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The European leaders add oil to the Greek fire instead of putting it out

06 April 2011 / 14:04:50  GRReporter
20611 reads

In the case of Dubai, however, the problem immediately transformed from a problem of the real estate market to a crisis of the state credit. Then, they started looking much deeper and tried to find out which foreign debt could be a problem later. So, they found Greece, which has always been of the verge of the rates. They started finger pointing it and because they had panicked already, and to show that they do something. As a result, the spreads of the Greek government bonds reached fantastic levels; the country can not be funded and failed. And we return to the main question – a country in the Euro zone starts burning, figuratively. What do the European leaders do to put this fire out? They add oil instead of water.

What do you mean?

They go to a bankrupt country and give it more loans. They want money from German taxpayers to give it to Greece, Ireland, etc. And instead of allocating the funds to warm the economic climate and to increase the budget revenues from taxes, they oblige them to give the money to the banks or to pay off old debts. At the same time, in order to get this "assistance" these countries are required to impose such stringent measures so that to reduce their GDP, which makes them even more ruined than before.

In other words, all the money given as aid, similar to the Greek one, were given in vain because they fall into the black holes which we mentioned above. Banks, however, do not solve their problems with this aid and the crisis spreads from country to country. That is why I think that this type of lending is like extinguishing fire with oil.

I understand your logic, but what would it mean the state to allow a Greek bank to fail? What would be the consequences in your opinion and what are the alternatives before us?

They would be disastrous and for the whole European banking system. Alternatives exist, but there is no political will. This puzzle ranging requires a few steps. The first is that when we have two problems like the foreign debt crisis and the survival of banks, they must be hit simultaneously. Currently, this is not happening. The rulers want to solve the foreign debt problem by ignoring the failed banks and lending to countries, thus only shifting the problem.

We should know what results we want to achieve to start from somewhere. Do we want to reduce the foreign debt? This will not happen if we are lent more money. It will not reduce through redundancies in the public sector, because these redundancies reduce the tax revenues due to the recession. We will reduce the credit if we turn to the European Central Bank, which is credited at much lower levels than those of the government bonds.

I will give you an example from life to make it clearer. If a young couple decides to borrow money today, but the bank does not know them, it would credit them at 10% interest rate. However, if the parents of either of them have been customers of this bank for many years and it trusts them because of the good cooperation the bank will grant a loan at a much lower interest rate, for example, 3%. Then, the young couple can enjoy the low interest loan and takes the obligation to pay the installments.

So, imagine that the European Central Bank plays the role of the parents and it is credited at very good prices. It could sell Eurobonds on the international markets, which will earn interest of not more than 2.5%. Thus, the legal foreign debt of Greece, which is 60% of the GDP for the Euro zone, could be transferred to the European Central Bank. The remaining amount of the debt remains in Greece to cope with it alone, but it has the option of cheaper credit within those 60%. When it comes to the maturity, Greece and ECB themselves settle the accounts.

At the same time, here comes the issue of the European Financial Stability Fund, which instead of giving money to troubled countries should begin to support the banking system in Europe. To check, for example, Deutsche Bank or any other European bank, what capital it needs in order to fill its black hole. This amount is not more than one trillion euros in total. There is no need to give them free of charge but in exchange for shares and to sell them when the crisis is over. In this way, the stability fund will be worth nothing to the community.

What prevents the EU leaders from discussing such a funding system for the Euro zone countries?

One of the reasons is political. If any of the European leaders or bankers makes a similar proposal in public and alone, then the spreads of the country concerned will reach the sky or the shares of the bank will fall significantly. Such a decision may be taken only by consensus. Currently, this is not possible because the necessary leadership will is lacking.

The second reason is also important. If such a decision is taken, Germany loses its right to leave the Euro zone. Greece, which has a deficit, can not leave the currency union even if it wants to but Germany can do it.

Tags: EconomyMarketsForeign debtBank crisisYanis VaroufakisEuropean union
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