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The Interconnectivity of Europe’s Debt

May 5, 2010
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During protests in Athens today over yet another round of austerity measures in Greece, three people were reported killed during a fire in a bank.  These deaths came just days after the EU and International Monetary Fund had announced that they would bailout Greece with €110 billion (about $143 billion).  Of this money, €80 billion ($104bn) would come from the EU, including €22 billion ($28.6bn) from Germany.  Germany had resisted helping bailout Greece, but Greek interest rates were skyrocketing and Standard & Poor’s had downgraded Portugal’s debt over the weekend.

One of the main arguments for letting Greece default is that it accounts for only about 2% of the Eurozone’s GDP.  However, The New York Times had a very interesting graphic showing just how interconnected are the debts of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) and how much they owe investors in France, Germany, and the United Kingdom.  If Greece were to default, exasperating Spain’s and Portugal’s already falling credit ratings, the Eurozone could face a major crisis.   While the four other PIIGS are not heavily exposed in Greece, nearly one-third of Portugal’s debt is held by Spain.  Thus, if Portugal were to default, Spain could go with it.  France and Germany are exposed to tunes of $75bn and $45bn in Greece respectfully, but France’s exposure in Spain is four times larger while Germany’s is 5.29 times larger.  In the very worst case scenario, Italy would wobble as Spain owes $47 billion to Italy, but Italy owes France a whopping $511bn or 20% of France’s GDP.  It would be hard to imagine the French economy easily surviving such a collapse.

Thus, while it will be hard for the Germany voter to swallow having to give Greece €22 billion to stave off default at the moment, if this rescue works, it will certainly be cheaper than taking the chance of waiting and hoping that Portugal does not follow Greece.

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One Comment leave one →
  1. May 6, 2010 12:06 am

    What I find troubling is the lack of responsibility being taken by the Greek people. It is clear that the government is primarily at fault for what is going on, but I find it difficult to be sympathetic to the protesters. They’ve been living a false life for some 30 years where they could somehow retire 10 years before many other EU workers (And as an aside, in an economy so heavily reliant on toursim, leave their customers out to dry during their frequent strikes). Also, the depth of tax evasion is startling. While here in the US there are tax evaders, they’re either very rich or if poor/middle class eventually caught by the IRS. My understanding of the situation is that tax evasion was endemic throughout the Greek population and generally accepted. I’m not exactly sure how these people expected to get government benefits or work in the bloated Greek bureaucracy without paying into the system. Talk about wanting to have your cake and eat it too! I feel bad only for the three bank workers who were killed in the petulant outrage of those who should be examining how their own behavior contributed to the circumstances in Greece. And if the report I heard on the BBC is true, shame on the police who stood by as the banks were being attacked.

    As for the richer EU states bailing Greece out, I agree that it’s probably necessary, but it would be great to see some bigger cajones from Germany and/or the EU. Greece needs to be on a tight leash where one slip-up means expulsion from both the Eurozone and EU. It would be a solid warning for Portugal, Ireland, Italy, and Spain to let them know the EU means business. This is prime opportunity for the EU to establish some legitimacy, albeit a German-centric one, in the fresh post-Lisbon Treaty era. If there is no strong stance that has teeth, then the euro and EU may be in peril.

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