More on the EU, Greek Debt and Bail Outs

 See my background piece here for further info on US investment banks, consumption growth, the EU and Greece.  EU growth and return to BAU is an essential element in our USG assumption of a return to BAU for the world, and therefore a return to BAU for America.  I am convinced we Americans will soon be having the same discussions about "bailing out" some of our own states -- Michigan? California? New York?.



For reference, the GDP of Greece is about $400 Billion, and the GDP of California is about $1.8 Trillion --  nearly  five times larger than Greece and about the same size as Spain and Italy.   Spain appears to be in a similar situation to Greece, but not quite as bad.  The EU group is terrified that the pissant Greece economy could tank EU growth.  Should we be concerned that California and New York could affect ours?   More on this in following posts.
 


Germany debt chief hints at Greek rescue
by Ambrose Evans-Pritchard

The head of Germany's debt agency has warned that Greek withdrawal from the euro would have calamitous effects and destroy Europe's monetary union, a prospect that leaves Berlin with little choice other backing an EU rescue plan. 'If one member of the eurozone were to step out for any reason, this would be a collapse of the entire system,' said Carl Heinz Daube, director of the Finanzagentur. 'It would mean that after ten years, the euro experiment has ended.' Mr Daube said a range of options are 'under discussion' for a possible assistance for Greece but confessed that the issue is a very hot potato in Germany. 'It is very hard to clarify to a man on the street why one country should step in to help another country,' he told the Euromoney bond congress in London.

The comments reinforce the widespread view that Germany must ultimately agree to loan guarantees, if only on a temporary basis and under such stringent terms that no other country will want to endure the ordeal. Germany's regulator BaFin fears that the Greek crisis risks setting off 'downward spiral' across Southern Europe, posing a system risk to the financial system. It said German banks hold €522bn of state bonds from the region. Moritz Kaemer, head of Europe ratings at Standard & Poor's, told the forum that 'a sovereign default is not going to happen in the euro zone. Greece is still comfortably an investment grade.'

However, he also warned that Greece not be able to tame its long-term debt, given its aging crisis and the gloomy outlook for Western economies. S&P expects public debt to reach 138pc of GDP by 2012, arguably near the point no return for debt dynamics. The agency warned this week that it may downgrade Greece two notches within a month. Mr Kraemer said it would take Greece 33 years to reduce debt to the already high level of 100pc of GDP even if it manages to consolidate at the rate of the last growth cycle – in boom times that may not be repeated.

Greece wasted a 'golden opportunity' to repair finances when it joined the euro and pocketed a windfall gain of 3pc of GDP in lower interest costs. Instead of paying down debt and enjoying a virtuous circle as in Belgium, it spent the lot, and more, increasing public spending by 7pc of GDP. Leaders that undertake the kind of fiscal squeeze needed in Greece or Ireland know that they are 'marching into the sunset', doing the right thing even if it means political self-immolation. Ireland's Taoiseach has accepted his fate stoically. Will Greece's leaders also follow Zeno, or Epicurus?"