European shares fall as debt woes hit Greek stocks

5 Jun 2015 | Author: | No comments yet »

DYER: Stalemate in Greece.

“The Greek government would be well-advised to act quickly — for the Greek banks, it is five minutes to midnight,” said Andreas Dombret, an executive board member of the German central bank, last weekend.

Normally, when a country spends itself into near bankruptcy like Greece did, the whole cycle of crisis, default (or a tough International Monetary Fund bailout), and recovery takes much less time than that. One is to make a deal with the IMF: in return for IMF loans to tide it over, the government promises to restructure the economy (stop subsidizing favoured groups and businesses), balance the budget (collect more taxes and cut spending) and, above all, devalue the currency. It is locked into membership of the Pan-European currency, the euro, which means that its costs stay high and foreign investment doesn’t flow in as it would after a devaluation.

You’ll be locked out of the international markets for some years, but you can only borrow at an exorbitant interest rate already, so what have you lost? And after some years, you offer to pay all the creditors you stiffed 10 cents on the dollar, they take the deal because something is better than nothing, and you can start borrowing internationally again. Greece has defaulted seven times before in its history, and almost every default was accompanied by a devaluation that put the economy on the road to recovery. But the EU goes on feeding Greece just enough money to prevent a default — and 90 per cent of that money goes straight back to German, French and other European banks in debt repayments. Indeed the Greek economy is already so badly damaged that there is some question as to whether the government could now raise enough income from domestic sources to maintain essential services after a default.

The European Union is prepared to cut them enough slack to keep them from defaulting, because its members fear the future of the euro itself if it becomes clear that countries can actually leave.

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