~by: Damon Yeo~
For a best part of the last two years, the newly-coined “sovereign debt crisis” had been dogging financial headlines globally. And in almost every article that mentioned the three words in parentheses above, you will find the country “Greece” mentioned.
The mechanics and reasons behind this debt crisis is complex, intertwined with post-World War II history, background of the formation of the European Union and politics of the member states.
To sum it up the most layman way possible, let’s do some role-assignment. Imagine the European Union (EU) is a large family, made up of very different family members (sovereign states) with very different relationships. This is a very powerful family – rich in wealth and influential in affairs.
Greece is the rogue child of the family. Since joining the family (back in 2000, with the creation of the Euro), this rouge child had been spending money like there is no tomorrow. Besides not working hard enough (not collecting enough taxes), he borrows heavily from other family members and other lenders (EU members and externally) to finance his unsustainable lifestyle.
The day of reckoning came when no one of a sound mind wanted to lend Greece anymore money. A large installment is due and if Greece do not keep up with the payments, the creditors will come knocking. Left with seemingly no other route to go, Greece turned to more senior and richer members of the family (Germany and France) to literally beg for money.
Come to the present, the co-patriarchs of the family are now deliberating whether to continue to lend Greece more money (bailout) or kick him out of the family altogether and risk the breaking up of the entire family.
The concept of a bailout is fundamentally flawed, for it is simply to lend more money to a bankrupt country so that it can borrow more money. There will be no end to this lending and the net impact is simply to put the debt burden on future generation instead of the current.
Bailout is Unfair
Quite simply put it, a bailout (or any bailout, for that matter) is unfair.
The undeniable, cold, hard fact is that Greece had been spending way beyond its means (including hundreds of millions for staging the Olympics in 2004) for a long time. The previous Greek governments had used the money for public spending to gain votes and stayed in power. The Greek people had reaped the benefits, either from better infrastructure or higher wages.
The banks and institutions which had lent money to Greece in the first place had also earned via the interest they had charged. They have also raked up millions performing work with respect to the Greek debt.
Yet, when a bailout is necessitated, the taxpayers are the ones being penalised – not all taxpayers, but taxpayers particularly from Germany and France, the two nations driving this bailout.
Taxpayers in these two countries, both individuals and companies, have received no direct benefits from the Greeks’ decade-long spending spree, yet are asked (well, forced by their governments) to fork out money to save Greece.
From whatever angle you look at this, it is simply unfair.
Bailout is a Moral Hazard
A sub-plot from Oliver Stone’s 2010 film, Wall Street: Money Never Sleeps, clearly illustrates the issue of moral hazard.
In the film, Shia LaBeouf’s character Jacob’s mum (Susan Sarandon) was a realtor who went into the risky business of speculating in properties by leveraging. Jacob had previously helped her mum out financially when things went sour for her, so at the back of her mind, she assumed that her son will always help her out if something drastic were to happen. Thus, she is much more willing to enter into riskier transactions.
Jacob’s assumed willingness to “save” his mum had caused her to take even riskier positions and ultimately lose a lot more money than if she did not have something to fall back on in the first place.
In real life, this had manifested itself as recent as early September.
With the cost of borrowing soaring for Italy, the Prime Minister Silvio Berlusconi and his government came up with an emergency austerity budget. With this, the European Central Bank (ECB) stepped in to directly purchase Italian bonds (at a lower than market rate) and alleviate the mini-crisis for the time being.
However, almost immediately after ECB stepped in, Berlusconi made changes to his budget, including scrapping a proposed tax on the wealthy. To put it very crudely, the sly Berlusconi had conned ECB into helping Italy and backtracked on his promises as soon as help was received.
With the safety blanket of bailouts, there is no stopping other European nations to take on additional risks and further increasing their own borrowings.
Bailout is the tip of the iceberg
Greece was the first European nation to have sought a bailout in this crisis. However, they are not the only. Both Ireland and Portugal have also requested for bailouts.
Currently, the entire spotlight is on Greece, simply because how this crisis is managed is likely to form precedence on how the rest of the bailouts are managed.
Germany and France are leading to charge to rescue Greece not because they feel the insatiable desire to be the heroes of EU, but simply because German and French banks hold the largest proportion of Greek debt exposure. Estimates vary, but Germany and France is likely to hold more than half of the entire value of the Greek bonds out in the market. Should Greece simply default and refuse to pay, the German and French economies will bleed billions of Euros instantly and suffer the brunt of this meltdown.
The UK are no doubt watching the Greek situation very closely. British banks are the most exposed to Irish sovereign debt and will no doubt lead the charge to save the Irish economy when the time comes.
Like ice-bergs, the problems and figures discussed in the current debt crisis probably form a mere 10% of the entire problem. A bailout fund may be able to save a Greek economy. Maybe two. However, if the situation worsens overnight and giant economies like Italy and Spain get sucked into the same predicament, there is nothing the rest of the EU countries can do.