June 2011, Week 4


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Sat, 25 Jun 2011 13:58:27 -0400
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European Authorities Risking Financial Contagion in
Greek Showdown; Where Is the U.S. Government?

By Mark Weisbrot
Guardian (UK)
June 24, 2011


The European authorities are playing a dangerous game
of "chicken" with Greece right now.  It is overdue for
U.S. members of Congress to exercise some oversight as
to what our government's role is in this process, and
how we might be preparing for a Greek debt default.
Depending on how it happens, this default could have
serious repercussions for the international financial
system and the U.S. (and world) economy.

The U.S. government has a direct and significant role
in the Greek crisis because the U.S. Treasury
Department has the predominant voice in the
International Monetary Fund (IMF). The IMF, together
with the European Commission and the European Central
Bank (ECB) - the three are commonly referred to as "The
Troika" - are negotiating a new austerity package with
the Greek government. This package promises more
suffering for the Greek people - that is acknowledged
by all sides. But the Troika thinks they can ram it
through the Greek parliament on Tuesday, with the
threat that they will not disburse the next $17 billion
installment of Greece's current loan package, thus
putting Greece in a situation of sudden default.

The Troika won the first round of its battle against
the Greek citizenry, with a parliamentary vote of
confidence last Tuesday; and if the ruling party's slim
majority holds up this Tuesday they will pass the
austerity package. But it is a high stakes gamble, and
this week's vote won't end the instability.

It has been largely forgotten, but there was a Greek
debt crisis just over a year ago, in May 2010, that
rattled world financial markets. It was exacerbated by
the extremism of the European Central Bank, which was
also playing a game of brinksmanship back then. On
Thursday, May 6, 2010, the ECB refused to commit to
buying European government bonds in the midst of the
crisis. The idea was that this would be a form of
"monetizing" the debt of the weaker Euro zone
countries, just as the U.S. Federal Reserve has
monetized hundreds of billions of dollars of U.S.
government debt in the last few years. This was
anathema to the ECB, which is considerably to the right
of the Fed. But after a harsh negative reaction in
world markets, including a plunging U.S. stock market,
the ECB reversed its position four days later and began
buying European government and private debt.

Perhaps the European authorities believe they have the
tools to stem any panic that may occur this time in
response to a Greek default. And as happened last year,
they can count on the Federal Reserve to open a swap
line of dollars as necessary. But it is worth noting
how much the European debt situation has deteriorated
over the last year.

At the peak of last year's crisis, interest rates on
the 10-year government bonds of Greece, Portugal, and
Ireland were 12.4, 6.3, and 5.9 percent respectively.
They are currently at 16.8, 11.4, and 11.9 percent.
Credit default swaps for these three countries - a
measure of the risk of default - peaked at 891, 460,
and 273 basis points in the May 2010 crisis; they are
currently at 1,977, 827, and 799.

Clearly the risk of contagion from the Greek crisis has
risen significantly since last year.  At the time, a
number of economists (including myself) noted that the
pro-cyclical policies imposed by the Troika would only
worsen the Greek economy and its debt situation. This
has clearly come to pass, as the economy shrank by 4.5
percent last year, unemployment continued soaring to
more than 16 percent, and public opinion in Greece
turned sharply against the austerity measures. A
"voluntary" rollover by some of the bondholders, as
currently proposed, will not resolve the problem. And
there is only so much punishment that the Greek
population (or the Spanish population, which has
recently seen hundreds of thousands of protesters in
the streets in the face of 21 percent unemployment)
will take. The Greek government has already laid off 10
percent of its government workers, and the plan that
they will vote on Tuesday calls for layoffs of another
20 percent. It also provides for a total of 12 percent
of GDP of fiscal tightening for 2011-2015 - a recipe
for never-ending recession, for the purpose of trying
to pay off an unpayable debt to bankers and

A Greek debt default appears inevitable, and the
potential for financial contagion is significant. What
is the U.S. government doing to avoid a financial
crisis, and to prepare for the various contingencies
that may be anticipated? One would think that after
living through the events that followed the collapse of
Lehman Brothers in 2008, some responsible government
officials in the United States would be asking these

Mark Weisbrot is co-director of the Center for Economic
and Policy Research and is co-author, with Dean Baker,
of Social Security: The Phony Crisis (University of
Chicago Press, 2000)


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