Greek Panic as Debt Crisis Hits New Countries

The debt problems in Europe just won’t go away. The crisis, created by over-spending governments, has spilled over into the bank sector in good part because banks own a lot of government debt. This debt flu continues to spread throughout the EU, with Cyprus being the latest victim:

Cyprus says it has begun talks with officials from the European Union and the International Monetary Fund to gauge how much money it needs from the EU bailout fund for its troubled banks. The Finance Ministry said in a statement Tuesday the officials will meet with government and central bank authorities, as well banking officials, union leaders and politicians over the next few days. It said the meetings are only exploratory and that no negotiations on possible austerity measures will be held yet. Cyprus last week became the fifth EU country to ask for financial aid from its partners in the common currency union.

For those of you who are unfamiliar with Cyprus, it is a small island in the eastern Mediterranean, split between a sovereign and relatively well-functioning Greek part and a deplorably poor Turkish part. The two are separated by a UN buffer zone. The Turkish part is a province of Turkey while the Greek sector is independent and a member of the EU. It is also closely tied, politically, economically and culturally, to Greece.

Its close ties to Athens are part of the explanation why the Cypriot government has now asked for help to save its banks. The Cypriot banks have invested heavily in Greek government debt which, as we know, is virtually a toxic asset today. There is no reliable data on exactly how large a part of the Greek government debt that is owned by financial institutions; in other troubled European countries, such as France, Italy, Portugal and Spain, the share is 40-50 percent. It is therefore fair to assume that the Greek share is in that vicinity.

This includes, of course, Cypriot banks. In other words, what goes around comes around: first the EU forced the banks who had invested in Greek government debt to take a debt write-down; then, as the banks suffer from their short-changed balance sheets, governments realize that they cannot let their banks fail; to avoid a bank crash, governments take taxpayers’ money and give it to the banks as compensation for the incapability of those very same governments to pay their own debt.

Instead of doing something about the underlying cause of the debt – the welfare state – Europe’s governments are shuffling around the pile of debt they have created, trying to pretend they can make it go away in the bargain. Which, of course, they can’t. And as hands-on evidence that this roundabout fiscal trickery simply does not work, consider the latest – and rather alarming – news out of Greece. The Yahoo News reports:

Greece’s new government will present “alarming” data on its recession and unemployment to international debt inspectors this week, in a bid to renegotiate the terms of its bailout agreements. Spokesman Simos Kedikoglou said in a television interview Tuesday that the data would demonstrate that the current austerity program was counterproductive.

Now, there’s a point worth noticing: austerity programs are always counterproductive. But that does not mean that re-negotiation of the bailout agreements will work: all that such re-negotiations would lead to is a deferral of more debt payments. That, in turn, further weakens the Greek treasury bond as an asset. Re-negotiations don’t solve the underlying problem: entitlement programs that promise way more than taxpayers could ever afford.

Back to the Yahoo News story:

He did not elaborate. Greece is relying on rescue loans from its partners in the eurozone and the International Monetary Fund to avoid bankruptcy. In exchange, it has made painful austerity cuts, such as tax hikes and cuts to public sector jobs, pensions and salaries. Along with uncertainty over the country’s finances, those austerity measures have hit the economy hard — it is in a fifth year of recession, with unemployment topping 22 percent, roughly double the eurozone average. The Greek government will argue that it cannot withstand the current pace of austerity terms.

Of course not. Austerity policies erode the tax base while draining the private sector for valuable resources. In a matter of speaking, austerity is a lethal concentrate of the fiscal venom that the welfare state injects in small, non-lethal but stifling doses into the private economy.

But, again, what alternative is the new Greek government offering? Well, as the Yahoo News story continues, a grim image emerges of a country in full panic, evidently unable to even conceptualize a dismantling of their welfare state:

Debt inspectors from the European Commission, the European Central Bank and the IMF are due in Athens Wednesday. “We will present information that is astounding. It is alarming in terms of the recession and unemployment, and it shows beyond any doubt that the current policy does not bring results. It brings the opposite results,” Kedikoglou told private Antenna television.

See, I told you so. But what is even worse than me being right in predicting this disaster is that Greece is in all likelihood way beyond rescue now. The fragile coalition that formed after the latest election is as unable to deal with the country’s government debt as the previous coalition was. The last couple of years of austerity policies have only made matters worse, while also further eroding Greece’s remaining social and economic fabric.

It is of great concern that the debt flu has now reached Cyprus, yet another EU member state. It is of greater concern that France is in bad shape, struggling with its own mounting debt crisis. But it is outright alarming that Greece now appears to have reached a point of political panic. What is the Plan B for Greece when the bailout efforts fail – re-negotiated or not?

Will Greece prove that the path from the welfare state to the totalitarian state is shorter than we think?

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