The sum of these various factors is that the shadow of debt hanging over the global economy is more severe than it was in 1929. The threat is heightened by the fact that this time, 80 years later, it is not only the American authorities that are attempting to fight the contraction with aggressive fiscal and monetary policy, the European and Asian authorities are doing so as well. ... This increasing inability to spend next week's money today is exactly what is now beginning to be observed in the Treasury auctions around the world, as more and more national governments are finding it difficult to sell the debt that underlies their currencies.
– Vox Day, "The Return of the Great Depression"
While I have long predicted the collapse of the euro and eventually the European Union, I have to admit that Greece was not even on the periphery of my radar as a potential economic flashpoint. I examined the various economies of Europe in some detail while writing "The Return of the Great Depression," and based on the incredible amounts of debt incurred by numerous countries during the real-estate boom of the last decade, it was clear there were a number of likely candidates for sovereign debt default.
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Ireland was easily the most likely candidate, given its massive housing bubble, fast-contracting economy and openly insolvent banks. Spain was a strong No. 2, with its disastrous seaside investment boom blowing up spectacularly in the faces of the foreigners who bought retirement villas as well as the banks that financed their construction. Solid cases could also be made for Lithuania, Latvia and Estonia, as in statistical terms they were in even more dire straits, but their relatively small size countered the qualitative severity of their financial problems.
However, Greece managed to surpass all of these economic basket cases by the simple mechanism of combining Madoffian fraud with the financial acumen of AIG. First, the Greek government simply lied when reporting its economic statistics; a series of belated revisions has revealed that its 2009 deficit was not 3.7 percent as projected in April, or 12.5 percent as reported in October, but may well be in excess of the 12.7 percent to which it is presently admitting. Second, its debt figure is now known to be even worse than is presently being reported due to a special cross-currency swap designed by Goldman Sachs which utilized fictional exchange rates to permit the Greeks to borrow more money than it appeared. This derivative-leveraged borrowing took place in 2002 and will be added onto the existing debt when the bonds must be repaid.
The response of the European Commission and the European Central Bank has been to take a page from Henry Paulson, former secretary of the Treasury in the Bush administration, and attempt to bluff the markets. They have danced the will-they-won't-they bailout routine that will be familiar to Americans who were paying attention back in November 2008. However, in the European case the charade appears to have been brought to a premature end by Reichschancellor Angela Merkel's recent statement that Germany had no intention of forcing its taxpayers to fund Greece's debt. Merkel, for one, understands that Greece is merely the proverbial canary in the debt mine, as any Greek bailout would serve as little more than an appetizer to the inevitable Irish and Spanish bailouts. But where does this leave the European Union? Based on Eurogroup Chairman Jean-Claude Juncker's declaration, it would appear to be in a state of denial.
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"The basis of the Maastricht Treaty is that a state bankruptcy does not come into question. If we had thought a euro zone member could go bankrupt, we would have devised instruments to deal with that. This is not envisaged."
State bankruptcies and monetary exits from the euro may not have been envisaged, but both are going to happen anyway. Given that we are still in the early stages of the Great Depression 2.0, it seems very unlikely that either the euro or the European Union in its expanded and heavily politicized form will be sturdy enough to survive the financial shocks and economic aftershocks that are still to come. And it should be kept in mind that this is not an abstract exercise in American schadenfreude, as the more serious question is if the United States financial system is itself strong enough to survive further economic pressure, since a number of U.S. states, including Illinois and California, are now facing situations very similar to Greece. There is no known mechanism for a sovereign American state to declare bankruptcy.
Debt-deflation proceeds apace. In January, total bank loans contracted at a pace that would cause more than 10 percent of existing credit to vanish by the end of 2010. Last year, the vast increase in public debt throughout the world mostly counteracted the disappearance of private debt, but as the example of Greece now shows, the exchange of public debt for private to finance continued GDP growth is not a strategy that can succeed for long, either in Europe or the United States.