Thursday, April 29, 2010

Greece Circles the Drain
Spain and Portugal May Go Along for the Ride

Tell me again how runaway government spending is a good thing. Spain hit as Greek 'illness' spreads over Europe - Times Online
Fear of contagion gripped Europe’s financial markets when the debt rating agency Standard & Poor’s cut the rating on Spain’s sovereign bonds. The decision — coming after the agency downgraded Portugal’s rating and cast Greek bonds into the scrapyard, designating them junk — sent the euro plunging against the dollar.
Government spending. You see almost 10 percent of Greeks work for the government. Not 10 percent of the working population, ten percent of the population which includes retirees and kids. And they get gold-plated retirement benefits. At this point "bailout" does not equal "loan." And the Germans don't want to give gifts to Greece because it may become a trend.
Opposition to the bailout in Germany has hampered efforts by eurozone leaders to speak with one voice. Germans fear that any money lent to Greece will be lost and they resent the idea of funding pension benefits to Greeks that are superior to those enjoyed by Germans. To appease public opinion, Angela Merkel, the Chancellor, has insisted that Greece make bigger cuts in its state budget.
Greek crisis: Athens to Ashes - Telegraph Greek financial instruments have effectively been frozen. The bonds have been relegated to junk status, and the refinance date is May 19. Which there is no market for. (Not even the speculators are showing up to buy Greek bonds at this time.) So on May 19, 2010, the short odds are on Greece defaulting on its bonds. Bankruptcy.

An aging population. Spending far exceeding income. Unions constantly staging strikes.
Chancellor Angela Merkel rather callously indicated yesterday that the country should never have been allowed to join the single currency. Much to her annoyance, Merkel is rapidly taking on protagonist status. The Germans have refused to sign off the emergency loan, which is probably reasonable, given that Greece only officially asked for it on Friday. But this delay – precipitated by the fact that there are regional elections early next month, and that the German public are almost unanimously against a bail-out – is what has sparked this week's chaos.
But the horror doesn't stop with Greece, or even with Portugal or Spain.
If Germany is reluctant to bail out Greece, where does that leave Portugal, which is also cursed with many of the same problems (gaping budget and current account deficits), or for that matter Spain, Italy or Ireland? For although the politicians are desperate to portray Greece as sui generis, it is merely the canary in the fiscal coalmine. The financial crisis occurred when investors realised banks were excessively overburdened with debt; in the sequel, they realise that the same can now be said of a swathe of countries. Britain shares many of Greece's problems, but not the most problematic – membership of the euro.
Which doesn't mean the UK can't get sucked in as well.

Now all of this goes a long way to explaining why the greenback is doing so well these days. But if you think that means it "can't happen here," well, I'm sure some people said the same thing about Europe.

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