Sovereign debt crisis – Greece and the Euro

This week markets took fright at the mountain of money Greece wants to borrow to pay its government bills. It needs to borrow about the same relative to its National Income as the UK. The markets have pushed the price of Greek government bonds down, so Greece now has to pay twice as much interest as Germany to borrow the same number of Euros for ten years.

Greece cannot devalue within the Euro. The UK has already knocked one fifth off the amount it has to repay foreigners who lent it cash by devaluing by a fifth over the last couple of years. Greece is saddled with paying back Euros, which have been more stable against the strong currencies of the lending nations. There are five possible options for Greece from here:

1. Leave the Euro and devalue. That cuts the amount of real money they would need to pay back, would make their exports more competitive and their imports dearer, leading to a shift from consuming too much at home to working harder for foreigners abroad. They would still need to cut their deficit by cutting spending, as they would still need to borrow to pay some of the bills and they would no longer be able to offer Euros for repayment.

2. Stay in the Euro and accept the discipline of the club. They are meant to keep borrowing down to 3% of their income. Instead it has soared to 12.7%. They could cut their spending substantially, restoring confidence and limiting the amount they need to borrow.

3. The strong countries within the Euro zone could lend them the money they want to borrow on better terms than the market, or give them grants to see them through this bad patch. London sends grants and loans to Liverpool so they can stay in the same currency union, so why shouldn’t Munich send cash to Athens, say some single currency single Europe exponents.

4. There could be a deal. Germany and her friends within the Euro zone could agree a package, where Greece cuts her deficit by spending cuts and then is eligible for some grants, loans or subsidies to make up the rest.

5. They could all decide to do nothing. Greece would have to pay more to borrow internationally, and would gradually have to take action to curb the deficit. Otherwise the interest rate she had to pay might become so penal the markets forced a crisis, requiring action under one of the four options above.

I think Option one, leaving the Euro, is unlikely. Greece is keen to stay in, probably hoping for protection from her own folly by belonging to the larger club, and hoping against hope for more loans and subsidies from within. Whilst some in Germany and France might see going back to a core Euro as an attractive and more stable option, the overall balance of opinion in the EU is likely to want to keep Greece in. If Greece left, the positions of Spain, Portugal and some others would also be in question. It could lead to a messy unravelling of the wider Euro project.

I suspect Option 5 is also running out of room, as the markets are close now to forcing action to correct the deficit or to force a bail out for Greece.

I would think Germany unlikely to simply offer to fund the excessive Greek deficit. It would be an open invitation to all the other ill disciplined Euro members to run up big debts and ask the centre for easy money to pay the bills. It would also start to place too much strain on Germany herself, as Germany is not without her own economic problems.

So that leaves the two options of tackling the deficit herself or doing so with European help and assistance for meeting various targets.

The whole saga shows the folly of premature currency union without proper arragements in place for transfer payments and common fiscal policy. The Euro is becoming a system to try to impose discplined policies on the periphery, as Ireland, Greece, Spain, Portugal and even Italy have to keep reining in their excesses to live within the Euro scheme. Their reluctance to do so creates unemployment and lower incomes in each of them, and will generate a series of debt crises and economic crises as they push against the need to control spending.

Greece has a simnple choice. Either live with German discipline, or run a shambolic fiscal and economic policy and be at the mercy of markets. The Euro is not the frree lunch some members thought it was going to be. It does not give a right to badly run countries to borrow at German rates of interest. You cannot run a single currency successfully unless you first create a single country and gain acceptance for the fiscal and other economic policies from all the voters of the enlarged area. The fact that we kept the UK out of it will mean the Euro is spared the bigger crisis of containing within it a large unruly subject with very different economic characteristics from the rest. It has also spared us in the UK major steps on the road to being subsumed into a European country.I helped oppose the Euro for the UK as a believer in an independent Britain, but one of the arguments I used was our actions would also spare the Euro a massive problem.

All past European currency unions have failed. All past attempts to create a large country or bloc of countries out of smaller European states have also ultimately failed. The plight of Greece a small chapter in the stpry of this latest project. If Germany and France are serious about a country called Europe they need to come up with deal quickly to keep Greece in on tolerable terms to both sides. If they are not, the sore will fester and the markes will dictate answers. Watch this space, and expect some messy compromises.


  1. Stuart Fairney
    January 30, 2010

    Greece now pays more to borrow money than Germany in the same currency as you say. One suspects Spain, Portugal and Italy are heading the same way.

    The ‘not borrowing more than 3% rule’ has been massively violated without serious reaction from the EU (showing incidentally the hollowness of EU threats to us).

    So might this not impact of the ability of France and Germany etc to borrow? If I can get twice the return with no risk of currency fluctuation since they both trade in Euros, then I just insure the debt and leave Berlin for Athens? Also, as a German, am I really thrilled that my Greek friends are debuaching themselves on debt with the same currency I use rather more responsibly? Probably not.

  2. Norman
    January 30, 2010

    If this crisis will 'teach' the Eurocrats anything then it will be that it is dangerous to let member states have too much individual freedom of action in the running of their own economies.

    Far better would be to have some unelected committee of experts, much like our own MPC but far more ranging, to help steer member states spending along better lines.

    A Bank of Europe, or Eurobank, centred in Brussels would be the ticket. Surely the Lisbon Treaty will allow this to be created without reference to those pesky unpredictable voters? Maybe Gordon Brown could be the first director!

  3. Ian Jones
    January 30, 2010

    Probably best to steer clear of comments on deficits after your leader has just announced he wont be cutting very much after all!

    Also, the UK is not out of the woods on foreign debt from devaluing as a significant amount of our banks debt is actually denominated in a foreign currency which means that debt is now 20% bigger. Mostly in the form of short term debts which will need to be repaid or rolled over in the next few years.

    Also a lot of the debt is owned within the UK by pension funds, so cuts to interest rates are simply moving the costs of the crisis from now to a future date when the pension fund comes up short.

    1. Mark
      January 31, 2010

      It's an interesting conundrum. I actually looked at the Pink Book – the UK official statistics on international trade, asset ownership and flows of investment, profits and dividends. The latest issue was last summer and covers end 2008 positions. Allegedly, the balance between the value of overseas assets owned by the UK and UK assets owned by foreigners (which includes loans and mark to market derivative profits as banking assets) has moved in the UK's favour as a result of devaluation and showed a small surplus. I suspect there may be some heroic assumptions about ownership and valuation, but it must be a major reason why the markets haven't yet imposed greater discipline on the UK.

      Of course, the amount of gilts held by foreigners has been quietly reducing – if it's on trend it will now be less than £200bn – smaller the the BoE's holdings under QE, and dwarfed by the compulsory holdings of pension funds. Overseas borrowing now funds most of our mortgages and commercial debt. Gordon tried to privatise as much overseas borrowing as he could.

  4. Brian Tomkinson
    January 30, 2010

    How long before the headline is "Sovereign debt crisis – UK and the £"?

  5. English Pensioner
    January 30, 2010

    At the time I was pleased that Gordon Brown was against the UK joining the Euro. Now we can see why. If we had joined, he would have been forced to stick to their rules and restrict our borrowing. For a spendaholic that would have been disaster!

    1. Lola
      January 30, 2010

      Brown wasn't against joining the Euro because of the liklihood of a crisis of the current type, or for any patriotic or sound economic reason at all. He's too clueless and narrow minded for that. His reason for not joining – the same as his FSMA 2000 – was to ensure that he, and only he, had full control of the UK economy. Well, full control, as in being able to tax spend, borrow and print money as he wishesd with no competent oversight able to see what he was doing and criticise it. He deserves no credit at all.

  6. alan jutson
    January 30, 2010

    Europe is all about one size needs to fit all.

    That is why the European Politicians want complete control over all Member States.

    You cannot run a Club properly where Membership has to take account of differing rules for differing Members, paying differing subscriptions.

    Given that many Members (States) do not want the same rules, tax, legal system, foriegn policy, susidies etc.

    It is not surprising that the Club is not working efficiently.

    Indeed it is a wonder that it can be run sensibly at all, and there is the crunch, it cannot be run sensibly for everyone, unless they all agree to have exactly the same rules, that is why eventually it will fail.

    Self interest of a number of States will eventually come to the surface.

    The Question is when and how.

  7. Michael Lewis
    January 30, 2010

    If Greece left the Eurozone , I'm sure some Lib Dem Europhiles would see it as a tragedy.

    Whilst, I'm no fan of the UK joining the Euro, but it could be argued that the US dollar is a good example of currency union. The economies of California, New York State, Michigan, Alabama may all diverge just has the economies of Greece and Germany.

    Though I do think this was predictable, if Greece left, I think we'd quickly see a 'Nordic Euro' of competent states with lots of devalued neighbouring states, not sure what effect that would have on East Europe.

    I suspect the German taxpayer will be forking out for his Greek chums, killing off any hope in the process of some of the other countries from joining the Euro is the meantime?

    Bond vigilantes are getting to Greece, the Chinese quite rightly don't want their dodgy paper, so who's next? … I wonder if Darling is worried.


    1. Stuart Fairney
      January 31, 2010

      "it could be argued that the US dollar is a good example of currency union"

      No it couldn't. Texans, Californians and New Yorkers all feel (and are) American, do you feel a sense of nationhood with Greeks and Spanish as we are "all european now"

      Nope, me neither.

      1. james harries
        February 1, 2010

        Well Stuart, the dollas IS a good example of a successful currency union. So is the pound (once we'd got that little Scottish difficulty of the Darien fiasco sorted). They even had a successful currency union in Greece once. A silver mine was fortunately discovered on Athenian soil just as the Persians invaded.

        But you are also right to say that it needs a crisis or a sense of (boo! hiss!) nationhood to make it stick.

  8. TheBoilingFrog
    January 30, 2010

    It's looking increasingly likely that the EU will bail-out Greece and impose IMF-like conditions to force Greece to tackle the deficit.

    The problem for the UK is if the EU decides to invoke Article 122 of the Lisbon Treaty in order to do this then the bill is shared, not just by the Eurozone members, but all 27 member states – Britain could forced to contribute up to £7 Billion for a currency it's not even part of.

    1. TCD
      February 1, 2010

      This does indeed look very likely as it only needs a qualified majority vote of Council.

  9. JohnRS
    January 30, 2010

    As you rightly state "You cannot run a single currency successfully unless you first create a single country" which is, of course, where the whole EU "project" is designed to lead. I would imagine that this crisis will increase the pressure from those in Brussels on all EU countries to hand over the last vestiges of nationhood so that the EU will finally become a single country. They may well succeed as governments go for easy-looking short term fixes to try to get through the current problems without appying painful solutions. The EU nation state may be closer then we think.

    Hopefully the same message will also be understood here in the UK but with the opposite effect.

  10. Lola
    January 30, 2010

    "…London sends grants and loans to Liverpool so they can stay in the same currency union,…" Hmm. You could look at that as an argument for the scrapping of the central bank, or at least the State monopoly of money.

    1. Stuart Fairney
      January 31, 2010

      Both very sound proposals indeed that really should be investigated far more by our compatriot voters. The only politician I have heard putting forward this view is Congressman Ron Paul of Texas, do you know of any others?

      1. Lola
        January 31, 2010

        Not really. Why? Turkeys don't vote for Christmas.

  11. Neil Craig
    January 30, 2010

    I d0on't think even Germany is staying within the 3% limit mentioned in option 2. One option therefore would be for the limit to be raised, perhaps "temporarily" while Greece cuts to the new realistic limit, say 6%. This does mean the Euro will be subject to more long term inflation.

    Greece does have tom cut somewhat because only a country run by an idiot could pretend that you can borrow 12.5% of GDP without effect.

  12. GJ Wyatt
    January 30, 2010

    I believe Greece's military spending is kept secret. If so how can the flows in the national accounts show what the true deficit is or whether Greece meets the Growth and Stability Pact's deficit to GDP ratio?

    1. andrianna pantelli
      February 12, 2010

      GJWyatt is spot on about military spending being kept secret by Greece but it is more the case that Greece just signed a deal with France to purchase up to five naval warships over the next three years. That deal will generate two to three billion euros for France and up to two billion euros for german companies, each and every year for the next five years until final delivery takes place.

      We used to supply Greece but british companies are out. In addition the long protracted negotiations were finalised the day before Greece received the good news that possible assistance
      to her financial problems was on the go with 'guess who' pushing for all member states to assist.

      France and Germany. where or where is Private Eye.

  13. Number 7
    January 30, 2010

    WRT Britain not being in the Eurozone and thereby not being called on to bail out Greece – What about Article 122 of the Lisbon treaty?

    Hat tip – The Tap Blog:-

    UK could face £7bn bill if the EU bails out Greece;
    Anatole Kaletsky: The eurozone will be tested to "near-destruction"

    The Mail on Sunday reported that if an EU rescue fund for the troubled Greek economy matched the country's budget deficit, the UK would be asked for £7billion, assuming contributions matched each country's share of the total EU economy. The article noted that, until now, discussion has focused on whether fellow eurozone members could be asked to bail out Greece.

    But under Article 122 of the EU Treaty, all EU members could be liable. The Treaty article says: "Where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the council of ministers, on a proposal from the European Commission, may grant, under certain conditions, Union financial assistance."

    The paper reported that the EU Council decision would be made on a majority vote with Britain having no veto. If other troubled eurozone members such as Ireland or Spain were excused from making a contribution, Britain's share could be even larger. A Treasury source would not comment on whether any official calculations have been made regarding Britain's potential exposure.

  14. Bob
    January 30, 2010

    Is it true that under the terms of the Lisbon Treaty the UK is jointly liable to contribute billions of pounds to support the Greek economy, even though the UK hasn't joined the Euro?

    And is it true that other EU members have no liability to support the UK economy because we didn't join the Euro?

    Reply: No, it's not as simple as that

  15. Man in a Shed
    January 30, 2010

    One of Greece's major spending areas is defence ( for which read preparations for possible war with Turkey ).

    The EU has a tendency to see opportunity for itself in crisis.

    It would not surprise me if the EU didn't offer to say base German and French aircraft in Greece under an EU hat, to allow the Greeks to cut back.

    I fear any help from Germany or France will come at the expense of Greek sovereignty.

    But then when your heavily in debt your no longer sovereign any more anyway.

    1. Stuart Fairney
      January 31, 2010

      Would German aircraft and troops on Greek soil be too bitter a pill for their voters I wonder?

      It would be a sensationally good metapor for the whole direction of the Euro project however!

  16. oldrightie
    January 30, 2010

    "You cannot run a single currency successfully unless you first create a single country."

    The circle then becomes complete. Economic dictatorship rather than military and the German-Franco alliance completes its journey begun in 1945.

  17. Demetrius
    January 30, 2010

    Beware of Greeks bearing gifts. I see there was another earthquake in Greece yesterday.

  18. Richard
    January 30, 2010

    They will choose Option 4. You have to hand it to the Greeks – they have pulled off one of the greatest frauds in history & no-one is going to go to gaol! Add up the subsidies they received from the EU prior to entry + the interest saved by being able to borrow at € rates as a result of fraudlent accounting allowing them entry. A huge fraud at the expense of other Euro and EU members.

    One alarming thing to watch out for: The French finance minsiter & the President of the Commission have talked about help to Greece from 'members of the Eurozone and the Commission'. The 'and the Commission' bit is worrying as this implies the whole EU (ie Britain also) may have to pay for the bail-out. Alistair Darling when questioned on this subject said 'there is no proposal yet'. It is beginning to feel as though we may have to pay. This must be resisited on principle. We have stayed out of the Euro, so British taxpayers must not incur costs of the failure of the system in other countries.

  19. bill
    January 30, 2010

    You cannot run a single currency successfully unless you first create a single country.
    We all know that now dont we ?
    Right – have the great and the goodin the conservative party now got that into their noddles. (Ken Clarke & his followers ) or are we just going to have to see the country fall apart even more.

  20. John Broughton
    January 30, 2010

    Excellent analysis John.

    The only point (I think) you failed to state is that Greece did not (and could probably never) qualify to join the Euro. The EU was so very keen to create montary union that it overlooked problems like Greece (and Italy, Spain, Ireland etc).

    In such circumstances I could argue that Eurozone members have an obligation to support Greece.

    My, very real, concern is that Brussels will decide the EU should support Greece and , as a result, the UK taxpayer will bear part of the cost.

  21. Martin
    January 30, 2010

    "Greece has a simnple choice. Either live with German discipline, or run a shambolic fiscal and economic policy and be at the mercy of markets"

    Why is "Gordon" spelt "Greece"!

    More seriously Ireland has started the painful cuts in its' public sector. All those countries that need to trim deficit growth that are stalling will have more pain in or out of the Euro.

    It will be interesting to see how things develop once the ECB starts to end Quantitative Easing. As Euro rates start to rise Sterling is going to get battered if the Bank of England doesn't start to end Quantitative Easing at more or less the same time.

    It would also be interesting (given the size of the public sector) to check public sector wage rates among all Euro and non Euro countries. This might give another sign as to where the Sterling Exchange Rate has to go.

  22. John
    January 30, 2010

    Their reluctance to do so creates unemployment and lower incomes in each of them, and will generate a series of debt crises and economic crises as they push against the need to control spending.

    And by staying out of the Euro, the UK has successfully avoided all that. Oh, wait….

  23. Ex Liverpool rioter
    January 30, 2010

    I think "They" are quite happy……..Euro falling has helped exports…hurt imports. The "PIIGS" will have to cut, to be honest Ireland & Spain have……

    But are we weeks away from a Pound collaspe?

    What Michael Por-till-O calls an "Event"?

    Hope so 🙂

  24. Javelin - the Obama
    January 30, 2010

    Financial journalists for the last 7 years have almost all pointed out how lenient the EU central bank has been in enforcing it's own rules.

    The problem hasnt been the build up of debt – per se. It has been the unwillingness of Governments to (follow the rules and) change their culture so that they can survive a shock to their system. Witness the EU audits being unsigned for over a decade.

    Greece is a good case, where the Government has allowed the civil service to have the power to dictate terms to them. Riots and strikes have been used to threaten the Government.

    So the question is "where does the responsibility lie for Greeces' problems?" I think the answer lies with both the EU and the Greek Governments, so the Effort to provide a solution will have to be shared.

    Now the problem has to be fixed before Q2, when the next Greek bond auction is due. The Greeks have 2 months to secure confidence in their ability to repay their debt. If they do not then bond savers will exit the country and the short term rates the Greek Government pays will soar into the 20% range before Q2.

    I think the next few weeks are going to be critical for the Greek Government. The unions need to accept publically the need to reform spending and publish a joint plan with the Greek Government showing how they will bring spending down to sustainable levels.

  25. Mark
    January 31, 2010

    PIGS might fly the Euro, perhaps along with some over-indebted Baltic countries. The warning on what happens when the markets say no is a salutary parable for the UK. I note Roubini commenting in Davos considers Greece on its own is containable, but he considers Spain the below the waterline risk that could sink the Euro. The Spanish (whose real estate bubble is about as bad as ours) are keeping their heads in the sand, pointing up that official government debt remains a low proportion of GDP while ignoring the international debt run up by their property bubble (a problem the UK shares), and the huge deficit that will balloon government debt fast. Fasten your seatbelts, it's going to be a bumpy night.

  26. Lindsay McDougall
    February 2, 2010

    I think that the Germans will make a strong and sustained attempt to force the rules of the Euro club onto Greece. They simply can not afford not to. If they bail Greece out, the floodgates will open.

    The Germans did not help themselves by breaking the rules themselves a few years ago. France did too and neither was punished by the EU, whereas when Portugal transgressed it was fined. That's the dear old EU for you. One rule for the Franco-German axis, another for everybody else.

    Given recent announcements by the Greek government, we must expect Greece to attempt to wriggle out of their obligations. They will do so for a long time. In extremis, they might default on some of their debt or print more of their own Euros (Where are the Euro printing presses? Who checks on the quantity of notes and coins produced by each Member State?).

    Whatever happens, we may expect a long period of unpleasantness and an attempt to get the UK to contribute. In case Gordon Brown has forgotton it, the word is 'No'.

  27. Adrian Peirson
    February 3, 2010

    Greece should print its own money instead of borrowing it.

  28. Euro Crisis
    February 3, 2010

    The price level in Greece is too high and wages most go down on the international level, while the budget cuts needed for these countries to remain solvent during a deflationary depression enforced on them by Germany via the Euro are so staggering that no modern democracy will be able to handle. As the riots in Greece have shown, any government in the world that will try to make public spending cuts in double digit percentage points will not survive. Not to talk about the fact that will need to lower the minimum wage during a depression, an action never done by any government.

  29. Edward C D Ingram
    February 3, 2010


    What about option 6? You never mentioned that.

    The answer lies in recognising that what we all think we know the word 'inflation' means is not the whole picture.

    If you would care to ask me for further information I will explain exactly why, by replacing all government debt with earnings-linked debt, including that of the UK and every other nation (if they so wish) a government can cut the cost of repayments dramatically whilst at the same time protecting pretty well everyone and everything.

    The first point to note is this: if debt is index-linked to Average earnings Growth, or to GDPgrowth, it is also linked to the governement's ability to pay: the tax revenue growth rate, at least over a period. In this sense it is cost free. It is just as easy / hard to repay in a year or ten or in a hundred years as it is now. But an agreed term can be set.

    If the government sells these bonds to pension funds and other institutions and makes them qualify for reserve assets, it takes the gamble out of buying government stock and so the demand will be significant and the price tag cheap.

    The price tag will also be cheap if the risk of default falls dramatically as it would: actual payment of interest of as little as 1% p.a. would suffice to attract most institutions in the days of stable economies and responsible governments, perhaps a little more nowadays.

    Compared to the 7% or more tht Greece is understood to be paying (I quote from the current edition of the Economist):

    where the analysis of the situation is significantly worse than John's,

    this is entirely sustainable. With government debt, on maturity a replacement bond can be issued, so the rate of capital repayment can be whatever is comfotable from time to time, with the government buying back its own debt at any affordable rate.

    If the government wishes to repay in a set period then it can, and an affordable schedule can be calculated with ease.

    Now this is what the world really needs right now so that we can restore confidence and not cut back too much on spending and jobs, whereupon the recovery can continue as before.

    For further information on these and other far reaching researches that I have done, write to me and ask for a copy of my draf book – I am being assisted in writing this by some pretty prominent and capable people. And I have a past reputation to envy all of my own anyway.

    THank you

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  31. Free Insur
    March 8, 2010

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