As Greece careened ever close to default this week, frightened investors also rushed to dump bonds from financially troubled Portugal, Spain and Ireland. But while the markets increasingly see this as a euro zone crisis, many European leaders are in denial.
Unless the European Union and the International Monetary Fund back up Greece, it could default on its debts. And the roughly $40 billion bailout promised — grudgingly — by Brussels with an additional $15 billion to $20 billion from the International Monetary Fund is unlikely to be enough. Greece has more than $50 billion in debt coming due over the next 12 months alone.
Meanwhile, Germany is resisting turning over the money. After George Papandreou, the prime minister of Greece, called on Friday for the bailout plan to be “activated,” Chancellor Angela Merkel of Germany said Greece first had to negotiate “a credible savings program.” Georg Nuesslein, a lawmaker in Merkel’s governing coalition, told Bloomberg the program “has to hurt.”
Greece’s efforts to curtail public spending have not made enough of a dent in its deficit to persuade investors it can bring its debt under control. But amid a severe recession, which is likely to be exacerbated by budget cuts, even the tightest belt-tightening can’t eliminate a deficit that amounted to more than 13 percent of its gross domestic product last year.
To stop a rout, the European Union must commit to activating the bailout. Then Europe and the International Monetary Fund must start negotiations with Greece for a much bigger bailout package. This would help restore investors’ confidence, allowing interest rates on its debt to fall from the punitive heights of nearly 9 percent reached last week. While some economists believe Greece would still have to restructure its debts, it would have space to negotiate the terms.
As investors made clear this week, the turmoil doesn’t end with Greece. Portugal, Spain and Ireland have seen their deficits balloon as the housing bust and the economic downturn took a toll. The European Union and the International Monetary Fund must put together a pre-emptive bailout package to convince investors of the stability of their finances and head off a flight to dump their bonds on a bigger scale. Speed is essential.
Treasury Secretary Timothy Geithner and European finance ministers should start working on that during this weekend’s International Monetary Fund meeting in Washington. This is mainly a European problem. But Washington must ensure that the fund commits adequate resources. The good news, if there is any here, is that American banks do not own much Greek debt. But the American economy won’t be immune if the Greek crisis spreads much further.
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