Hazards of Rescuing Greece

I suspect that many of us have had at one time a friend or relative who has through negligence or design dug themselves into a financial hole, by living beyond their means. In other words, spending more than they earn, or taking on debt they cannot service from their earnings. I don't mean otherwise responsible people that hit a bump on the road of life, such as losing a job or having to deal with some other misfortune, but those who seem destined to make trouble for themselves.

When this person approaches you to guarantee a loan, you will quite sensibly want to think this over carefully. Clearly the lender knows he or she is high risk and wants to reduce that risk by having you backstop a potential default. This could put you in the position of footing the entire cost of the loan, both principal and interest. There is no direct financial benefit of taking on this risk, only the prospect of helping out a person that matters to you, or perhaps to keep peace within the family.

This is in essence what Europe is now doing. Monday's astounding market rebound reflects the belief of many that their bailout can work, that it will at least temporarily address the risks of lending funds to the EU's misbehaving family members. Greece (and the other so-called PIIGS countries) must become fiscally responsible or the problems will return, and next time they may be allowed to deal with their own demons. Except that next time you can be sure that the rest of Europe will have put in place safety valves whereby Greece can be cut adrift without undue impact on the Euro and global markets. Those safety valves do no currently exist, so this bailout is as much to the benefit of Germany, France and other countries as it is to the PIIGS. They can do this now, while the problem is mostly contained within Greece, since they are small in comparison to the other PIIGS and the EU.

None of this solves the cause of the problem, that Greece has been running an enormous deficit for a long time, due to internal societal pressures and government weakness. This will still have to change. Keep in mind that this bailout only requires Greece to reduce their government deficit from 13.6% of GDP to 8.6%. The reduced number remains far above the 3% that Eurozone members countries are required to maintain. The EU and ECB are in a bind in part because they have failed to enforce the 3% rule. That makes partly responsible for the current crisis. The only reason to moderate the reduction in Greece's deficit is to maintain public order. I find it arguable that citizens of Greece are accountable for this crisis and therefore should bear the burden of a steep reduction in public spending, even into the black. Except that taking the moral high ground is unworkable since the political instability that will result, and will spread beyond Greece's borders, makes the go-slow approach necessary if unseemly. The real threat isn't to the Euro but to the cohesiveness of the EU itself.

For today at least, I am enjoying the market rebound. It should last awhile, but unless more is done to solve Europe's problems there is no reason for complacency.