to support Greece. "The other members of the euro group want to monitor and manage the situation very carefully, they may have fresh proposals to make," Darling said.

If Greece is the canary in the coal mine then we are descending the mine shaft.

"In a way, the Greek case signals that we are in a new phase of the global financial crisis where the forefront issue becomes fiscal sustain-ability rather than exiting the recession," Pier Carlos Padoan, chief economist at the OECD said in an interview with Reuters yesterday.

Based on projections from the International Monetary Fund, the average ratio of G20 government debt-to-GDP will reach 118% by 2014. The United States, the group's biggest member, will see its debt exceed 100% of GDP in two years' time. Its federal deficit already adds up to 10% of GDP.

Imagine what happens to US debt costs when 10 year Treasury bond interest rates go over 7%. The US government would need to pay the equivalent of over 7% of GDP just on interest costs. That'd run about $1 trillion per year. Welcome to the approaching era of high taxes and low levels of government services.

As the US sovereign debt grows the US government runs the risk of an acute crisis where suddenly the market dries up for new Treasury notes.

We are going to experience declining living standards due to accumulating government debt, the need to stop running trade deficits, a worsening demographic picture with an aging and dumbing down population, and Peak Oil.

Share |      By Randall Parker at 2010 February 12 08:38 PM  Economics Sovereign Crises

A.Prole said at February 13, 2010 2:34 AM:

Only one possible way out of it:
The whole shitty 'liberal' economic paradigm (ie the policy advanced by those shit-cunts at the WSJ and 'The Economist', basically free-trade, no immigration control etc), must be junked and a tabula rasa and a brand new economic policy instituted.

Bob Badour said at February 13, 2010 6:12 AM:
We are going to experience declining living standards due to accumulating government debt, the need to stop running trade deficits, a worsening demographic picture with an aging and dumbing down population, and Peak Oil.

Don't be so pollyannaish--tell us what you really think. ;)

Wolf-Dog said at February 13, 2010 8:35 AM:

When the governments become unable to pay their debt (to the upper class), they can (and would) resort to counterfeiting by printing new money to pay off that debt to the upper class.

Yes, a lot of people are warning that the latter government action would cause inflation, but this "inflation" would only be the inflation of the money supply, and not price inflation: this is because when the new money is accumulating in the upper class, there is no danger of price inflation for the common goods, the only price inflation would be for high-end luxury goods that the upper class would buy. In a stagnant economy, if the government gives a moderate amount of money to the average citizen, these victims would lose that money by buying non-durable goods and services from the upper class, indirectly transferring that new money to the upper class. In fact, the large corporations are happy that the economy is stagnant because this stagnation is preventing the emergence of new small companies that would compete with the established corporations: right now, all the government deficit spending that is given to the average citizen, is being accumulated by the large corporations, since these people have to spend that money to survive.

The only problem with the government deficit spending is that the latter new money is leaking out of the United States because of the enormous trade deficit. Excessive trade deficit reduces the efficiency of the government deficit spending.

Stephen said at February 13, 2010 5:17 PM:

"shit-cunts"?? Mr Prole, you should give Sigmund Freud a call - I'm sure he'd be fascinated to explore the psych that came up with that conjunction.

CamelCaseRob said at February 13, 2010 5:47 PM:

What would happen if the U.S. just renounced its debt? Who would suffer most?

A.Prole said at February 14, 2010 2:18 AM:

In the lexicon of insults used by Cockneys (the now vanished indigenous inhabitants of London), and the traditional slang of the British Army, "shit-cunt" is the ultimate insult.It is, of course, completely self-explanatory.
I sincerely apologise for the offence caused by this horrible usage, but there is no other word in existence in English or any other extant or extinct language to express my utter, utter contempt for the editorial boards of the WSJ and 'The Economist'.

kurt9 said at February 15, 2010 9:22 AM:

The drudgereport is now reporting that Germany will not bail out Greece until they may serious cuts in their government budget. I think they are all playing a game of chicken.

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