Don’t look now, but we just loaned almost $7 billion to Greece. That’s our share of the International Monetary Fund bailout of that country.
Don’t worry; We can always borrow the money from China, or raise taxes in the likely event that Greece proves unable to repay the IMF and the eurozone countries that are contributing to enabling Greece to refinance the loans coming due this month and the rest of this year, and next. A bit of an exaggeration, but you get the point.
It is hard to tell whether the bailout of Greece is farce or tragedy.
Farce, because some of the workers taking to the streets to protest the cutbacks in government spending don’t want their retirement ages extended from the current level of 50 years, and the wealthy want to continue evading the tax collector. The New York Times reports that residents of a wealthy Athens suburb admitted to the taxman that they own 324 swimming pools, while a satellite survey of the neighborhood shows 16,974 such privately owned facilities in which the rich can escape the heat of a Greek summer.
Tragedy, because the decision to bail out the munificent Greek welfare state, in return for promises to be more frugal in the future — promises the bond markets simply do not believe — creates moral hazard.
What is good enough for Greece is certainly good enough for Spain, which also is finding it difficult to borrow still more money, and Portugal, and even Italy. I say “even Italy” because unlike Greece, which owes billions to foreigners, Italy’s government debt is held largely by Italians.
So if Greece defaults, it will create huge problems for the German, French and other banks that hold its sovereign paper, whereas if Italy defaults it will only be cheating its own citizens out of their money. That would have a much smaller effect on the world economy than would a Greek default, which would force many European banks to wipe assets off their balance sheets, and impair their ability to lend to companies only now emerging from the recession.
So far, we have benefited from Greece’s problems. Whenever there is a financial crisis of this sort, there is what investors call a flight to safety. That means get your money out of the threatened region — in this case Europe — and buy U.S. Treasury bonds and notes. That keeps the prices of those securities up and, the flip side, interest rates down.
Which is just what the Fed and the administration want so as to make it easier for consumers to find mortgages they can afford, and for businesses to invest.
But the Greek crisis, and those likely to follow in already-downgraded Portugal and Spain, are not entirely good news for America, itself deeply in the red. There but for the grace of printing presses go us.
Faced with a similar inability to pay off the enormous debt with which the administration has burdened Americans for generations to come, we can always print our way out of the problem. That, the Greeks cannot do, since long ago they gave up their drachma for the euro, and with it the power to devalue their currency so as to increase their international competitiveness.
Of course, if we do run the presses — inflate our way out of our debts by repaying with debased dollars — we will pay more for all those imported goods, and cheat those who have frugally saved for their retirement by making their savings worth less. Inflation is a medicine with serious side effects.
Examiner Columnist Irwin M. Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.
