The reason why banks won’t lend to insolvent companies is that they don’t expect to get their money back. And that’s exactly why we should not be lending to Greece. The Greek problem is not a temporary liquidity problem which can be resolved by a short-term loan until things pick up. It’s long-term insolvency. So by all means let the EU give them money — they need to eat. And we can call it foreign aid, or charity. But let’s not pretend it’s a loan.
The Greek Tragedy continues to unfold with horrid predictability. Greece is well and truly locked into a debt trap, a vicious circle, a downward spiral, which can only end in default. They can come up with all the cleverest euphemisms — the latest are “debt-reprofiling” and “roll-over”. But as a commentator said on the BBC Today Programme not an hour ago, “If the borrower doesn’t repay in full and on time, that’s a default”. In any case, simply extending the repayment terms merely postpones the problem. It doesn’t solve it. And adding new debt does much the same, while digging them deeper into the hole.
The only real solution for Greece would be economic growth, with fiscal rectitude. But the country is far too far down the debt vortex for growth to be credible. So default is the only way — despite the damage that default will do to the balance sheets of banks across Europe, and not least to the ECB itself, which is holding rather a lot of Greek debt. Indeed it is probably the potential damage to the European banking system which is causing Brussels and Frankfurt to delay the evil day, though they know that default must come eventually.
We were promised a new Greek bailout yesterday — despite its futility. But the details have not been announced.
Meantime a new danger arises. Jean Claude Trichet, boss of the ECB, is calling for a “European Finance Ministry”, with wide powers to impose fiscal discipline, German-style, on European states. Ominously, he was not entirely clear whether he meant “Eurozone states”, or “All EU member-states”. No doubt he’d prefer the latter.
Cameron has pledged to resist the creep of European powers. That’s good as far as it goes, but we didn’t resist the European Arrest Warrant, or the European Investigation Order, or European financial regulation, or the European External Action Service, or the new “Super-Observer Status” for the EU at the UN Security Council. In fact I’m struggling to think of any piece of Euro-nonsense which the Coalition government has resisted. After all, if European financial regulators come, can a European Finance Ministry be far behind?
I have written elsewhere of the only two options I foresee for Greece — either default within the Eurozone, or default while leaving the Eurozone. And for the reasons I previously set out, I think that the only permanent solution is for Greece to quit the euro. Default within the Eurozone is merely kicking the can down the road.