Europe’s Bear Stearns
ALG Editor’s Note: In the following featured editorial from the Wall Street Journal, the board warns against a bailout for profligate Greece as its true debt is once-again modified upward as Moody’s downgrades its credit rating:
Greece isn’t Lehman, though it could become so if the EU keeps trying to solve Greece’s real debt problems by press release and bailout. Greece represents only 2% of euro-zone GDP. While European banks would take losses on any Greek debt restructuring, those losses would not by themselves be catastrophic. But that wouldn’t be true if the sovereign debt panic spreads to Portugal and Spain. Far better for the EU to draw the line now, force Greece and its creditors to take their pain, and demonstrate to markets that there won’t be a rolling series of bailouts. To adapt Mr. Schäuble’s Lehman analogy, better to stop the moral hazard at Bear Stearns, lest Spain become Lehman Brothers.
As a sovereign debtor, Greece can declare an interest standstill while it restructures via a maturity extension, a haircut to bondholders, or both. Countries that spend beyond their means have often had to restructure, some more chaotically than others, but there is no obvious reason a Greek restructuring should prove contagious.
Greece’s problems are familiar across Europe: a welfare-entitlement state that is unaffordable given the country’s anemic economic growth. This is what has to change, but it won’t as long as the Greeks marching in the street believe their standard of living will be salvaged by German or French taxpayers. The real systemic risk is letting Greece believe it can continue its spendthrift ways, and letting creditors believe they can lend Greece money without fear of losses. This is a far greater threat to the euro-zone and European prosperity than a Greek debt restructuring or default.