SODOM & GOMORRAH: The European Union continues to struggle to cope with the massive financial blackhole that is Greece. In short, default is both inevitable and the only real solution.
In December, the International Monetary Fund reviewed the Greek economy and released a set of findings that shows how impossible any easy fix will be for the Mediterranean country. The IMF states that even if almost every private creditor decided to write off half of what’s owed to them, Greek debt would still stand at a staggering 120% of GDP by 2020. It’s more likely that creditors will agree to write off a significantly smaller portion; another debt restructuring would be necessary in the future.
Up to this point, the EU has refused to consider default an option, but with the numbers looking the way they are it is basically an inevitability. And with the European Central Bank being, quite likely, the largest holder of Greek debt, such a default would impact the rest of the economic coalition.
What’s being discussed now is “Private-Sector Involvement” (PSI), which is nothing more than a plan to impose all the losses on the private creitors rather than the governments that hold these bonds. It isn’t likely that any deal will avoid Greek default and the governmental organizations that hold these bounds will eventually eat the losses. The Euro probably won’t survive 2012.
In response to the massive overspending that governments like Greece have undertaken in recent years, the Eurozone is currently debating a new treaty that would impose stricter budget rules on member-states. Under the treaty, European governments could sue each other in the European Court of Justice if they suspect one another of failing to work to keep their deficits within the new limits. If the accusing state wins, the court could impose a fine of up to 0.1 percent of the losing state’s GDP, which would be paid into the Eurozone’s new bailout fund.
EU leaders are set to discuss such measures today.