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A bad deal for Greece, a bad deal for China

Can you believe Greece - a nation that represents less than 2 percent of the euro zone economy, that has less than half the assets Lehman Brothers had when it collapsed - has the ability to trigger a global financial and economic crisis?
Last modified: 1 Nov 2011 14:54
European stocks open sharply down as proposed referendum on Greek bailout casts doubt on eurozone recovery prospects. [Reuters]

We had a deal of sorts from the eurozone leaders - but it was a terrible deal for Greece. Now it seems the Greek Prime Minister George Papandreou has flown back to Athens, and in the cold light of the day, realised he and his people had been sold down the river. Hence a referendum. 

You see German Chancellor Angela Merkel wants to keep kicking the can down the road. There is no legal framework to stop eurozone nations spending beyond their means. And the German nation doesn’t want to bailout anyone - by coming forward with an incomplete deal the pressure is on Italy, Spain and France to find more austerity measures. It’s the German way of keeping the house it built in check, let the markets (bond investors) demand more interest of new bonds sold.  

Merkel and French President Nicholas Sarkozy may not want to read this: but can you believe the world’s biggest and richest trading block is begging China for money?

Can you believe Greece - a nation that represents less than 2 percent of the euro zone economy, that has less than half the assets Lehman Brothers had when it collapsed - has the ability to trigger a global financial and economic crisis?

This is a containable problem.

Yet it would appear that Germany, one of the world' s richest nations, hasn’t the political will to say: we want the euro to succeed.

Germany as a nation has benefited from the euro - its economy would have been dragged into recession if it still had the Deutschemark. It would have felt more pain than Switzerland and Japan are experiencing right now - both nations have seen their currencies hit record highs against the dollar, both are seen as safe havens in these turbulent times. 

Germany spent 1.3 trillion euros on reunification. And now it can’t find 150 billion euros to aid Greece, while Berlin is willing to guarantee 220 billion euros in the eurozone bailout funds.

Merkel is willing to standby as Greece faces rising suicide rates, hundreds of thousands losing their jobs, pensioners are being pushed into poverty, and rising homelessness.

Meanwhile, countless jobs are on the hook in Switzerland and Japan as their currencies come under pressure. Millions of jobs in Asia could be lost as the global economy slows. 

All the while we’re being spun more tales as to why this simple problem can’t be resolved. Bottomline - extraordinary times call for extraordinary measures. 

Sarkozy was right - Greece should never have been allowed into the eurozone. Maybe the eurozone should sue Goldman Sachs - which helped hide the nations debts - for the cost of the bailout. 

The eurozone should stop perpetuating the idea that this is a global crisis. Sovereign debt is a North Atlantic problem. At least when Dubai realized it had a problem it put its hands up, sat down with its creditors and came up with a solution. It’s economy is still in the process of throwing of the froth but the economy hasn’t missed a beat. 

But Western economies have made a mountain out of a mole hill. The US debt-ceiling was a manufactured crisis. The eurozone is aping that.   

The eurozone has dragged in the banks to take 50 per cent of losses. Astonishing as this barely cuts 50 billion euros of Greece’s 350 billion euro debt. Greece will be in recession for the rest of this decade, and officials at the eurozone believe Athens debt-to-GDP ratio will hit 120 per cent by 2020!

Not likely, more like 160 per cent - Athen will default. It has no choice. 

It can only get better for some - the International Monetary Fund and the European Central Bank won’t take losses on their Greek debt. But some institutions are more equal than others.

Eurozone leaders didn’t present a solution - instead they sent an uncompromising message to China and other emerging markets: pay for our troubles of else we’ll bring the global economy to its knees. 

You want a solution. Berlin takes on 150 billion euros of Geek debt. Italy’s cost of borrowing will fall as it tackles it debt, since Rome’s finances are in a better position than most. France won’t lose its AAA rating if it needs to bailout its banks. And no need for Europe to depend on China to fix its economic mess.