Research & Commentary

A New Greek Debt Drama Takes Center Stage

Greece’s debt drama has returned to center stage. But global financiers are balking at another bailout. Meanwhile, Europe’s banking system remains fragile. There’s only one way “Europe’s seemingly endless series of financial crises will end.”

 

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[Editor’s note: The text version of this video is below.]

In 2010, the bailout for Greece amounted to €110 billion. Also, Greeks endured painful austerity measures.

EWI’s June 2011 European Financial Forecast discussed the prospects of bondholder losses and the restructuring of Greece’s debt:

This is the process by which a decades-long credit buildup deflates: slowly and painfully, credit by agonizing credit, until the level of economic production can again support principle and interest payments. Greece is merely out in front of a continent-wide struggle that will make headlines for years. [emphasis added]

Sure enough, another bailout of €130 billion was news in 2012. And, now, we find these headlines in 2017:

  • Germany’s Schaeuble rules out cutting Greece’s debt (APF, Feb. 9)
  • The last thing Europe needs: another Greek crisis (CNN Money, Feb. 8)
  • European debt crisis: It’s not just Greece that’s drowning in debt (The Telegraph, Feb. 8)
  • Greece, the never-ending crisis in Europe (CNBC, Feb. 7)

The Telegraph explains (Feb. 7):

A fresh crisis over Greek debt could be triggered as soon as in July when Greece is due to repay some 7bn euros to its creditors — money the country cannot pay without a fresh injection of bailout cash.

But, as the article notes, global financiers at the International Monetary Fund are balking at the idea of “endless bailouts” for Greece.

This chart (The Telegraph, Feb. 7) shows that Greece’s government debt as a percent of GDP in 2015 was 177%.

Also notice that Italy’s government debt (second from the bottom) was 132% of GDP.

Besides facing a mountain of debt, Italy’s government had to recently rescue its third largest lender – and the world’s oldest bank.

The January European Financial Forecast showed this chart and said:

The Italian government just authorized a €20 billion rescue of Monte dei Paschi di Siena, the world’s oldest bank. Authorities suspended trading last month as the bank’s share price has collapsed 99% since its May 2007 all-time high near 10,000. …

In essence, the government was forced to do what private investors would not: shore up a hopelessly failing bank.

The publication also cited the misguided optimism that attended the legal settlements of Deutsche Bank and Credit Suisse and went on to discuss the folly of government intervention in Europe’s banking system.

The story is as old as banking itself, and Europe’s seemingly endless series of financial crises will end only after a seven-decade buildup of debt is wiped off the books by way of default.

Monte dei Paschi di Siena was founded in 1472. It persisted for centuries through untold number of calamities: revolutions, wars, natural disasters — but not the current European crisis.

The long build-up of sovereign debt might be headed for the same fate.

 

 

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