The news is hitting the media today that those high up in the Eurozone are in fact, conceding that a default / debt rollover are inevitable http://www.guardian.co.uk/business/2011/jul/12/greece-set-to-default-massive-debt-burden. The journalists report that those in the financial sector are saying that the focus should now be on the manner in which the default is allowed to occur. The emphasis is very much on a stable process and one that should involve some private sector involvement to prevent other sovereign nations from footing the debt bill.
Foresight
It is often said that this kind of event would be helped by the people at the wheel having foresight, the gift to see things happening before they happened. This should have been a black and white, clear cut case that Greece, no matter the words and efforts of its people to deal with its debt, would default. It is not a strong economy, it has a bad track record on collecting taxes from its citizens, it provides very generous pensions to people who retire early relative to other europeans and don't put that money back into the exchequer through their working lives. Given these constants, those in the financial sector should have been able to call the stick a stick. This would have reduced the amount of meetings and stress on the Greek people and would have freed up a lot of time for the leaders to come to a good plan forward out of the mire of indebtedness.
This however is a very quick and much less stressful method of approaching the problem. The financial sector makes a lot of money on comission and as such, has liased with the governments of the EU countries and has created a bailout package which costs a lot of money to implement and there will be plenty of interest on the debt accrued for the financial sector to mop up before giving the remnants back to the countries who loaned in the first place.
It seems that this final call for the default of Greece was in fact heeded after much delaying by those at the top. They delayed this point as long as possible so that the 'risk of contagion' to other struggling EU countries can be correctly quantified and
and appropriate action plans enacted.
Contagion
There is a much-touted phrase on the lips of financial sector workers and government ministers and that is 'risk of contagion'. When used in conjunction with the imminent default of Greece, the risk of contagion means the risk of the same thing happening to other EU countries. The prospect of many EU countries defaulting is a grim one. The fallout will last for a long time and does little to provide a 'way back' to liquidity http://tutor2u.net/blog/index.php/economics/comments/the-sovereign-default-option-is-costly/. The list of consequences of a sovereign default is short but is a very strong incentive to stay solvent:
1)Because your country cannot pay its debts and defaults, your currency loses value. This means that any financial institutions holding your money as a store of capital will drop it like a soiled nappy. This will cause a rapid rise in inflation and leave your citizens to carry the can as their real living standards will drop considerably. Be prepared for rioting, protests and massive numbers of people becoming unemployed.
2)Because, through default, you've proven your country cannot pay its debts once, any further lending post-default from other countries will come at a hefty interest rate. This will make accessing necessary capital for government projects very difficult. This will effectively 'freeze-out' your country from financial markets worldwide and you will have to fend for yourself or accept cripplingly high repayments on your debt, much like the extortionate African debts of old.
3)As your country (both government and private sector) cannot borrow money, your banks cannot lend to small and medium businesses ( the source of most job creation needed to get your economy back on its feet and providing growth). This means that your citizens often will not be able to obtain capital for their own business start-ups.
Mixed outlook with a chance of dominoes
Before the news broke this morning (12/07/11) there were a few blogs from people close to the financial sector who said that it would probably better that Greece defaulted and 'got on with it'. This mild speculation doesn't equate to substantiated claims that default was definately on the cards but the fact that these same articles continued that the Italian government is undergoing hasty financial maneuvers implies future woes there too.
Whilst talking about the future of the Eurozone financial situation, one must look West to Spain and Portugal as Spain has unempolyment nudging 9% and massive debts to service too. Its economy is weak and has suffered a lot from reduced tourism from the UK and elsewhere. It has troubles similar to the US (unemployment, massive debts and an ageing population who need care (and therefore, cannot contribute to the exchequer)) but where the financial world has a lot of confidence in the US system, Spain doesn't enjoy such support.
As a result, Spain will find it hard to recover from the downturn it has experienced on its own and it may need a bailout to restore itself. As Spain has a massive dependance on tourism, the downturns in other countries will hold off consumer money from entering the Spanish economy and will delay self-recovery further.
portugal endures the same problems as the other member states and will probably need some great assistance from other EU countries and the IMF. Ireland, often overlooked as it has already been doled out a £65bn bailout will also struggle to service its debts as the housing market is depressed after the property bubble burst and there is no wealth creation within the country from small and medium business. This problem is exasterbated by the failure of banks to lend to these job creation powerhouses. Again, a loss in tourism is a big hit to the local economy and as a result, the wider Irish economy.
Solutions
Looking at the situation as a whole, the Euro future looks bleak and lots of restructuring and 'technical defaults' will be needed to ensure that the member states stay united and retain their ability to compete on the world stage. The risk of contagion is a myth in that there are inherent flaws in the financial and social systems of these countries and this mismanagement of the country must be rectified so the waste can be trimmed from the system and the governments can run their countries more efficiently. More must be done to support the fledgling small businesses as they are the route out of the mess. Low interest micro-loans and government grants for business innovation are the way to solve these crises and though the provision of this money by the government will cost in the short term, the long term stability of the country will more than cover it.
