GREECE -- Can the Tragedy be avoided?



Greece- How do we save the patient?



After years of lax fiscal discipline and fiddling the economic figures, Greece is in a real crisis -- that incidentally will touch us all -- even in the UK,although we keep pretending that it is a pure European affair, it isn't at all. Greece should never have been allowed into the Euro as its debt was not in line with the principles for joining the single currency, thought it looked as if it was at the time,suspiciously so, some commentators thought and they were proved right.

Holders of Greek government bonds are nervous, although interest rates on their bonds are high,this reflects the fact that the risk of debt default by the Greek government is viewed as likely by the bond markets. Its debts are nearly 160% of its GDP and it is destined to receive a 110 billion euro bail out this year with another 100 billion euros to follow to keep the country going until 2013. The IMF is demanding privatisation of Greek state assets and deep public expenditure cuts. There is already fighting Syntagma square. Is this approach sustainable no matter what we think of Greek profligacy?

What is to be done?

Greece could default but even if it walked away from its debts it would still have to reform itself because it would just get back where it is now without radical reform of its public sector. It would have to leave the single currency and re-introduce the drachma which would probably need to be de-valued anyway. No-one would lend it any money so it could not afford to make any more mistakes

A more realistic option might be to re-structure its debt -- that is a proportion of its debt -- say 50%, could be forgiven. Good for Greece but less good for the private banks and government's (but mainly banks) that hold Greek debt -- It would still affect the global economy but the banks would probably be able to better cope with such write offs than they could have done 3 years ago.

Will Greece be ever able to repay over 200 billion of euro debt or is a restructure of its debt the best thing to do? In my view a severe haircut for European banks might just save Greek Society from catastrophe. Even after a re-structure the Greek economy would need to be nurtured for many years to come --

The patient would be sick but it could recover after a debt restructure-- Other forms of medicine might just kill the patient and no-one would want that.