Vicious Circle: Will bankrupt Greece set fire to the world economy?

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By M.S. Shah Jahan

Greece owes 367 billion dollars. Who is going to bail out? The other European countries. Ireland owes 565 billion dollars. Who is going to bail out? Rest of Europe. How much Italy and Spain owe? One trillion dollars each. Who is going to bail out them? France, Britain and Germany. How is their monetary situation? They are struggling.

Who is going to bail out Portugal? It is Germany. But Portugal is broke. How are they going to repay and how will Germany recover? How much Spain owes to Italy? One billion dollars. How much Italy owes to Spain? 1 billion dollars (statistics may differ).

What a vicious circle is this? Where will Europe end? According to Reuters, barely a month after an injection of bailout funds helped to avert bankruptcy, Greece is back at the centre of the euro zone crisis, with fears of a default and a possible euro zone exit.

Cash-strapped Athens needs a deal with the private sector within days to avoid going bankrupt when bonds of 14.5 billion euros mature in late March. A 130 billion euro second international bailout for Greece could fall apart without a private sector bond swap involving a voluntary write down.

Talks with creditor banks broke down because of different views on what interest rate is acceptable. But Greece put a brave face on the standoff. “There is a little pause in these discussions,” Greek Prime Minister Lucas Papademos told CNBC television. “But I am confident that they will continue and we will reach an agreement that is mutually acceptable in time.”

Germany, the only major eurozone member to retain a top-notch credit rating, refused to consider boosting the bloc’s rescue fund, to help Greece. The International Monetary Fund was also weighing on the talks by warning that the Greek economy and the eurozone’s economic outlook have worsened since the bailout package was agreed in October, raising Athens’ funding needs to make its debt sustainable by 2020, they said.

The Economic Collapse blog quoted the following:

The rest of the world needs to sit up and take notice of what is going on in Greece right now. This is what can happen when you allow government debt to spiral out of control. Once it becomes clear that you can’t pay your debts, a financial collapse can happen very suddenly and you start losing your sovereignty to those that you must turn to for financial help. So is the financial collapse of Greece the “canary in the coal mine” for the global economy?

EU finance ministers have given the Greek government two weeks to approve another round of brutal austerity measures. If the austerity measures are not approved, Greece will not receive the next bailout instalment of 12 billion euros. If that happens, the whole globe better buckle up because it is going to get crazy.

July 3rd is the deadline. Basically the EU has put a gun to the head of the Greek government. Without this bailout money, Greece will default and economic hell will break loose all across the country.

It is important to keep in mind that this is just the first Greek bailout that we are talking about. Last year, the EU and the IMF agreed to provide the Greek government with a 110 billion euro bailout. The current 12 billion euro instalment is part of that package.

Sadly, it has become apparent that the first bailout is not going to be nearly enough for Greece. A second bailout, which will be of the same size or even larger, is already being discussed. This is going to put the Greek people even more under the heel of the money powers in Europe.

Keep in mind that all of these “bailouts” are just more loans. There is no way that the Greeks are ever going to be able to repay all of this money. But this is what happens when a nation lets debt get out of control. For years and years it can seem like all of that debt does not have any consequences, but then the day of reckoning comes and it is a complete and total nightmare.

In order to get the next installment of 12 billion euros, European finance ministers are insisting that the Greek Parliament approve a package of austerity measures that will be worth approximately 28 billion euros.

At this point, it is uncertain whether those austerity measures will pass. However, the pressure on the Greek government to get them pushed through is immense. These austerity measures include tax increases, budget cuts and a “large-scale privatisation programme”.

This is often what happens to third world nations who cannot pay their debts. Organisations such as the IMF and the World Bank will come in and insist that they tax their people more, cut back on their spending and sell some of their public assets to big corporations.

As the economy crumbles, Greece has descended into an almost permanent state of civil unrest. Unfortunately, the fact that the EU and the IMF are able to put a lot more pressure on the Greek government than the people and demand even more austerity measures, has sparked some wild rioting in Greece in recent days, as a significant percentage of the Greek population is not happy with all of these austerity measures.

Not all protesters are being violent. Some of them are showing their displeasure in non-violent ways. For example, workers of Greece’s state-owned electric utility are staging 48 hours of rolling strikes that are designed to create blackouts over large areas.

Former Greek Prime Minister George Papandreou recently gave the following warning to the Greek people about what could happen if this debt crisis ends badly….The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for the households, banks, and the country’s credibility.

Not only would a Greek default be a total disaster for Greece, it would potentially be a total disaster for the entire global financial system. Sung Won Sohn, an economics professor at California State University, said: “The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis did in the United States”. So will these bailouts solve the problem? No, giving Greece more loans is only going to kick the can down the road for a little while longer.

The truth is Greece is bankrupt. Unless huge amounts of Greek debt are forgiven, Greece is going to default sooner or later.

When confidence in the finances of a nation is lost, borrowing costs can go up very quickly. Today, the yield on two year Greek bonds is up to 28.6%.

Anyone that has ever been late on paying their credit cards knows how painful an interest rate like that can be. So why doesn’t Greece just slash government spending to the bone and get their financial house in order? Well, it is not that easy. Harsh austerity measures have already been implemented. As a result, unemployment is rampant and there is anarchy in the streets.

The truth is that, as an article in The Guardian recently explained, austerity has taken a brutal toll on the Greek economy….

A year of wage and pension cuts, benefit losses and tax increases has taken its toll: almost a quarter of the population now live below the poverty line, unemployment is at a record 16% and, as the economy contracts for a third year, economists estimate that about 100,000 businesses have closed.

The frightening thing is that Greece is not alone. Ireland has already received a bailout and they are probably going to need another one at some point. Portugal is a financial basket case and they are probably next in line for a bailout. The employment situation in Spain is absolutely nightmarish.  Spain will probably be able to squeak by without a bailout if the global economy stays stable, but if the dominoes start to fall Spain could be in a massive amount of trouble very quickly.

Not that many people are talking about Italy, but the truth is that Italy has a huge debt problem. Moody’s warned that it may downgrade Italy’s AA2 debt rating at some point within the next 90 days. Belgium and France also have very substantial debt problems. They probably would not be the first dominoes to fall, but if the “contagion” starts to spread they could certainly have massive problems.

The truth is that Europe’s entire financial system is extremely vulnerable right now. As a result, the world financial system too is in a far more precarious state today than it was back in 2008. Big banks all over Europe, and especially in Germany, are leveraged to the hilt. All it would take to topple many of them is a stiff breeze.

When Lehman Brothers collapsed, it was leveraged 31 to 1. Today, German banks are leveraged 32 to 1. German banks are also holding a massive amount of Greek debt. That is why there is so much fear that the crisis in Greece could spread across the rest of Europe and start toppling dominoes.

The sovereign debt crisis in Europe did not happen overnight and it is going to be with us for a long, long time even if the global economy remains relatively stable. At the moment, the best that officials in Europe can seem to come up with is to put off the pain for another day.

Pimco’s Mohamed El-Erian told CNBC: “This problem is not going to go away. It’s going to weigh on markets here and we’re going to see the same set of headlines over and over again. We simply cannot continue to kick the can down the road, because we’re coming to the end of the road in Greece.”

The next wave of the financial collapse is going to hit at some point, and when it does, it is probably going to be even more painful than the last wave. Our world is becoming an incredibly unstable place. Are you prepared for the coming economic collapse and the next great depression? You better get ready!

M.S. Shah Jahan, is the CEO of Taipan Trading Company, a Gem and Precious Stone Consultancy Company based in Colombo, Sri Lanka.

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