Tag Archive | "European debt crisis"

Photo courtesy of Quapan

News Post: European Debt Crisis Continues

Photo courtesy of Quapan

Photo courtesy of Quapan

The turmoil in Europe continued this week, with a new Greek government preparing to implement the European bailout plan, whilst a significant crisis unfolded in Italy.

The leaders of Greece’s two main political parties agreed Sunday to form a new government under novel leadership.  The agreement includes an explicit, time-limited mandate to implement the EU-IMF bailout plan before holding new elections and dissolving the former government. The next €8 billion, provided through the bailout package, will be distributed once the new government formally approves the implementation of the plan in writing.

On Monday, negotiations focused on the leading candidates for the renovated Greek government. Candidates included the former European Central Bank Vice President, Lucas Papademos (who is currently the front-runner), as well as the director of the International Monetary Fund and former finance minister, Panagiotis Roumeliotis.

Discussions about the nature and qualifications of the individuals who should serve in the interim government have caused delay in the execution of the negotiation; specifically, the debate is over the appointment of technocrats vs. politicians.  Papademos is demanding that politicians lead the government, while the opposition leader, Antonis Samaras, insists on technocrats serving in the temporary command of the country in an attempt, he claims, to avoid the risk of political calculations by the interim government ministers.

The distinction between politicians and technocrats is vitally important in the discussion of long-term, sustainable changes for Greece. According to a Reuters analysis, technocrats are seen by experts to have a relatively good record at pushing through reforms seen as tough but necessary” when there is a national consensus about what needs to be done. A technocratic led government will likely insulate the popular backlash by the tougher austerity measures required to implement the European bailouts. The problem in Greece, and throughout Europe, is the utter lack of consensus on the issue, as well as the nature of politicians to navigate and advance a dysfunctional political system during a campaign season.

Meanwhile, across the Adriatic in Italy, Europe’s third-largest economy, borrowing rates have reached a “euro-era high” as Prime Minister faced a no-confidence vote in the midst of a budget battle. The potential of an Italian economic collapse has lead smaller eurozone nations to express concern that Italy may be “too big to fail.”

The crisis occurring in both Italy and Greece highlight the fundamental issue that the structure of the eurozone requires weaker economies and political systems, like Italy and Greece, to compete on the same level with Europe’s economic powerhouses like Germany. So far, the eurozone nations have yet to address this larger, overarching issue; but, needless to say, it inexorably requires a superior strategy than the quick-fix solutions currently being discussed.

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Protesters in Greece

The Epic Proportions of the Greek Debt Crisis

As Odysseus was returning home from the Trojan War, he came to a narrow channel that enclosed two deadly monsters: Scylla and Charybdis. On one side – Scylla – a six-headed demon that devoured any sailors that came too close. On the other side – Charybdis – a kraken that would swallow massive amounts of water to create huge whirlpools that capsized any ship in the area. While these whirlpools would only come three times a day, a sailor had no way of predicting when one was about to begin. Avoiding Charybdis meant passing through Scylla’s striking zone, and vice versa.

Odysseus had to make a difficult decision. While he originally contemplated charting a course down the middle of the channel, in the end he decided it was better to pass within the reach of Scylla. With Scylla he would only lose six sailors, one to each of her six terrible heads, rather than risk the loss of his entire ship in the whirlpool.

Today, the European Union faces a similar situation as it contemplates the Greek debt crisis. Scylla is reincarnated as a structured or “orderly” default program. A structured default would result in large losses for Greek debt-holders, but offers more predictability. Charybdis takes the form of continuing credit injections. While bailout money may allow Greece to escape the whirlpool of bankrupcy, many feel that there is a strong chance the country would default anyway. A default in this situation could lead to a panicked run on the banks and could potentially sink the entire European Union as the crisis spread to Italy and even Spain.

Protesters in Greece

Protesters in Greece

Which is the lesser of two evils?

Like the story of Odysseus’ trip home to Ithaca, the story of the Greek debt crisis has been a protracted one. Greece first requested a €45 billion bailout from the EU/IMF in April 2010, amid fears that it was carrying an excessive debt load. In May 2010, the EU/IMF agreed to a larger, €110 billion euro loan package to be distributed over three years. Of course, as a condition precedent to receiving this loan, Greece had to undertake rigorous fiscal adjustment (a.k.a. austerity measures). These austerity measures, which included public-sector pay cuts, pension reductions, and increases in taxes, lead to mass protests by the Greek population. Despite these austerity measures, however, Greece failed to bring its debt under control. In fact, 2010 estimates indicated that Greece’s debt had increased to €328 billion which amounted to 160% of its GDP.

In June 2011, Standard and Poor’s downgraded Greece to a CCC credit rating, suggesting that the market felt that the bailout was a failure. As the situation continued to simmer, many analysts began to argue that an uncontrolled full default was looming. While it is difficult to predict what would happen in the case of a full Greek default, it would likely prove disastrous for the Eurozone. Banks in countries with weak finances could face a run by depositors, exposing Italy, and possibly even Spain, to the crisis. The Italian and Spanish economies are far bigger than those of Greece, and the European Union would struggle to bail them out if that became necessary.

Thus, world leaders are moving towards rescue proposals that include a structured partial default for Greece. If these proposals are passed, the country will simply be allowed to pay back less than it actually borrowed. Institutions that lent money to Greece will have to write off some of the money they are owed.

Like Odysseus, the European Union seems to be choosing to make a controlled sacrifice to avoid potential disaster. While structured default includes guaranteed losses, those losses are easier to contain. Let’s hope that the European banks are able to come out relatively intact as they pass through Scylla’s many-headed attack.

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University of Denver Sturm College of Law