Tuesday, May 4, 2010

Greek problem not going away


Germany's Chancellor Merkel commented on the need for "orderly insolvencies". Nothing like spooking the herd just after it as calmed with the Greek aid package.

As we find out more about the details of the Greek aid package and what needs to be done, it is becoming more evident that the 100+ billion euro aid package will only be a stop-gap and that Greece may be in a credit death spiral. Of course talking about orderly insolvencies should not be considered a policy exercise.

The death spiral for Greece is easy to imagine. Cuts in government expenditures lead to lower income and strikes, which lead to lower tax receipts. For example, the traditional 13th and 14th month bonuses to public employees will have to be eliminated but this will only save a billion euros. The budget does not get balanced and more funds are needed which leads to more austerity. The only solution is for debt holders to take only a portion of what they are owed and wipe the slate clean.

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