Greece Teetering Into Oblivion Once Again

| Thu Jun. 16, 2011 12:56 AM EDT

The temperature in Europe is once again getting dangerously high:

Greece's 18-month sovereign debt crisis brought the government to the brink of collapse as public fury over savage austerity measures erupted in pitched battles with riot police on the streets of Athens. The escalation of the Greek crisis had instant European and global impact, sending world stocks tumbling and exposing European Union paralysis over whether and how to launch a second attempt in a year to save Greece from insolvency.

....Following the fall of the Irish and Portuguese governments in recent months after driving their countries into bankruptcy, it appeared that the eurozone's worst crisis was claiming another scalp....The ECB warned that a Greek default could spark "contagion" across Europe, causing Greek banks to implode and inflicting major damage on the big banks in France and Germany.

....Berlin, backed by the Dutch, Austrians, and Finns, have been arguing for weeks that there can be no new bailout of Greece without the country's private creditors being forced to suffer losses on their loans. Otherwise, they argue, European taxpayers will be shouldering the costs while the international banks pocket the proceeds.

The ECB, the European Commission and other EU countries led by France argue that this could pave the way to disaster, with the financial markets decreeing the compulsory "haircuts" on private bondholders a Greek default, a "credit event" that could lay waste to the single currency.

Within Greece, it's the politicians vs. the people. The politicians want to make huge budget cuts in order to qualify for more aid, but the people are threatening revolution if they try it. Within the EU, it's the politicians vs. the central bankers. The politicians want to force the banks that own Greek bonds to share the pain of a Greek semi-default, but the ECB is absolutely, completely dead set against it. The reasons for the ECB's hard line on this are a little obscure, and theories range from the fairly ordinary (the ECB believes it would cause chaos and bank failures) to the outre (the ECB wants a crisis in order to force European governments into closer fiscal union).

In the end, I suppose this will work out. As usual, European governments will wait until the 11th hour to do anything, but when the clock is about to strike 12 they'll finally come up with some kind of can-kicking semi-solution that will hold things together for another few months. If they don't, though, this is just the kind of thing that could annihilate our already fragile recovery. So let's hope they find some spit and bailing wire once again.

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