The Truth About the Greek Bailout
October 18 will signify either a salvation or a prolonged suffering for Greece. The euro-zone leader’s summit, set for the 18th in Brussels, will complete the modifications to the European Financial Stability Facility, the bailout fund used to save Portugal and Ireland last year, to have the extended funds and power to bail out Greece. Again.
Greece, with a debt-to-GDP ratio around 160%, is hoping for the next 8 billion euro payment from its original bailout.
European policymakers are caught between a rock and a hard place. Bailing out Greece would use up political capital with Germany, who believes that the continued aid only profligates the European way of living outside their means. German chancellor Merkel is under pressure from her voters not to allow a bailout, considering that previous unpopular bailouts of Portugal, Ireland and Greece failed to stop the crisis from spreading.
A bailout would also be only yet another short-term solution. As Reuters points out, “Greece will get a few more weeks’ breathing room.”
But, to look the other way and allow Greece to default would have a number of negative side effects. French voters, in contrast to the Germans, are pressuring President Sarkozy not to allow a Greek default. After witnessing the collapse of the US Lehman Brothers bank in 2008, they believe that their investment firms are at risk. As Sarkozy said in a meeting with the Greek Prime Minister, “The entire banking system around the world paid the consequences.”
Reuters summarized the viewpoints of Germany and France. “The instinctive French response to the crisis remains ‘more solidarity’ — read: lend more public money to Europe’s weaker brethren. The German reflex is ‘more discipline’ — read: tougher punishment for deficit ‘sinners.’”
The United States’, after Wall Street lent considerable funds to European investors, are now more vested than ever in the situation. As Richard Reich, former Secretary of Labor, points out, “a default by Greece or any other of Europe’s debt-burdened nations could easily pummel German and French banks, which have lent Greece (and the other wobbly European countries) far more. That’s where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle… Wall Street has also insured or bet on all sorts of derivatives emanating from Europe – on energy, currency, interest rates, and foreign exchange swaps.” Therefore, as the NASDAQ news service makes clear, if any European country defaults, whether it be Ireland, Portugal, Italy, Spain, or Greece, investors will flee German and French banks—directly impacting US lenders.
Despite any solution that would or could be implemented, it’s doubtful that any significant improvements would result in the short term. As the Economist notes, “Even if the euro-zone crisis were to be solved tomorrow, the region’s GDP would probably shrink over the coming months.” This delay is easily understood, considering the massive time gap between the slow, consensus-based policymaking and the market’s paradoxical need for both quick fixes and long-term solutions.
We will eagerly wait for October 18th.
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