Blog author: mmiller
by on Monday, May 17, 2010

Though the Greek Debt crisis may seem far away, here is a sobering article by Kevin Hassett at Bloomberg. Greece’s Bailout Heroes arrive in Leaking Boats

Those countries coordinating the $1Trillion bailout of Greece find themselves in similar trouble. Hassett writes:

The fatal flaw in the plan is that the European nations bailing out Greece — even Germany, where government debt has risen to about 80 percent of gross domestic product — have similar budget problems and even less political will to take similar medicine.
Their plan appears to rest on the hope that lenders won’t notice. Eventually they will, and when that happens, a worldwide loss of faith in government debt markets is a virtual certainty.
In other words, it is hardly good news for a creditor if a hopelessly bankrupt borrower offers to take on the debts of a hopelessly bankrupt borrower.
During the financial crisis, faith was restored in large financial institutions because toxic assets were essentially exchanged for government bonds. If government bonds become toxic, there will be no effective treatment options remaining. The collapse will have no bottom.

He also notes that the US is not immune to the problems that plague Greece. According to a study done by the IMF in 2003, the US finds itself an unsustainable debt situation that if not resolved could lead to even the possibility of default.

The paper, written by economists Paolo Manasse of the University of Bologna along with Nouriel Roubini of New York University and the IMF’s Axel Schimmelpfennig, studied historical sovereign-debt crises, exactly the situations that Western nations are hoping to avoid. They found that external debt levels — money owed to foreigners — exceeding 50 percent was a key indicator that debt default may occur.

Here is the chilling fact: the average external debt as a percent of GDP among countries in their sample the year before a sovereign debt crisis was 54.7 percent, and 71.4 percent in the crisis year. The U.S. external debt on Dec. 31, 2009, was $13.77 trillion, or almost 100 percent of GDP. For much of Europe, the story is worse.

It seems that the only way to solve these impending crises is to rethink the entire way we look at the roles and responsibilities of government in democratic societies, but that may take the political will that no one has.