The Greek Crisis.

Once again the people of Greece are on strike and rioting in streets it what seems like three continuous years of strikes and rioting. This latest round is in protest against austerity measures that the Greek government needs to pass in order to release the latest tranche of the first European Union (EU) bailout. Today (20/6/11) EU ministers have decided to withhold this funding until Greece puts those austerity measures in place and passes an inspection. Tomorrow (21/6/11) the Greek government faces a no confidence vote in Parliament. However while everybody argues over this first bailout everyone also knows that it won't be enough and Greece will need, at least, a second bailout.

There are many, many reasons why the Greek economy is on the brink of bankruptcy. For example they have an overly generous social welfare package that guarantees everyone a free university education, labour laws that are so restrictive that it's pretty much impossible to employ anyone under thirty and seemingly a national culture of tax evasion. The main problem though is debt. Specifically the type of debt that Greece is in. While it varies greatly and specifics are very important most national debt (Sovereign debt as it's known) is paid back over a period of 10-15 years with regular interest payments. Greek debt though is only about 3-5 years in length. As a result the Greek government is almost constantly having to take on more debt to re-pay outstanding loans as they come of age. Put simply Greece is trying to pay off one credit card with another credit card and they're fast running out of credit cards.

So the most obvious solution to Greece's problems is a debt consolidation deal only on a massive scale. This would involve the European Central Bank (ECB) buying up all of Greece's short term debt at say 30 cents in the dollar and then working with Greece to make sure that money is paid back over a longer term and at a lower interest rate. The only problem is that this means that Greece's creditors will lose most of their money.

A lot of people are not keen to see this happen because the first thing that will happen is that all these banks, pension funds and other nations will get really angry. Secondly it will break the current rule that sovereign debt always gets paid regardless of the national economies ability to do so. If that happens then the people who buy sovereign debt will start looking much more closely at a Country's credit ratings and ability to repay before they lend them money. This prospect makes a lot of people nervous because across the globe there are quite a few countries whose excellent (AAA) credit ratings are more the product of fast talking and charm then economic reality. Hence all the posturing.

So while it will be difficult to find support for this plan I really can't see what the alternative is. After all the other members of the EU simply can't afford to keep giving Greece millions of Euros every time the need to raise capital because even the strongest economy in the EU, Germany is not as bullet proof as a lot of people think. Besides why should the Germans be forced to pay more tax just the Greeks can't be bothered to pay any?

The only other option is that Greece leaves the Eurozone and goes bankrupt by defaulting on it's debt. Although this would be great news for the rest of the Eurozone it means that Greece's creditors will still lose most of their money creating the same problems in the debt market. It also means that the Greek people will also have to put up with even more austerity measures, savings being wiped out as banks collapse and their economy basically being dead for the next ten to twenty years because no-one will want to do business with them. Apart from that though it sounds like a brilliant idea.