Rating agencies, which advise banks and other lenders on the risks associated with making loans, say there is a fifty-fifty chance of Greece defaulting on its debts.
Greecehas €340 billion ($500 billion) in foreign debt and has had a €110 billion ($150 billion) bailout, led by the European Union.
A default means that the borrowing country admits that it cannot repay its debts and reaches an agreement with its creditors to repay a fraction of its debts. For example, it might agree to pay 20 cents in the dollar. The lenders agree to take what bankers call a “haircut”.
Let’s be very clear about this — the loans will never be repaid in full, the outstanding amount is written off and the money is lost forever.
Whoever lent the money takes the loss.
If the lenders are individual bondholders, they will lose their money. If the lenders are banks, the banks, and their depositors, will lose their money.
If the lenders are governments, they will have to put up taxes to cover the loss, so taxpayers will lose their money.
In the end, everyone loses, including the borrowing country, which will have conditions placed on its government and economy by the International Monetary Fund (IMF) or whoever else arranges the bailout. In the case of Greece, it’s the IMF, the European Union and the European Central Bank.
It is virtually impossible for Greece to repay its debts. Greece has a population of just over 11 million people, with an annual per capital income of US$32,000. Under pressure from the EU, Greece is busy trying to sell off virtually every government enterprise to raise money to pay its debts.
This has been tried before and hasn’t worked, because these enterprises are heavily unionised and stacked with political appointees.
Previously, the government has retained a minority stake and still dictated policies, which are to employ as many people as possible with little regard to profit.
Enterprises to be sold include railways, ports, toll roads and lotteries. In any case, even if the sell-offs were completely successful, the proceeds would only amount to a fraction of the debt outstanding.
Someone will have to pay Greece’s debts, but it won’t be the Greeks. According to London’s Daily Telegraph, Greece has been in default for half the time since it gained its independence from Turkey, describing a loan to Greece as a gift by Europeans mesmerised by Plato and Pericles, Marathon and Thermopylae.
Germanyand France, in pursuit of their joint project to dominate the continent of Europe, extended the euro zone to include nations and economies to which it was manifestly unsuited. Germany demanded a strong euro as the price for abandoning its beloved Deutschmark.
Nations on the periphery of Europe traditionally devalued their currencies to make their exports competitive. Italy could have its sclerotic labour laws, overstaffed government corporations and extravagant welfare system as long as it also had its black economy and the ability to devalue its currency at will.
The EU project assumed that Greeks would work like Germans, maintain rigorous accountability, not lie about government statistics and make business decisions based on economic, rather than political, criteria. As anyone who has spent any extended period of time in Greece could tell you, these expectations were never likely to be fulfilled.
Thus, nations that were simply less efficient than those at the European core were shackled to an overvalued currency, while others, in particular Germany, traded with a currency that if anything was undervalued, leading to a boom in growth and exports. The nations forming what was initially called “Club Med” and later “the PIIGS” — Portugal, Ireland, Italy, Greece and Spain — were hung out to dry.
The end result is that Europe’s largest and most prosperous economy, Germany, is left as banker to Greece and the rest of the EU, and the banker to the German government is the German people. Indeed, Germany is the only thing holding the eurozone together.
The logical thing would be to let the euro fall apart and let Greece default.
However, two problems exist. First, the other PIIGS would soon follow, and, second, it is likely that some German banks, which hold billions in dud bonds, would fail.
If there is something that should make Europeans very nervous, it is the prospect of Germans losing their life savings in bank failures.
The alternative is that the EU (read Germany) will take over fiscal as well as monetary policy as the price of a bailout. In other words, the EU will take over, slowly but surely, government spending decisions across Europe.
This is already on the table. That way is the only way the German government can justify a bail-out of Greece and prevent a Greek default.
However, it remains to be seen if this can save Greece — and the rest of the PIIGS as well.
Jeffry Babb is Melbourne-based journalist and commentator on international affairs.