Greek Debt Crisis Escalates
In Europe, the inevitable happened not once, but twice.
Greece’s default on its sovereign debt in March, at $231 billion, was the biggest of its kind in history. Private holders of Greek debt, mostly banks, were forced to take a write down (haircut) of as much as 75 percent. This was only a short respite, however. The country had two elections over the summer, pushing it to the brink of exiting the eurozone, as the public grew more discontent with austerity measures.
The economy worsened, unemployment reached 25.4 percent, and Greece’s GDP has been dropping at a rate of 7 percent. So the sovereign defaulted again in November, although the restructuring was smaller this time. Meanwhile, politicians across the globe kept throwing good money after bad, with total bailout sums reaching $527 billion, stretched over many years.
Greece wasn’t the only concern that kept central bankers and politicians busy in 2012. Worries about Spain and Italy and their banking sectors prompted the European Central Bank (ECB) to pump $1.3 trillion into the banking system via Long Term Refinancing Operations (LTRO). As Spain’s banking system neared collapse over the summer, the ECB went all-in and promised unlimited money printing. The unlimited buying of short-term government bonds would only be activated if a country agreed to close budgetary supervision by the European Union. So far no country has used the facility; the mere announcement was enough to push bond yields—and borrowing costs—lower.
The only clear recognizable pattern is this: Germany is only willing to provide assistance to the periphery with strings attached. Berlin has been pushing for more European integration and the forfeiture of budgetary sovereignty, putting all the power in the hands of bureaucrats in Brussels. The peripheral nations on the other hand would like aid without conditions. This tussle will be continued in 2013.
