Open Thread: How Will the Greek Financial Tragedy End?

Three years after the collapse of Lehman Brothers, what was the fourth-largest investment bank in the US, the Federal Reserve, European Central Bank, Bank of England, and Japanese and Swiss central banks moved last week to avert a liquidity crisis in European banks struggling to deal with the failing Greek economy, leaving American investors with portfolios of Greek bonds worried. Do you think a Greek default is inevitable? Let us know your thoughts in the comments.

Following the falling E.U. bank stocks and a Moody's downgrade of two of the largest banks in France, the central banks are acting to protect the financial world against a Greek default that everyone sees as inevitable, except perhaps Angela Merkel, Nicolas Sarkozy, and George Papandreou.

The more obvious uncertainties seem to be defining the terms of a Greek default and managing any possible wider damage. As explained at the Daily Beast:

Contagion has now reached the Rhine and is mightily roiling German politics, making it uncertain whether Merkel can even get the second Greek bailout through the Bundestag. That is by now, however, all but irrelevant because in Greece itself, the game is up. Its economy is collapsing, the interest bill on its soaring debt will absorb a quarter of state revenue next year, and the taxmen who should be collecting around €40 billion in unpaid Greek taxes are all but on strike. Reforms have been woefully timid but are still bitterly resented. The vaunted sale of state assets has never left the drawing board, a run is developing on Greek banks, and unless the E.U. and IMF cough up the next €8 billion within a fortnight, Athens will run out of cash to pay next month’s bloated public-sector salary bill. In a desperate throw of the dice, the government has announced a property tax to be paid through domestic electricity bills—which the mighty electricians’ union has said it will refuse to collect. [...]

Writing down Greek debt by, say, 60 percent would saddle the European Central Bank with a big bill; create holes in the balance sheets of some big French, German, and Belgian banks; and, to an unknown extent, expose British and American holders of credit default swaps. Not only Greek but Romanian and Bulgarian banks could collapse, while Cyprus’s exposure to Greek debt is 156 percent of its GDP—and Russia holds massive deposits in Cyprus. But as Timothy Geithner has observed, the eurozone is not exactly penniless, and should be able to recapitalize banks that need it. The harder task will be to calm the European bond market, starting by providing Ireland and Portugal, which are in the recovery ward, with sufficient liquidity to ride out the storm. The European Central Bank will also need to buy Spanish and Italian bonds—but on the condition that their pampered politicians take the sort of steps Italy balked at this summer, notably the total abolition of Italy’s pointless and costly layer of provincial government.

An equally great risk is the political risk. Instead of buckling down to fix the root of the problem, many European politicians are instead bent on another political redesign. Jose Manuel Barroso, the European Commission president, said the "fight for the economic and political future of Europe" demands "a new federal movement." However, Greece's current economic situation is a direct result of combining incompatible economies. Of course, it would be extremely difficult to dismantle the euro in today's turbulent economy, but looking into the future and the lack of support generated by many countries' eurozone membership, the problem that needs fixing could be the euro itself.

What are your thoughts?

NB Staff
NB Staff