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Debate: Greece bailout

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Should the European Union and the IMF bail out Greece?

Background and context

On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively high-interest loans) be activated. And, on May 2nd, the European Union and IMF agreed to a $145 billion bailout for Greece, and a $975 billion 'solidarity package' designed to protect other Euro zone countries. The question remains whether this bailout is the right move, or whether default and national bankruptcy is superior? The article below breaks down the pros and cons. The debate comes after years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck in 2009 and 2010. This whisked away a curtain of partly manipulated statistics to reveal debt levels and deficits that exceeded limits set by the Eurozone, an economic and monetary organization comprised of 16 members of the European Union. The national debt in Greece, put at €300 billion ($413.6 billion), is bigger than the country's economy, with some estimates predicting that it will reach 120 percent of gross domestic product (GDP) by the end of 2010.
The country's deficit --how much more it spends than it takes in -- is 12.7 percent. Greece's credit rating -- the assessment of its ability to repay its debts -- has been downgraded to the lowest in the Eurozone, meaning it will likely be viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise. The Greek government of Prime Minister George Papandreou, which inherited much of the financial burden when he took office late last year, has already scrapped most of its pre-election promises and must implement harsh and unpopular spending cuts. Greece is already in major breach of Eurozone rules on deficit management and with the financial markets betting the country will default on its debts, this reflects badly on the credibility of the euro. There are also fears that financial doubts will infect other nations at the low end of Europe's economic scale, with Portugal and the Republic of Ireland coming under scrutiny.

Contents

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Default: Would Greek default be disastrous?

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Pro

  • Default would harm the whole euro area "Problems in any euro area member country are bound to have strong negative spill-over effects for its partners." ["How to deal with sovereign default in Europe:Towards a Euro(pean) Monetary Fund", by Daniel Gros and Thomas Mayer, February 2010]
  • Failing confidence A Greek default would be disastrous, even more than the Lehman Brothers collapse. Greek is a nation, and a member of the euro zone. A default would be disastrous in the international economy. South Korea, a relatively remote trading partner with Greece, had a huge impact on the South Korean stock market. A confidence shakedown on the Greece bailout was thought to have caused the Dow's 1000 points decrease. If the hint of a default could cause that much damage, how much carnage the default itself would bring?
  • Default would devastate Greek and global economies Stephanie Flanders. "Default is no soft option". BBC News. May 2010: "The short-term cost to the economy would be huge. Imagine the Greek government stopped paying interest on its debt tomorrow. It would still have a primary deficit - excluding interest payments - of more than 8% of national income, and it might not have anyone to borrow that money from. That could mean more austerity, not less, especially if the country remained in the euro. There would also be the collapse of the domestic banking system to consider, Greek banks being the largest holders of Greek sovereign debt. And that's before you get even to the costs of contagion (or spread) for other countries, as investors wonder who will be next."
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Con

  • Default is the best option for Greece Jeffrey Miron. "Let Greece Default". Forbes. May 2010: "Rather than bail out Greece, the E.U. and IMF should allow it to default. This will hurt Greece's creditors, but those entities assumed the risk when they loaned to a country long known for its profligate ways. If Greece does default, its economy may suffer in the short term. External credit will be scarce to non-existent, so Greece will have to live within it means. But however painful this adjustment may be, it is unavoidable if Greece wants to join the first rank of nations; current policies are unsustainable from every perspective, so the sooner Greece abandons them the better."
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Euro: Is the stability of the euro at risk?

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Pro

German Chancellor Angela Merkel said in early May of 2010 in response to the announced bailout: "We are not only helping Greece but we stabilize the euro and thus help people in Germany."[2]


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Con

  • Greece does not present a threat to the Euro Patrick Barron. "Greece Needs Capitalism And Freedom." The Bulletin. May 2010: "The Greek crisis is simply that the Greek government is spending more Euros than it receives in tax payments, and private banks are balking at lending it more. Since the Greeks no longer have a national currency, they cannot debase it and pay off their creditors with cheapened drachmas. So, the Greek government is left with the choice of raising taxes, cutting spending, or some combination of the two that will satisfy its creditors. Now, would someone please tell me why and in what form this Greek financial crisis, serious as it is to the Greeks themselves, constitutes a threat to the Euro?"


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Morality: Is the bail out of Greece morally permissible?

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Pro

  • Bailing out Greece is a necessary evil David Moenning. "Greece Makes Choice Between 'Collapse or Salvation'" IstockAnalyst. May 2010: "We are waging together a difficult and relentless battle dealing with the problems — the dimensions of which one could never have imagined. It is true, we were the first to speak of the crisis — a crisis of politics, a crisis of institutions, a crisis of values which in turn led to the huge economic crisis. No citizen of Greece could ever have imagined the size of the debt and the deficit which the former government had caused and hid upon its exit. This is not the time for accusations, however. The people of Greece are fully aware of where they lie. The consequences, however, are manifold. We have no other choices and no time, so accessing the bailout is inevitable."


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Con

  • Bailout forces Greece to accept unfair conditions "Bailing out Greece is not the answer". Allister Heath. February 2010: "Greece and any other European economy that benefits from a bailout would officially have to fulfill extremely strict conditions; they would in effect lose their fiscal independence, a move which would be unlikely to fill the Greek unions with joy. Mass anti-cuts demos are already taking place; in truth, Athens is stretching credibility beyond breaking point when it claims that it will slash its budget deficit from 12.7 per cent of GDP in 2009 to 2.8 per cent by 2012."
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Efficacy: Will a bailout help solve the problem?

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Pro

  • Bailout of Greece provides long-term solution. Bailout is the only way from the current crisis. Should Greece default, the whole EU would be sent spirally into a crisis, the euro would depreciate and thus the overall economic situation of the euro area would worsen further. Preventing such contagion and setting the groundwork for financial sustainability in Europe is a long-term solution that comes from the bailout.
German Finance Minister Wolfgang Schaeuble told Monday's Bild newspaper in May of 2010: "sufficient to stabilize the country on a long-term basis."[3]


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Con

  • Bailout does not address policy problems in Greece; delays inevitable Jeff Miron. "Let Greece Default". Forbes. May 2010: "A bailout will not address the fundamental causes of Greece's fiscal problems. Greece has an expansive but highly inefficient civil service and an economy stifled by regulation, favoritism and rent-seeking. These policies have generated double-digit deficits and a debt-to-GDP ratio well over 100%. A bailout [...] does nothing to fix the misguided policies that have generated Greece's existing debt and ongoing deficits. Bailout therefore merely postpones the day of reckoning."
  • Greek debt is too large for bailout to solve Bill Bonner. "Greek bailout only adds to debt." The Christian Science Monitor. May 10th, 2010: "Greeks borrowed money they couldn’t reasonably expect to pay back. [...] The plans of the ruling classes are not merely unjust. They are unworkable. Over the next three years, Greece will add $50 billion in deficits, stabilizing the debt at 150% of GDP. It will also need to come up with $70 billion to pay off debt that matures over the next two years. That is more than the amount offered in the bailout. [...] when a debt cannot be repaid, there’s no use pretending. When you cannot keep up with the interest on a debt, it is added to the principle. The debt grows, becoming evermore unmanageable. It’s better to admit the error as soon as possible and start organizing the details of your financial funeral."
  • Greece bailout adds to debt, does more harm than good Jim Rogers, chairman of Rogers Holdings said in an interview with CNBC in April of 2010: "The way to solve this debt problem is not with more debt. The idea that you would solve a problem with too much debt and too much consumption with more debt and more consumption, that defies comprehension," Rogers said.
  • Bailout addresses wrong problem: liquidity not solvency Felix Salmon. "Why the Greek bailout won’t work." Reuters. May 3, 2010: "The fact is that the bailout package really doesn’t address the problem, which is one of solvency rather than liquidity. The European loans are being extended at about 5%, which while much lower than market rates is still not low enough to make anything approaching a dent in Greece’s debt dynamics. And by the time the bailout package is exhausted, if Greece even gets that far, its debt-to-GDP ratio will be significantly higher than it is right now, thanks to both a rising numerator and a declining denominator."


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Feasibility: Is it feasible to bail out Greece?

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Pro

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History: Have large-scale bailouts worked in the past?

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Pro

  • IMF bailouts worked in the UK in the 1970s "A Primer on IMF Bailouts". The New York Times. December 22, 1997: "In early 1976, a steady loss of confidence in the pound stirred amid expectations that the budget deficit, current account deficit and inflation were set to worsen, and that the government would encourage a depreciation to boost the economy. In late September, after a one-day fall of 4 percent in the pound, Denis Healey, then Chancellor of the Exchequer, unveiled plans to seek $3.9 billion from the IMF. The new policies worked quickly, in part because the forecasts of worsening deficits proved too pessimistic. Within one year, Britain beat its IMF budget deficit target, the current account was back in the black and the government was trying to restrain the pound's rise."
  • Marshall plan was effective bailout after WWII "History: European Union." History.com: "The Marshall Plan was a U.S.-sponsored plan designed to rehabilitate the economies of 17 western and southern European nations in order to create stable conditions in which democratic institutions could survive. [...] some $13 billion worth of economic aid was distributed over the next four years, helping to restore industrial and agricultural production, establish financial stability, and expand trade. Direct grants accounted for the vast majority of the aid, with the remainder in the form of loans. The Marshall Plan was very successful; several western European countries experienced a rise in their gross national products of 15 to 25 percent during this period. The plan contributed greatly to the rapid renewal of the western European chemical, engineering, and steel industries. The Marshall Plan concept of economic aid was so successful that President Harry S. Truman extended it to less developed countries throughout the world."
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Con

  • IMF bailouts failed in the Asian financial crisis Daryl Montgomery. "Will the Eurozone Crisis Crash World Markets?" May 2010: "A small country with a currency problem causing major problems in the global financial system has a recent precedent in Asia in 1997. The Thai baht, which was pegged to the U.S. dollar, came under speculative attack in May of that year and the government was forced to drop the dollar peg and float the currency on July 2nd. The problems in Thailand, a relatively small economy, then spread throughout East and South Asia. They eventually washed up on the shore of the U.S., with a mini-crash in the stock market that dropped the Dow Jones Industrial Average 7% in one day. The selling may have been worse, but stock trading was halted early that day. While events in 1997 had their biggest impact in East and South Asia, echoes of the problem wound up impacting U.S. and other stock markets into 1998. The current situation is much worse in 2010 than it was in 1997. Bailouts were used to deal with the problems in 1997. Governments and central banks have already used this tool to a massive extent for the last two years. If we are having another crisis, clearly it isn't working."
  • Keynesian economic policies fail in the long term "Keynes’ Folly Hits Home in Greece", Dan Amoss, February 2010 "The endgame of Keynesian policy is on display in Greece right now. The reputation of loose government spending as a serious policy will, by the end of 2010, be dealt some deserved blows. These policies ultimately lead to bankruptcy, not prosperity. When responding to a criticism of the long-run costs of his prescriptions, John Maynard Keynes, (the economist so revered by fans of big government) quipped, 'In the long run, we are all dead.' Well, he may be dead now, but plenty of people are still alive, and living with the consequences of his distorted view of reality. Production comes before consumption."


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EU responsibility: Is the EU responsible to bailout Greece

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Con

  • EU not responsible for bailing out reckless Greece "The EU’s Greek Bailout Mistake." The Independent Institute. May 2010: "Members of the EU agreed to limit their deficits and public debt as a condition of membership, and Greece violated the agreement, which landed them in financial trouble. One way to look at this bailout is to ask whether, when the rules are violated, the violators should suffer the consequences, or be helped by those who did not violate the rules. On that ground, the answer is clear: Greece violated the rules and should not be bailed out. Furthermore, the bailout violates the EU’s own rules saying the Community shall not assume the commitments of central governments."
  • Greece bailout is not fair to European taxpayers Wilhelm Hankel, said it sets a terrible precedent: "It is not just about one country. After Greece there’s Portugal, then there’s Spain, then there’s Ireland. I added up the amount of debts that just this group of countries might need. It is more than two trillion euros. Europe cannot afford this and our taxpayers are not able to pay this."[4]
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Legality: Is the Greece bailout legal?

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Pro

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Con

  • Greece bailout is illegal under EU law "Five Reasons Not to Support a Bailout of Greece." The Heritage Foundation. May 2010: "Article 125.1 of the Treaty on the Functioning of the European Union expressly forbids one member state bailing out another. It states: 'The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.' Lord Lamont, Secretary of the Treasury when Britain, pointed out that the Maastricht Treaty specifically ruled out such bailouts so that responsible members of the Eurozone would not have to subsidize irresponsible ones."
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US contributions: Should the US contribute to a bailout?

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Pro

  • US only indirectly helping Greece through IMF contributions. The United States is not actually making a direct low-interest loan or gift to Greece. Rather, the US makes annual contributions to the IMF of around 17% of its annual funds, which are used for a variety of international financial loan and stabilization packages. In this case a good portion of those funds will - rightly - be directed to Greece. It is wrong, therefore, for conservatives to use the talking-point of a the "US is bailing out Greece". This is not the case. US funds are merely being used by the IMF, as they always are, to do exactly what they are supposed to do: ensure global financial stability and, in the process, US interests.
  • Stabilizing Greek/EU crisis is essential to US economy Sam Norton. "Necessary Evil: Why the US Should Push for a Greek Bailout." American Foreign Policy. March 28th, 2010: "With the US facing significant economic challenges of its own, it is easy for it to overlook the impact of the so-called “Great Recession” on the rest of the world. In today’s interconnected marketplace, however, economic problems in foreign countries can have major political ramifications for the rest of the world. Just as the Great Depression contributed to the rise of authoritarian regimes in Europe, today’s economic downturn could lead to the destruction of the American-led liberal order if the negative repercussions of the crisis cannot be contained. [...] One of the most prominent trouble spots in the global economy is Greece. The government’s massive and rapidly expanding debt burden has raised concerns that the nation might be forced to declare bankruptcy. In light of this danger, the US ought to take action to resolve Europe’s internal dilemma. It should push for measures to contain the crisis while preventing similar situations from arising elsewhere."
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Con

  • U.S. is risking its own sovereign debt crisis "Five Reasons Not to Support a Bailout of Greece", The Heritage Foundation, May 2010 "It was bad enough when the federal government bailed out AIG, and then Fannie Mae and Freddie Mac, and then many of the mega banks, and then GM and Chrysler. At least these firms had the modest merit of being U.S. companies employing U.S. workers. Even if U.S. government finances were in pristine shape, U.S. taxpayer dollars should not be used to bail out a perennially dysfunctional state. But as spending-driven trillion dollar budget deficits and a presidential debt commission starkly evidence, the U.S. is seriously risking its own Greek-style sovereign debt crisis. Fortunately, the U.S. does not need an IMF bailout; it needs only a President willing to acknowledge that he has led the country on a Grecian spending binge it cannot afford."


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Public Opinion: Does public opinion support Greek bailout?

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Pro


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Pro/con sources

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