This is admittedly oversimplified but let's suppose I have an income of $30,000 per year. But I have credit card debt of $45,000 on which I am paying 16% interest. I also owe child support of $10,000 per year. There is no forseeable prospect that my income will increase any time soon. My child support might have to go up. Would anyone in their right mind lend me MORE money ? Can anyone see a way I could possibly stay solvent and avoid bankruptcy ?
Well that is exactly what the EU has just done with Greece. Greek debt is already 150% of GDP. That's GDP where only a percentage is actual revenue the government can use to pay interest on its debt. ( I said my hypo was oversimplified. ) Rather than force a restructuring, the EU has just lent Greece ANOTHER $86 billion. Thanks in part to a few austerity measures, Greece's GDP is actually DECLINING . Yet, many segments of Greek society refuse to accept reality. In my hypo it is "child support" but for Greece it is pensions and other somewhat fixed expenses they foolishly ran up over the last two decades. The interest on existing Greek debt is averaging about 16%.
Everyone knows that the only realistic option for Greece is to restructure its debt.
Private holders of Greek debt are going to have to get used to the idea of trading high interest Greek bonds for lower interest new issues. Pensioners and other government beneficiaries are going to have to make do with smaller pensions. One part of Greece's problem are over a million people who retired at age 50 ! In a country where the life expectancy is well into the 70's ! Where Crete and some other Greek islands have some of the world's highest life expectancies !
Everyone is watching white knuckled and trembling as this farce plays out toward its inevitable denouement. If Greece goes, can Ireland and Portugal be far behind ? And then, what about Spain ? How generous are the Germans (and other reasonably solvent EU members) willing to be ? They look at Greece's predicament and rightfully ask :" Vy do ve haf to bail out zose lazy Greeks ? "
The U.S. has been going down the same path as Greece and the other PIGS. As Mel and I have been warning since we both started posting on these and related matters. While not as acute as Greece, our country has to fish or cut bait on bothits budget and its debt or we could easily end up at the mercy of the Chinese, EU and ( God Help Us ! ) the IMF. Our own debt is approaching 100% of GDP.



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