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The Future, one side

Greece, in the same situation as the GSE’s, will require unlimited support. Greece’s financing costs remains at unsustainable levels and there must be grave doubt that they can recover from this predicament without default.  Whilst some of the productive sectors of society accept the need for austerity there is a huge civil service with a vested interest in the status quo, and the potential for violent political protest.  The country must reduce its debt by 4% within 12 months which is unprecedented.  

By the same measure, politicians in Germany are constrained by popular opinion from offering an unlimited bailout despite the economic advantages that have accrued to Germany by being part of a weaker currency zone.

If it was Greece alone the sums would be manageable, however any precedent will be eagerly watched by Portugal, Spain, Italy and Ireland.   If there can be no reconciliation between the two extremes of the Eurozone, the spendthrift countries and the trade surplus countries, it will no longer be possible to paper over the cracks.  Without a central government with the ability to set and redistribute taxes, the Eurozone is inherently unstable.

Greece is playing a dangerous game of poker in the expectation that eventually Germany will do what is necessary to support the Eurozone.  This is far from certain given the enormous costs.  It seems inconceivable that the pressures will accelerate the creation of a federal states of Europe similar to the USA as the EU is far too fragmented and slow in making decisions.  The alternatives would seem to point to a collapse in the Euro or ejection of some defaulting members.  Germany itself could elect to leave.

In the worst case the GSEs can be nationalized, Greece cannot.

The Future, the other side

The U.S. poses the same debt default risk as Greece, as debt increased to high level of the GDP.  If the level of the U.S. debt stays at “unsustainable” levels, it will damage the US debt rating and increase the debt financial cost.  Then who will bailout out U.S.? The IMF?  Is the U.S. on the same path as Greece and do greater austerity measures need to be implemented in the U.S?  This may lead to social unrest. With greater levels of state ownership of housing and other industries the country will resemble more a managed socialist economy.   In the end China, like Germany, will need to stand behind the US consumer and pick up the tab, at least until the Chinese economy can generate much higher demand for manufactured goods.  

Last Part,

Only history will tell if the Greece bailout by EU, IMF is a repeat of the U.S. government support for Fannie and Freddie or perhaps a sign for the rising cost of insuring U.S. debt against default.  Both are on the path of “unsustainable” levels of debt.  Even, if this is not a sovereign debt default for the U.S. the writing is on the wall after decades of growth and the last decade of negative savings.


The bailout package for Greece backed by the EU and IMF is a repeat of  U.S. Government support for Fannie and Freddie

Or perhaps  a sign  of the increasing cost of insuring U.S.  debt against default

Is The GREEK Bailout History Repeating Itself Or Is It The Precursor Of Things To Come In The US?   

Separated in time, the bailout actions taken by the U.S. Treasury Secretary and European Union (EU) have something in common:  due to large amounts of debts that was rolling into future months, the U.S. government and the EU had to put money to 1) bring down the yield spread that these bailout entities must pay to borrow funds and 2) to provide confidence in this entities and bring investors back.

Paulson’s “bazooka” for GSE; Geithner pledges unlimited blank checks

In 2008, the former U.S. Treasury Secretary Henry Paulson had to bring a “bazooka” to the table to silence market unrest fueled by Fannie Mae and Freddie Mac vast sums of debt and their solvency.  The proposed federal backstop infused money in these government-sponsored enterprises (GSEs).   Eighteen months ago, Fannie Mae and Freddie Mac were taken over by the government.  As a result the U.S. taxpayers have tossed $127 billion into these companies to keep them solvent.

The current U.S. Treasury Secretary Timothy Geithner also supports the prop for these two enterprises, pledging unlimited aid removing the $400 billion financial cap on the money.  Mr. Geithner justification for issuing the “blank check” for Fannie and Freddie bailout is that is crucial in helping to stabilize the housing market and the overall economy.

EU brought the pistol to the table: EU, IMF Bailout

Similarly, the jump in Greece’s financing costs prompted EU finance ministers to infuse money to bailout Greece.  Under the plan, the EU will put up €30 billion in the first year and the IMF as much as €15 billion. There is some concern that even these sums will be insufficient.

Greece has raised enough funds to cover more than €10 billion in debt maturing in April, but still needs to sell more bonds to finance the deficit. Greek officials plan a presentation to U.S. investors this month before a possible dollar-denominated bond sale.

Greece is a small part of the Eurozone and is the first state to hit market turbulence.  There are far bigger states in a similar position making the potential bailout cost unthinkable.