By Satyajit Das: “Progress” of the European Debt Crisis
By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk (forthcoming August 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)
In Oscar Wilde’s Importance of Being Earnest, Lady Bracknell memorably remarks that: “To lose one parent… may be regarded as a misfortune; to lose both looks like carelessness.” The Euro-zone’s need to rescue three of its members (Greece, Ireland and Portugal) with three others increasingly eyed with varying degrees of concern (Spain, Belgium and Italy) smacks of institutionalised incompetence.
European Debt Crisis Returns
In little over a year since the announcement of Greece’s debt problems, the European debt crisis has ebbed and flowed with markets oscillating between euphoria (resolution) and despair (default or restructuring). The European Union’s (“EU”) “confidence boosting”, short term “liquidity enhancement” programs, unfortunately, have failed to resolve deep-seated structural problems.
The most recent concern about the peripheral countries was triggered by concern about Greece. Having repeatedly failed to meet economic targets prescribed by the EU, European Central Bank (“ECB”) and International Monetary Fund (“IMF”), Greece needs additional financing or a fresh bailout to meet its financial commitment. An immediate concern was the suggestion that a further tranche of Euro 12 billion might be withheld making its impossible for Greece to meet its commitments to repay lenders on a maturing bond in mid-July.
The debate has several separate and conflicting dimensions. The first is whether Greece can or will implement the required actions to rehabilitate its economy and finances at tremendous cost to its population. A related issue is whether the plan, entailing further austerity, even it is implemented will actually succeed. The second is whether commercial lenders, who helped fuel Greece’s debt binge, should accept some losses, bearing some of the cost of the restoration of Greece’s finances. The last is the cost of any default or major restructuring to Greece and the Euro-zone. On the last two issues there are divisions between Germany (investors should take their share of losses) and France and the ECB (lenders should be spared to avoid financial Armageddon). The same issues are relevant ultimately for all the other deeply troubled Euro-zone members.
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