Are the Greeks likely to secede from the EU because of their sovereign debt? John Mauldin, a financial investor and writer who claims 1 million+ email subscribers, says its not as fanciful as it sounds:
The third option is that they could vote to leave the European Union. While this is unthinkable to most Europeans, it is an option that may appeal to some Greeks. They could create their own currency and effectively devalue their debt. It would make their labor and exports cheaper…
Most people scoff at this notion, but money is flying out of Greek banks into non-Greek ones, and to my way of thinking that is a suggestion that some Greeks think secession might be a possibility. It is also causing severe stress at Greek banks.
Mr Mauldin’s letter is worth reading in its entirety (he requires an email address to access full letter). It’s a 20min read but explains the reasons behind the Greek financial crisis and the possible ways out, and along the way showing the parallels with the rest of Europe and America.
Greece is being told that it must cut its budget to an 8.7% deficit this year and down to 3% within three years.
For my American readers, let’s put that into perspective. That is the equivalent of a $560-billion-dollar US budget cut this year and another such cut next year. That would mean huge cuts in entitlements, Social Security, defense, education, wages, subsidies, and on and on. And repealing the Bush tax cuts? That would just be for starters. No “let’s freeze the budget” and try and grow our way out of it, as we effectively did in the ’90s, or gradually cutting the budget a few hundred billion a year while raising taxes. That combination of tax increases and budget cuts would guarantee a US recession. Unemployment, already high, would climb higher.
And yet, that is what the Greek government is being asked to do as the price for a bailout.
Whether it is Japan or Portugal or the US or (pick a country), the body of evidence clearly shows that there is a limit to the amount of debt a sovereign country can handle without a crisis developing. That limit is different for each country, but there is a limit that the bond market will impose. And there are many countries in the developed world that are approaching that limit.
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