NEW YORK (MarketWatch) — I must be very stupid.
I have been watching this European financial crisis for two years now. And it still doesn’t make any sense to me whatsoever.
When it started out, I figured that it would soon become clear. But it hasn’t. It’s getting worse.
Am I alone? Am I the only person baffled? Does everyone else understand this?
Here are my questions.
Reuters
A commercial street in Athens. Greece has repeatedly flirted with bankruptcy in recent months.
1.Why would anyone lend their money to Greece for 30 years at 3.5% interest? That’s the rate being insisted on by the Greek government in the current negotiations with its bondholders. But that’s less than the rate Australia and New Zealand — countries with some of the strongest finances in the world — pay for 10 year money. Would Greek prime minister, Lucas Papademos, lend his money on these terms? If so, will he agree to do so as part of the negotiations? And if not, why should anyone else?
2.If Greece gets to pay 3.5% interest on its debts, as a reward for defaulting, why would the Irish continue to pay 7.2% for not defaulting? Why would the Spanish pay 5.7% and the Italians 6.5%? Why won’t they look at this deal and say, “We’d like the same thing”?
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3.Why on Earth did the European Union leaders try to make a big stand over Greece in the first place? It was always a lost cause. And it is a tiny country anyway. Its economy accounts for less than 2% of European Union’s gross domestic product, and its debts for less than 3%. Why didn’t they draw the line around somewhere more defensible, like Ireland?
4.Am I mistaken, or couldn’t we have reached this point two years ago? It seems that we have spent the last two years hearing about the European Union’s attempts to prevent Greece from defaulting. Unless my eyes deceive me, this looks like Greece defaulting.
5.How exactly is the imposition of new austerity rules on depressed countries like Greece, Italy, Spain and Portugal going to help them recover? You don’t have to be a raging Keynesian to think that bringing in “tough new budget rules” at this moment is like throwing an anvil, instead of a life preserver, to a drowning man.
6.Owners of Greek debt are being told that unless they accept haircut on their loans as part of a “voluntary” agreement, they will have a deeper haircut imposed upon them by fiat. Could someone in the European Union please explain the use of the word “voluntary” here, and how it differs from the word “blackmail”?
7.Why don’t the Greeks just leave the European Union and relaunch the drachma? They could devalue, regain their autonomy, and restore growth. Great Britain boomed after it left the European currency union in 1992. And being outside Europe hasn’t hurt the Turks: Their economy and their stock market have done much better than the E.U. since their talks to join the union got bounced five years ago.
8.Why do we keep talking about “bailing out Greece” when we are really bailing out the French and German banks who lent them money? The Greeks have already had the money, and spent it. They aren’t really being bailed out at all — least of all if the “bail out” means making their lives even more miserable. Shouldn’t Angela Merkel and Nicholas Sarkozy be required to admit that we are talking about bailing out some of their constituents, and not the Greeks?
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9.If you come right down to it, why are the European Union, the European Central Bank and the International Monetary Fund even intervening in this at all? If some banks were foolish enough to lend to the central bank of Greece on the same terms they lent to Germany and Sweden, isn’t that their problem? And if Greece must renegotiate the terms of the debt, isn’t that really a private matter between the Greek government and the banks? Why shouldn’t Greece just be allowed to default and go through Chapter 11, the way American Airlines is doing? We would not expect the EU to intervene, say, to settle a contractual dispute between the Greek government and a company hired to collect the trash in Athens or run the airport. Certainly, international institutions can reasonably step in to settle markets in a panic, or to provide emergency liquidity, but that is a totally different matter from intervening in these contracts.
10.People who bought credit default swaps — insurance — on Greek debt did so in order to insure themselves against a Greek default. Counterparties sold them these CDS insurance contracts in order to earn a return on their money in exchange for taking a risk. Clearly Greece is going to default by any common sense definition. If the European authorities rig this process so that it is not a “technical” default, simply in order to avoid triggering payouts on these credit default swaps, how is that not an act of theft against the owner of those contracts, and in favor of the seller?
I’m sure the answers to these questions must be obvious. I look forward to hearing them.
