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Yet Bob Doll, chief equity strategist at BlackRock, gives light to a different perspective. “We’re going to find Band-Aids and we’re going to muddle through these credit problems,” Doll said. “The consequences of not following that route could be pretty dire, and I think the interested vested parties are going to step up.”
Yet most economists remain unconvinced. Greece’s current debt amounts to 340 billion euros ($485 billion), which is 150 percent of the country’s annual economic output. Calculations by Reuters, based on 5-year credit default swap prices from Markit, show an 81 percent probability of Greece eventually defaulting, based on a 40 percent recovery rate. Then there is Greece itself, which must pass any austerity package agreed upon if Europe is to be spared what many nervous bankers have referred to as a “Lehman type moment,” harking back to the 2008 collapse of Lehman Brothers which sparked the current Great Recession.
It is an austerity package which promises to be even more severe than the one which precipitated several riots in that country, including the ones last Wednesday in Athens, where tens of thousands of angry Greeks massed around the main Syntagma Square to protest. Some of the rioters hurled gasoline bombs at the Finance Ministry, and police responded with tear gas. And while “Band-Aids” appear to be the order of the day, they may only be deferring the inevitable. Economic professor Nouriel Roubini illuminates why. “The muddle-through approach to the eurozone crisis has failed to resolve the fundamental problems of economic and competitiveness divergence within the union,” he said. What he means is elucidated by investment banker Martin O. Hutchinson. “Greece produced nothing close to the level of economic output that would be needed to justify its spending and the lifestyle of its people…Its people need to suffer a decline in living standards of about 30% to 40% so that the country’s output is sufficient to repay its debts,” he echoed.
Greece is not alone. Last Friday, after European markets had closed for the weekend, Moody’s placed Italy’s Aa2 rating on review for possible downgrade during the next 90 days, due to “structural weaknesses such as a rigid labor market [which] posed a challenge to growth,” reinforcing the notion that the Greek debt crisis is “contagious.”
Such contagion has not gone unnoticed in the United States. Also on Friday, four Senators, Jim DeMint (R-SC), Orrin Hatch (R-UT), David Vitter (R-LA) and John Cornyn (R-TX) introduced an amendment to the Economic Development Revitalization Act, which would prevent the IMF from accessing $108 billion of U.S. taxpayer funding sanctioned by the Obama administration in 2009 to bail out foreign nations. “Now is not the time, when Americans are struggling to find work and have budget problems of their own, to tap innocent American taxpayers in order to bail out profligate European governments,” said Hatch in a released statement.
This is an obvious attempt to insulate the United State from a eurozone suffering through a string of related defaults. And America is not alone in in that respect. According to “senior sources,” British banks, including Barclays and Standard Chartered, have radically reduced the amount of funding available for unsecured lending to other eurozone banks, withdrawing tens of billions of pounds from the inter-bank markets. The move threatens to seize up credit markets in a scenario similar to 2008, when stronger banks refused to lend to weaker ones, which led to a string of major banks going under–and taxpayer bailouts for those that didn’t.
Where is all of this headed? A brilliant speech given last Thursday by Lorenzo Bini Smaghi, member of the executive board of the ECB, at the Executive Summit on Ethics for the Business World explains some of the current thinking:
The fight to survive, which in a capitalist system should reward the company with the best product, is changing in nature. Particularly in a period of economic difficulty, when returns are limited, those who survive are those who bet on the failure of others and who manage to convince the market that such a failure is inevitable. It is no longer about Schumpeter’s ‘creative destruction,’ but ‘destructive destruction,’ where the one who survives is the one who bets, rather than the one who innovates and produces.
“The same is true for countries,” he said.
Next week, the Greek parliament will vote on the latest series of austerity measures, which include $39.5 billion of taxes and budget cuts, along with a privatization drive valued at $70 billion–all of which is required by the IMF before it will release the next $17 billion installment from the original bailout package. The government has also promised to cut 150,000 jobs from its over-loaded public sector workforce by 2015, effectively ending the long-cherished concept of lifetime government employment in the process. All of it will be thoroughly despised by Greeks who, to paraphrase Margaret Thatcher, have yet to comprehend that the inevitable demise of their socialist society comes because Greece is running out of French and German money to spend. The vote is scheduled to take place at midnight on Tuesday.
For a eurozone faced with the real possibility of dissolution if the vote goes the wrong way, it’s even later than that.
Arnold Ahlert is a contributing columnist to the conservative website JewishWorldReview.com.
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