March 9, 2010
By now, you must have heard about the much-discussed swaps that Greece used in order to conceal itâ€™s debt load. To cut a long story short, the key problem here is “credibility”. Greece now has lost it and this explains why its bond yields have soared astonishingly high.
The European Union is now investigating Goldman Sachs Group’s hand in using legal loopholes that helped Greece use swaps to postpone the day of economic reckoning past its inclusion to euro membership.
Goldman says, though, that there was “nothing inappropriate” in the transactions it facilitated.
At the same time, a new dispute is unfolding about how long European Union officials have known that Greece used derivatives to conceal its growing budget deficit.
Federal Reserve Chairman Ben Bernanke believes the use of credit default swaps to destabilize a country is “counterproductive”. “We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece,” Bernanke said Thursday in testimony before the Senate Banking Committee in Washington.
What is the trouble with Greece?
When the global financial crisis struck Greece was badly prepared after years of extravagant consumerism, hosting the grand Olympic games in 2004, and failing to control in its spiralling public debt.
Surprisingly, the government debt summed even more than a full year’s national output in 2009, and is expected to be 120% of GDP this year. Greece was picked out as vulnerable from the start of the crisis, but with the government struggling to persuade the markets to trust its plans to cut its deficits.
A eurozone bailout seems likely. Previously, European funds were used to support Hungary and Latvia as part of the bailouts brokered by the IMF at the height of the credit crunch.
An EU summit in Brussels tomorrow will address the Greek crisis in the hope of containing the growing threat to the eurozone.
What’s the learning?
Although Greece’s economy is quite small in global terms, its financial crisis reinforces the fast that one of the ill-effects of the recession of the past two years is a set of heavily indebted governments, which cannot rely on cash-rich financial markets to provide cheap borrowing.
And Greece’s problems are especially worrying because they endanger the stability of the single currency:Â the euro.
There are 16 member states with 329 million people in the eurozone.
Why are other European nations so bothered up ?
If Greece were permitted to split from the 16-member single currency zone (eurozone), this would potentially endanger the euro project.
That’s why the French and German governments appear to be so concerned and are considering a bailout.