Digging Greece out of ruins: Banks across Europe could start to wobble if Greek bonds aren’t shored up

Thursday, May 6, 2010
By Paul Martin

by Eric Margolis

PARIS — Ah, romantic springtime Paris! Angry farmers drove 1,100 tractors through the City of Light last week. They fired volleys of wet manure from a terrifying farm machine. Train unions, teachers and postmen threaten more strikes.

But France’s biggest headache is being caused by Greece and other members of Europe’s Club Med of debt. France’s banks are Europe’s biggest holders of Greek debt, some $67 billion, that is fast losing value. There is talk of a bond market crash.

Greece cooked its books. Italy, Spain and Portugal may have done the same.

What is it about sunshine that makes people forget the basics of sound finance and live on debt?

The great 17th century French fabulist Jean de la Fontaine epitomized financial imprudence in his wonderful tale of the grasshopper and the ant. The grasshopper parties all summer while the ant labours to store food. When winter arrives, the imprudent grasshopper starves in the cold. The ant refuses to help him.

So far, the EU is not ready to spurn wayward Greece. A $160-billion European Union/International Monetary Fund rescue package for Athens is being assembled. But irate Germans are demanding more painful austerity from the unwilling Greeks, who are already rioting daily over budget cuts.

If the rescue fails, Athens may default on its bonds or extend their duration, a humiliation usually associated with banana republics. Italy, no financial Gibraltar itself, holds $27-billion worth of iffy Greek bonds.

Portugal and Spain face a growing financial crisis. Foreign exchange speculators mercilessly savage currencies of nations showing the slightest signs of weakness. Bond rating agencies have downgraded Greece and Spain to junk status.

Last week, the euro dropped to its lowest level in a decade.

This decline should boost Europe’s exporters, particularly its leading one, Germany. But the Club Med crisis threatens the EU’s financial institutions with another near-death financial experience after 2008.

Greek government bonds are playing a similar role in the EU’s growing crisis that bogus mortgage-based securities did in America’s self-inflicted financial disaster.

German, French, Dutch and Italian banks hold billions of depreciating Greek and other Club Med bonds. Unless these securities are shored up, Europe’s banks will have to sharply cut lending and may themselves begin to wobble.

All eyes on Spain

All eyes are now on Spain. Like that other sunny but financially derelict paradise, California, Spain’s economy soared on inflated housing and now is in deep trouble. Fortunately, Spain’s well-run national banks so far remain solid, though its savings and loans banks are a mess.

Up in the gloomy north, the fretful German ants are furious at the grasshoppers of the south. As in the U.S., irate German taxpayers are asking why they should bail out Greeks who pay little taxes and retire around age 60 on generous pensions. Why bail out Spaniards who gambled with their houses, as did so many Sun Belt Americans?

Germans have an admirable tradition of financial rectitude, a product of stern Lutheran teachings and frightful economic suffering after two world wars.

But they are painfully torn between telling the Greeks to go jump in the Aegean and trying to hold Europe’s finances together. German Chancellor Angela Merkel faces a key election May 9 in North Rhine-Westphalia, which has more voters than Greece.

Some German wits have proposed Greece make good on its debts by selling its gorgeous islands.

European critics claim the European Union expanded too far, too quickly, and should not have admitted Greece, Portugal, Bulgaria, Romania and Cyprus because they were unready for admission to the northern rich men’s club. Most Germans want Greece evacuated from the euro zone — schnell!

These poor but sunny Club Med nations tried to keep up with their rich northern neighbours by borrowing like crazy and hiding their debts through sleazy, Goldman Sachs-style financial hipper dipper.

The bouzouki music has stopped. Club Med’s credit cards are maxed out. The repo men are at the door.

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