The Greek Dilemma - English

The Rescue Bubble

By Stefano Casertano7.03.2012Global Policy

Greece is caught in a particular bind: If the country acknowledges its default, it could set off a catastrophic chain reaction of economic instability. But the longer Athens denies that reality, the bigger the rescue funds bubble grows.



Since the a first aid package of 110 billion euro was authorized in May 2010, Greece recently enjoyed an additional offer of 130 billion with the help of the complacency of the German parliament. It is clear that if Athens is short of cash, this is due to pride and prejudice: The Greeks cheated on their books to join the Eurozone, and the other European countries did not take adequate measures to ensure the long-term stability of their currency union – see “this column by Paul Krugman”: For better or for worse, each working Greek must now bear an additional debt of almost 49,000 euro from the rescue loans. Add that to the existing national debt and you get… an awful lot of money. With due respect to Greek workers, there is little chance that the wonderful country in the Mediterranean will ever be able to pay all this money back. Actually, Greek workers were not overly enthusiastic about receiving a gift from Berlin (or, to be formally correct, from Brussels). Increasingly, the idea of a default is becoming popular among the rioters in the streets of Athens. Reverting back to the Drachma would not spare the country from harsh measures but at least it would enable the introduction of competitive monetary devaluations. We should also mention that Greece could merrily engage in new elections in April without bothering to counter proposals of the “suspension of democratic rule” to meet economic ends and austerity goals. This was never a good proposal for a country that was undemocratically governed until 1974! Even Germans would love the Drachma: They would be able to vacation in Greece at affordable prices again. A Mojito in Rhodes may soon cost the equivalent of one euro. Prom parties and bachelors delight! Yet apart from a boost to tourism, the German elite is facing a conundrum of another kind: A Greek default would come at a very high political cost. The first problem is merely semantic, yet it is of pivotal importance. Today, the Greeks are forced to receive money they will never be able to repay. 75 percent of public debt held by private subjects has been written off. In textbooks this would be termed a “default”, yet the best we could get was Standard & Poors defining it a “partial” default. The rhetorical avoidance has a reason: If Greek officially “defaulted”, the “Lehman Brothers” problem might arise quickly: A Greek admission of default could lead to a domino effect that might destabilize the rest of the Eurozone, not unlike the collapse of Lehman Brothers destabilized the global banking system. Italians would rush to their banks and collect their money (or transfer it to Switzerland). Together with the Spanish, they would buy even more properties in Berlin, testing the patience of German residents. In one word: the impact on the economy would be enormous. Secondly, there is the delicate issue of the German elections. Chancellor Angela Merkel is trying her best to give Greece artificial respiration until October 2013 (when German voters decide on her political future). Whether she accomplishes this daunting task is hard to say, and for Greece’s sake we all hope she does. Nevertheless, nothing prevents us from believing that if the risk of a default is of the Lehman kind, the risks of trying to save Greece are equally high. Monetary rescue means money printing, and this is what Europe is doing now. We have seen this dilemma before. The idea of relaxing monetary policy through very low interest rates was adopted by former FED Chairman Alan Greenspan after the dotcom bubble burst. It was also the policy of choice after the mortage bubble collapsed, and then again when the banks went under. Now it is being used to cure the wounds of the public debt bubble explosion. But there is a danger in money printing. We are transitioning now to a bubble of new kind: a rescue funds bubble. We must hope that the strategy succeeds. After all, Greenspan’s successor Ben Bernanke is a scholar of the Great Depression, and he seems to believe that inflation is better than depression. Enjoy the ride.



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