Why the Greek debt crisis won’t 'grow away'
Rolling over Greek debt is a graceful default, but it's still a default
Most of investors’ attention has been fixed on the Eurozone. Europeans wring their hands or curl their lips. They are worried. They are mad. And they don’t know what to make of the situation.
French bankers came up with a plan – much like the Brady bonds of Latin American debt fame. The idea is simply to roll over Greek debt, voluntarily, to 30 years. This is a default…but it’s a graceful default. Lenders lose money – they don’t get their money as promised. But they can still hold their heads up; they’ll get it later. If everything goes well.
Investors seemed to be betting on it yesterday. Stocks and bonds rose.
Trouble is, things are not likely to go well. There is no plausible growth rate that will make it possible for the Greeks to ‘grow their way out’ of this debt. All they can do is default, one way or another.
Americans who take the trouble to look across the Atlantic gloat. They knew the euro would never work out. And now, even Europeans themselves are saying so.
Our old friend John Mauldin, for example, recorded French economist Charles Gave as follows:
Now, for those who have never had the extreme pleasure of time with Charles, he is a powerful, white-haired French patrician, and one of the better economists I know. Quite a brilliant thinker and not afraid to express his mind forcefully with a voice that sounds like God talking, with about the same assurance (note to self: never again follow Charles on a speaking stage).
“The question is entirely irrelevant” – punctuating the air for added emphasis. “The euro will not exist in a year. The whole thing was dysfunctional from the beginning.”
Gave has a habit of coming up with clever, well-argued ideas. Some are even good ideas. But we would not rush to dump our euros. The dysfunctional nature of European central planning is a blessing; the Europeans aren’t nearly as good at undermining their currency as Americans.
Along the southern and western periphery of Europe, people are wondering what will happen next. This week, the Greeks are scheduled to vote on a 5-year austerity plan. If they vote against it, maybe the French will reconsider. But the French banks aren’t the only ones holding Greek debt. It’s all over the financial world. Sooner or later, it will have to be reckoned with.
Further to the west, Italians are getting ready to vote too. They run deficits and are faced with the threat of bankruptcy too. In minutes, fearful investors could push up the price of borrowing beyond their reach. They need to soothe the marketplace by beginning to cut spending now. On Thursday, Berlusconi’s cabinet is expected to approve $40 billion of cuts.
But wait. We didn’t have to come to Europe to read headlines like that. The LA Dodgers filed for bankruptcy yesterday.
And what about the Golden State? Or Illinois? Or New York? If these were separate countries, their finances would be no better than that of Europe’s southern tier. Add their share of the US central government debt, and their share of unfunded pension and health programs, to their already bulging state and local debt and what do you have? That’s right, Greece!
In terms of debt to GDP, many of America’s states are as heavily burdened as Europe’s limping, battered debt-plagued countries. The difference is, in America the central government shoulders the largest portion of the debt.
So, in Europe, a few marginal nations head for bankruptcy. In America, the whole shebang is going broke.
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