The eurozone is playing a dangerous game with Greece. Officials are treating the Greek crisis of payments as a liquidity problem. And that’s true as far as it goes. But Milton’s famous line from Paradise Lost in the title of this post may still be true for Europe
Greece nearly couldn’t pay its debt to the International Monetary Fund (IMF) last week. Greece was able to pay the IMF only by withdrawing its own emergency funds left on deposit at the IMF. Obviously the IMF gained nothing from having Greeks withdraw money they had deposited in the IMF in order to pay the IMF.
Nevertheless, eurozone officials and financial reporters keep referring to Greece’s problem as a payment-on-time problem. That kind of problem is indeed what set off the toppling of the US financial system at the start of the Financial Crisis of 2007.
But it isn’t the same with a sovereign nation like Greece.
Greece simply has no more money to pay anyone—ever. That, my friends, is insolvency, or more popularly put, imminent bankruptcy, not merely a liquidity problem. The IMF, ECB, and European Union are trying to squeeze Greece when it has no more juice left.
Without European loosening of restrictions on the country, Greece will not only default; it may lead to the default of three other countries in the European Union: Italy, Portugal, and Spain.
A ranking of the debts of national governments can be seen easily using the debt to GDP (Gross Domestic Product) ratio of each nation. The lower the ratio the healthier the country’s economy is. A government debt to GDP ratio of over 90 percent, however, is deemed being in the ‘danger zone‘.
In 2015, Greece’s debt to GDP ratio is 177.1 percent —after rising steadily every year except 2013 from 100 percent back in 2006.
Three other countries out of the five in eurozone that have been contemptuously labeled with the Acronym PIIGS also have debt-to-GDP ratios near or over 100 percent.
Italy’s ratio rose to 132.1 percent in 2015—up from 105.9 percent in 2006.
Portugal’s ratio ascended steeply upwards to 130.2 percent in 2015—up from 62.8 percent in 2006.
Spain’s ratio grew to 97.7 percent in 2015—up from 43 percent in 2006.
Clearly the austerity policies demanded by the European Union of Greece haven’t worked for these three other countries either.
The remaining PIIGS country, Ireland, is the only nation that seems to be heading into the black. Ireland’s debt-to-GDP ratio grew from 27.2 percent in 2006 to 123.2 percent in 2014, but so far this year Ireland’s debt to GDP ratio has dropped to 109.7 percent.
The possible bankrupting of at least three more eurozone countries after Greece is perhaps the prospect that impelled Mario Draghi, the head of the European Central Bank, to start buying short-term bonds of these other three failing eurozone countries through quantitative easing.
Analysts say Draghi hopes to raise prices of Spanish and Italian bonds, in particular, thus helping these countries finance their debts at lower interest rates.
Yes, quantitative easing (QE) worked for the US, but the United States was not facing insolvency. In 2006, the United State’s debt-to-GDP ratio was 63.3 percent. In 2008, the US government debt to GDP was only 65.8 percent.
As the crisis began, the Fed simply needed to backstop the private financial system that couldn’t pay its debts on time. The Fed and other government agencies did this through government purchases of debt from corporations “too big to fail”. But they didn’t need to bail out the US government itself.
US quantitative easing involved purchases of bank debt, mortgage-backed securities, as well as Treasury notes. The Fed ultimately bought 4.5 trillion dollars of these long-term debts. Draghi, on the other hand, seems to have been anticipating serious short-term fallout from Greece’s imminent bankruptcy in buying shorter-term sovereign debt from eurozone countries.
But here is the lesson for Europe from the United States. After the Fed took onto its balance sheet $4.5 trillion dollars from buying debts of failing US financial corporations, mortgage-backed securities, and the US government’s own Treasury notes, our US government debt to GDP ratio grew steadily from 65,8 percent in 2008 to 101.53 percent in 2014,
While the US debt to GDP ratios for the years from 2012 to 2014 have all hovered close to 100%, the US too is clearly now a nation in the ‘danger zone’ when it comes to paying its debts.
So, is the eurozone playing with fire? Can the European Central Bank really afford to take on the debt of at least three other PIIGS countries while casting the Greeks loose to face a fate as unpleasant as that of Odysseus and his crew in ancient times?
Will the new Greek Odyssey have a happy ending, or could Greece take the rest of Europe down with it?
Reprinted from Huffington Post