How Much Trouble Is Greece in?

By Inya Ivkovic, MA — The Financial World According to Inya columnApparently, a lot! Greece seems to be sinking deeper and deeper, signaling that an emergency bailout may be needed, while Europe’s currency of choice, the euro, is going through an unparalleled crisis in its young life. Who is panicking the most? International investors, who remain unconvinced that the bailout that was already given to Greece by the European Union (EU) and International Monetary Fund (IMF) made even the slightest dent in the country’s ailing finances.
As this Greek tragedy unravels, the worldwide markets are laboring under the realization that the global recovery may not be taking root as strongly as many had hoped that it would. Additionally, it is coming to light that the EU’s leaders may not be equipped to deal with the kind of crisis that is plaguing Greece, so the possibility of ceding their obligations toward the country to the IMF is very real.Some analysts are actually hoping that the IMF will take control of Greece’s economic woes, due to the IMF’s track record at turning struggling economies around. However, the EU and Greece are not exactly thrilled to drop the latter’s crisis at the IMF’s door, due more to their political sensitivities than to what may be the best for the global economy.That explains the EU’s recent attempts to calm the global markets by asserting that not all is lost because Greece has not actually defaulted on its debt and because the country’s deficit-reducing plan was going to be enforced religiously. However, despite all of the calls for calm, the fact remains that debt-laden Greece has to come up with $15.5 billion by the end of May, one way or another. Because no one knows which way it will go, 10-year Greek bonds spiked to a record high in the history of the euro last week.Making things exponentially worse is that what used to be a crisis revolving around government debt is now spilling into Greece’s financial sector. Last week, several major Greek banks shaved quite a chunk off of their market caps, prompting an announcement that the banks will need to tap into whatever money is left in Greece’s stimulus pool just to meet their short-term capital requirements. The sentiment is that Greek banks are getting shut off from the European financing taps, and that is wreaking havoc on the country’s financial sector.So, why does Greece’s problem appear to be of a perpetual nature? First, there is a huge lack of confidence in the indiscernible plan that was put together by Germany, France and the IMF to open up the necessary lending lifelines to Greece. The problem with the plan is
not only that it is vague, but also that all EU nations would have to approve the rescue, which, at this point, does not seem terribly likely.

In addition, even if this plan comes to fruition by some miracle, Greece could end up being charged huge market rates, which is likely to add to the overall trouble, as opposed to retracting from it.

Finally, the plan is vague regarding the IMF’s role, which is making everyone antsy, not just Greece. The last thing that the EU’s leaders want is for the world to see that they are not capable of handling problems in their own backyard.

It seems to me that Greece’s one remaining way out is to swallow its pride and start sucking up to the IMF. Sure, the IMF is known as a problem solver, even though many of those whose problems it has solved did not like its methods. The fact remains that Greece’s debt problem is worrying the rest of the world and, until the matter is resolved, every time a shudder comes from Greece, the global markets could easily start spinning out of control.

 

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