When a Europe-wide meeting of finance ministers is downgraded suddenly to a conference call, you know someone is sending a signal—and it’s not about saving travel expenses. The announcement yesterday that the ministerial meeting in Brussels Wednesday would be canceled was a clear message from virtually all European governments, especially the rich and resentful Germans, that they are fed up with what they see as Greek procrastination and prevarication.
Privately, some call it Greek extortion, as the politicians in Athens seem to be betting that Brussels would do just about anything to keep their little country from defaulting and falling out of the club of nations with the euro as their common currency. To avoid such a default, the rest of Europe and the International Monetary Fund already have pulled together hundreds of billions of dollars in bailout funds. They’ve also twisted the arms of banks and other private investors to make them take a loss of 70 percent on the Greek debt they currently hold. In financial parlance that’s quite a haircut.
But there are growing signs that Greece, like some drug-addicted relative who lies endlessly, spends recklessly, and endangers people foolishly, has worn out its welcome in the euro-zone family. And the family has been moving to defend itself. The threat that a financial implosion in Greece would spread instantly to the weak economies of little Portugal and Ireland, then to the big economies of Spain and Italy until the whole euro zone and Europe went up in financial flames, spreading outward to the feebly reviving American economy and even the slowed-down Asian ones—well, that’s still possible. But it’s less likely.
This Greek drama has gone on for so long now that the idea of a tragic ending with no deus ex machina descending from the heavens to set things straight has been at least partially accepted by the markets.
Banks that would have been terribly, perhaps fatally vulnerable to a Greek default a few months or years ago are now looking at a situation where they’d be losing that 70 percent if they help Greece avoid bankruptcy, and some have insured their bonds and could cash them in for 100 percent of their value if Greece actually goes belly-up. At the same time, these private institutions have increased their cash on hand significantly thanks to the European Central Bank’s decision late last year to make €500 billion (about $660 billion) available to them at nominal rates.
Meanwhile vulnerable Portugal, Ireland, Spain, and Italy have shown no inclination to squeeze private investors the way the Greeks have done, which automatically gives them some protection from the rampant speculation on the market that seemed to be pushing Europe to the brink of collapse last fall. If the IMF and Europe succeed in creating the kind of trillion-dollar-plus firewalls against speculative assaults that IMF managing director Christine Lagarde has proposed, that will further shore up the defenses in the rest of Europe, even on most of the periphery.
For precisely these reasons, you now hear such distinguished and influential voices as Olivier Blanchard, chief economist at the IMF, talking about Greece as if it’s a whole separate problem. “There are dramatic differences between these countries,” Blanchard told a panel at the Carnegie Endowment in Washington last week, “and one has to be careful to put Greece on one side and the others on the other.”
The Greeks like to say they’ve been forced by radical austerity measures and resulting growth of negative 6.8 percent to wear a hair shirt while the private investors are taking a haircut. And the spectacle of rioters burning buildings in downtown Athens and protests in every corner of the country certainly commands the attention of Greek politicians maneuvering for the parliamentary elections coming up in April. The conspicuous, deepening divisions between coddled, incorrigible political and financial elites and the masses of workers, who are increasingly poor, could easily lead to further violence.
But even if Greece squeaks through the next round of bailouts in March, that is hardly the end of the affair. Nobody is going to be buying Greek bonds for many years to come, so the taxpayers of other European countries (especially those darn Germans again) will be forced to foot the bill for a country whose debts are worth about 160 percent of all the goods and services it produces every year. In the best of foreseeable scenarios, that will get down to only about 120 percent in the near term, and with the Greek economy shrinking so fast, the chances of it recovering significant growth in the near future seem small, or nonexistent.
If the price of international help is continued hardship year after year, can any Greek government survive the withdrawals? That’s an open question. But for now, at a minimum, the powers of the euro zone are demanding that every major political party abide by the terms of the agreements being hammered out and implement them. One by one, the party leaders are taking the pledge. But, just like a 12-step program for addicts, this is a situation where good faith is being tested one day at a time.