FT: Greece is Europe’s very own subprime crisis

This is going to be the most important week in the 11-year history of the euro-currency, according to Financial Times associate editor Wolfgang Munchau in the article below.

A Greek default on its debts now looks virtually inevitable, the only question being when.

The Irish Government has agreed to contribute €480 million to the joint EU/IMF bail-out for Greece aimed at staving off this default. The opposition Fine Gael and Labour parties promise to back the Government in this.

If Greece defaults, Irish taxpayers will never get all of this money back.

The 11 EU countries that have not adopted the euro – the UK, Sweden and Denmark amongst them – are being asked to contribute only to the IMF part of the loan to Greece, viz. 15 billion euros out of a promised total of 45 billion. The 16 eurozone members, including Ireland, promise to lend the other 30 billion.

A question: will Ireland be expected to contribute to both the IMF part and the EU part of this Greek loan, thus giving dollops of money from two sources to Greece, in contrast to the 11 EU Members States which have not adopted the euro?


http://www.ft.com/cms/s/0/47b429f4-5091-11df-bc86-00144feab49a.html
Greece is Europe’s very own subprime crisis
Wolfgang Münchau
Financial Times
Monday 25 April 2010

[…] Some parliamentarians… argue that the best solution would be for Greece to leave the eurozone and rejoin later. On this point, they are supported by large parts of the country’s legal and economic establishment.

Their argument is full of legal hypocrisy. Those who make it pretend to care deeply about the strict fulfilment of the Maastricht Treaty’s “no bail-out” clause. Yet they see no problem in advocating a breach of European law by proposing a Greek exit from the eurozone. Under existing law Greece cannot be pushed out. In fact Greece cannot leave the eurozone voluntarily, without having to leave the EU as well. In any case, it is smarter for Greece to default inside the eurozone than outside. So what happens if the Bundestag blocks the aid? Greece will simply default, and this will put several German and French banks that hold large chunks of Greek sovereign and private debt at risk.

[…]

Just as unhappy families are unhappy in their own distinct ways, Portugal is different from Greece. But its problems are no less severe. The problem in Portugal is not the state sector. Portugal’s gross public sector debt is projected by the EU to be about 85 per cent of gross domestic product by the end of this year. This is high, but not exceptionally so. On my calculations, using data from the World Bank, Portugal’s external debt-to-GDP ratio, including public and private sectors, is a staggering 233 per cent – the government at 74 per cent and the private sector 159 per cent. The net international investment position is about minus 100 per cent of GDP – the amount by which Portugal’s financial assets abroad are outweighed by assets owned by foreigners in Portugal. The current account deficit is projected to remain at just under 10 per cent of GDP. This is an acute private sector crisis. And like Greece and Spain, Portugal has lost competitiveness against the eurozone average of some 15 to 25 per cent during its first decade in the eurozone…

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