Why Europe Will Not Give Up on This Greek Tragedy

For Europe to abandon Greece, or vice-versa, in the middle of the most fragile financial crises would be political suicide for the Eurozone. Naturally, no disaster is too far away from the US and its own interest.

There was a feeling of sullen desperation as the who’s-who parade of Europe’s finance ministers finished talks in Luxembourg on Monday, having decided to postpone €12 billion (approx. $16 billion) in loans to Greece until the bankrupted Mediterranean state promises to fulfil a stern set of austerity measures.

It is now in the Greek government’s hands to win a vote of confidence and, if succeeding, vote on an austerity package on June 28. These loans would serve as a bridge headed towards a second bailout worth €170 billion, only 18 months after the first which cost the EU €145 billion.

The austerity measures being stipulated by the European Union (EU) would see €25 billion in fiscal belt-tightening as well as pledging to make €50 billion through privatizations. But given the vehement demonstrations around Greece against such proposed government measures, one might believe that a subsequent bailout rests on a meagre hope and a cynical prayer. You can apprehend those protesting on the streets of Athens, but desperate times call for the desperate measures, and rarely have times been so forlorn.

Around Europe, and particularly Britain, who wants no part in any subsequent bailout, there are calls in the press for Greece to split from the Eurozone, give up on trying to pay off a debt that amounts to 140 per cent of the country’s GDP output, pay the price for years of unrestrained spending and cheap lending, and thereby quit impoverishing the rest of Europe.

Such calls should not be heeded, despite the EU showing signs of timid tentativeness in its decision to postpone the first set of loans. In fact, if the EU decided to sit back and decide not to grant Greece any bailout money the country would be forced to default; a suicidal move for the whole of Europe.

First of all, Greece quitting the EU would see hundreds of billions of Euros in loans essentially wiped out. Holders of the €340 billion in Greek sovereign debt, the hundreds of billions in Greek commercial debt and tens of billions in derivative contracts on Greece’s debt would see all worth in those assets evaporate. The result of this would see a colossal inflation in perceived risks in lending within the Eurozone, particularly to other states whose financial wellbeing is on the brink – Spain, Portugal, Ireland and to an ever-greater extent Italy. Loans taken out to those states and their banks would see vast additional loses and future loans would be plagued with harrowingly higher premiums.

Any increase in the price of borrowing is the last thing anyone needs right now; all it does is increase the risk of more EU member states defaulting, which would bust the European Central Bank, which holds more Greek, Irish and Portuguese debt than any other institution, and injure many other European banks.

Furthermore, it is not just Europe that would suffer under a Greek default. The US is in a similar boat, floating not too far away. Statistics published by the Bank for International Settlements show that the US has $41 billion in “actual and potential exposures” in Greece, not to mention a further $46 billion in Portugal and a astounding $205 billion in Ireland. It therefore comes as little wonder why some Euro Finance Ministers want to see some the bailout money rolled out from private American banks, a call that has quickly been quashed by credit agency Fitch, who threatened to regard Greece for default if this occurred, as well as the International Monetary Fund.

Come what may over the coming days, regardless of whether Greek Prime Minister George Papandreou wins a vote of confidence, Europe will do whatever it takes to guarantee some sort of bailout package, even if it means that subsequent bailouts down the line are inevitable and that countries in peril will have to live with stern austerity for the coming years. It might not seem like a particularly attractive option for anyone right now, but that is because there simply are no attractive options.

On Tuesday, leading European industrialists will take out full-page adverts in the French and German press pleading for intervention to save the euro currency. The advert will read: “A return to a stable financial situation will cost many billions of euros, but the European Union and our common currency are worth every effort.” God speed.

Photo courtesy of the Daily Telegraph