How long will the Obama administration kick the can down the road regarding the financial crisis in Greece? The financial debacle enveloping that country is not a problem that can be fixed just by the International Monetary Fund or the acquiescence of German politicians. There is a relatively new term entering the vernacular of financial crises worldwide: contagion, which is the preferred euphemistic language of central bankers and politicians for another word – financial panic. Greek two year bonds are trading at 20% interest rates now. There is no way Greece can roll over debt at those prices so the only “alternative” is currency debasement or chaos. Currency debasement is a softer form of debt repudiation but at the end of the day if it results in substantial harm to other creditor countries the consequences, historically, range from international trade isolation to war.
Megan McArdle has a good take on how this effects the American consumer at this link:
The Great Depression was composed of two separate panics. As you can see from contemporary accounts–and I highly recommend that anyone who is interested in the Great Depression read the archives of that blog along with Benjamin Roth’s diary of the Great Depression–in 1930 people thought they’d seen the worst of things.
Unfortunately, the economic conditions created by the first panic were now eating away at the foundations of financial institutions and governments, notably the failure of Creditanstalt in Austria. The Austrian government, mired in its own problems, couldn’t forestall bankruptcy; though the bank was ultimately bought by a Norwegian bank, the contagion had already spread. To Germany. Which was one of the reasons that the Nazis came to power. It’s also, ultimately, one of the reasons that we had our second banking crisis, which pushed America to the bottom of the Great Depression, and brought FDR to power here.
Not that I think we’re going to get another Third Reich out of this, or even another Great Depression. But it means we should be wary of the infamous “double dip” that a lot of economists have been expecting. The United States is in comparatively good shape, but the euro is in crisis, and already-weak European banks seem to be massively exposed to Greece’s huge debt load. They’re even more exposed to the debt of the other PIIGS [Portugal, Ireland, Italy, Greece], which is far too large for it all to be bailed out. The size of the rescue package that Greece needs is already going to take a fairly substantial chunk of the IMF’s war chest.
And yet, like a lot of analysts, I don’t see much chance that a bailout is going to work. As Felix Salmon points out, even a substantial IMF intervention isn’t going to bring yields down to their pre-crisis levels, because the new debt is going to jump in front of other creditors–so while it reduces the odds of default, it also increases the haircut that debtors will have to take if the bailout actually happens.
It’s not clear that Greece has the political will for the austerity measures it’s going to have to make even if its debt yields come back down–and the higher they stay, the smaller the chance. This is about the calculation its creditors are making, which is why yields are now in the 20% range. Which, perversely, makes it more likely that they’re going to lose their money
If Greece can’t recover then what happens to the similarly weak economies of Ireland, Portugal, Italy and Spain? Any pandemic will consume the weakest first and financial crises are no different. The US dollar enjoys (still) the privilege of being a reserve currency (which means there is still a lot of room left to debase the currency) but that does not make this country immune to effects of a global depression. Is the Obama administration betting on Pacific Rim and Asian emerging markets growth to prop up failing Western economies simply because that’s where the growth is? If US voters learned anything from the recent financial crisis it should be that panics are like snowballs. They start out small (Greece) and gather momentum until they become unmanageable. A rapidly growing US economy (sorry but 6% GDP growth comprised mostly of government spending will not do the trick), which dwarfs the size of the PIIGS and the European Union, could perhaps lift the anchor that weighs on the global economy. But the Obama administration has demonstrated an indefensible disregard to domestic pro growth policies and fiscal responsibility in the US.