Imagine a group of people being stranded amidst deep amazon forests with nothing to eat except insects and lizards, with nothing to cover their heads, being tugged out into the wilderness of discomfort and agitation. After days of extensive and tireless operations, rescue officers ultimately landed with loads of food and all the amenities they can offer. But there was a tragic turnaround: rescue officers decided not to take the stranded people out of the claws of death; on the contrary, they agreed to continue their operations as long as they can.

This is what Greece is going through. Over the year of crisis, it has been observed that whatever the assistance mechanism (in terms of bailouts and loans) designed and amended so far contributed more towards fiscal chaos and debasement of the economy, affecting the lives of millions of people and its image as a whole.

Assistance extended so far allowed Greek government to spend,  since the engine of the economy has bottomed-out and domestic resources dried away.

Bailouts and loans just sway a nation back and forth in ravines of debt and despair. Bailouts may help a worn-out engine run, but it can’t help reduce deficits. It is very uncommon to witness that after years of crisis, authorities failed to restructure deficits, failed to frame rules concerning public expenditure, failed to eradicate to fiscal illness, and failed to bridge the fiscal gap and move on.

For example, how far have measures taken to stabilize Argentina debt crisis been successful? Ten years after the Argentinean sovereign debt default, the world seems to have ignored or fizzle out lessens learned in South America. Even today, after a decade of financial fall-out, litigation are continuing; debtors are still hopeful that one day they might get their money back.

On the other hand, austerity measures help curtail expenditure. They assist in lowering the possibility of the further accumulation of debt, but in no sense do austerity measures help reduce previously accumulated debt. This is where action by the International Monetary Fund and European Central Bank turns folly.

A system has to be put in place that brings public expenditure under an axis of regulation, under the barricades of the financial capability of a nation to spend, rather than printing stacks of money to purchase government bonds. Institutions aiding financially are just acting like a cushion, instigating or backing-up nations to carry on reckless spending patterns no what matter whether they can withstand the debt burden or not!

Institutions that promote spending cuts followed by hybrid doses of bailouts partly shift responsibility back to themselves from a debt-laden nation, and continue the legacy of fiscal fallacy.

Legal framework on a systematic platform has to be implemented at a global level, so that in the future we live in a debt free world, a world where fiscal discipline matters and budget surpluses are a reality for all. At least in the case of Europe, a fiscal institution has to overlook the fiscal affairs of all the member nations, capping public spending based on the country’s own financial health and current debt.

The situation where Greece is currently dwelling is very close to people stranded in Amazon forest. What is needed is effective fiscal management. International institutions can play a much bigger role with technical guidance on budget management and by discounting policies that hardly bring any substantial change.

The need of the hour is to lift people away from the woods, not to let them survive being the weakest!

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This year the world witnessed repercussions of the most disastrous and indecisive fiscal management in the Euro Zone that shattered one’s sense of security and disturbed the lives of millions of people.

The debt crisis of a hand-full of members of the Euro Zone has potentially inflicted a wound, that has possibly introduced a series of deathly rating downgrades across the region and exposed a lot of risky behavior, especially in the banking industry, credit markets and dithered global economic recovery.

The Contagion

According to the Oxford Dictionary, the word contagion refers to a communication of disease from one person to another. In the world of finance and economics, it refers to the spread of economic crisis in one county’s bond or equity market to another.  In this case, there has been the communication or spread of fear, faithlessness, and inefficiency at the political level and, most tragically, the spread of an illogical attitude.

Greece was the first to be exposed to massive levels of debt and because of its inability to service its debt, apparently under a veil of ignorance and falsehood, became doomed and fear of default spread like a raging fire, putting into question the competency of these countries.

Crisis of Consensus

German Chancellor Angela Merkel said the European Central Bank cannot be relied upon to resolve the crisis, since its statutory role is different from the Federal Reserve Bank or the bank of England. She further said that “no single stroke” will work and joint euro bonds are “unthinkable.”

On the other front, the occasion of the failure of the recent German bond issue, a senior fellow at the Council on Foreign Relations in Berlin said that “it’s only got us closer to the end-game, either the break-up of the Euro or Euro bonds.”

The German Government had always been opposed to jointly-issued bonds, because it involves German taxpayers’ money for members of the bloc, it involves partial backing by German Government and, finally, it will contribute to a rise in cost of borrowing for Germany.

The Catastrophic Logic

In his book, “Back From The Brink,” Alistair Darling said he is gravely concerned that the coalition is repeating the mistakes made during the Great Depression in 1930’s in the United States.

The United States went into double-dip recession in 1937 because its government followed stiff fiscal tightening policies, andUK and debt-laden countries in the Euro-Zone today are following suit.

According to Keynesian school of thought, when effective demand is weak, expansionary fiscal policy should be followed, but under these circumstances, widening of authority of the ECB to finance state expenditure is quite undeniable rather than taking the hand away.

Greece has almost frozen its spending along with Italy to some extent, and it has strengthened the belief that the efforts should be in the reverse order to invite stability across the countries. Hopefully, the new proposal by Merkal to bring in radical changes in treaties will resurrect the rubble.

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The most faltering and tragic questions of the 21st century is how to manage the fiscal system of a country regardless of their level of economic growth. Leaders, politicians, lawmakers and ordinary citizens are deeply baffled and greatly offended by the scale of the problem in their domestic economy, and in the recent global economy.

The economy was still in its sick bed in late 2009 when the Greek government spilled the truth about their official figures being misrepresented for years. The most pronounced effect of the horrific level of public debt has been had the outcome of the unpopular austerity measures.

The unprecedented action to curtail and mitigate the dangerously high proportion of debt failed to bring in the amount of hope that the measures were designed for. Attempts to subsidize or fend-off the crisis were made by the European Commission, the IMF and the European central bank by setting-up a tripartite committee to prepare appropriate programs and economic policies.

A loan agreement was reached between Greece and the other Euro zone members, with an agreement settling on a total of 110 billion €. Greece, being member of the Euro zone, it cannot unilaterally stimulate the economy by expanding monetary policy. According to Vicky Pryce, senior director of economics at FTI, “we will see a haircut on Greek bonds, a recapitalization program of banks and increase in the size of the bailout”

Ultimately, nations under the hammer of fiscal congestion and monetary impossibilities will have fewer possibilities of revitalize the sluggish economy in order to gradually subside the debt debacles. President Obama said when German Chancellor Angela Merkel Visited the US, that “European Debt Crisis must be brought under control predicting disastrous results if there is an uncontrolled spiral and default in Europe”

According to the German Finance minister, Wolfgang Schauble, creditors holding soon-to-mature Greek bonds would need new bonds on similar terms that are payable for several years. But this plan doesn’t release Greece from the shackles of their staggering debt — it only shifts the burden to future generations, providing a short-term relief.

In another plan which has been accepted by the European Central Bank, a ‘no bond exchange’ requires that private creditors can cash in on maturity and be encouraged to re-lend some of their money. This plan is only viable if private creditors believe that re-lending to the government won’t put them back to previous risk levels.

Even so, Greece is not out of the woods completely, since it will also require paying interest with principal for those bonds. Some economists have echoed the option of Greece leaving the Euro zone. Greece has some good reason to leave the Euro zone. If it can devalue its currency, Greek exports will rise and provide a cushion for economic activity and bring in cash.

But it might push the inability of other members of the Euro zone to rescue a financially unstable member country and may endanger the whole financial system of the region.

If Greece withdraws itself from the Euro zone, the confidence in Europe would be tarnished, inviting catastrophic consequences to other debt laden nations like Portugal, Italy, and Ireland. Nevertheless, debt restructuring and beyond could be a possibility now the ECB has granted permission for exposed countries to have unilateral monetary policy.

 
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A group of analysts from the three institutions responsible for granting the country with its next package of financial help, known as the troika, has arrived in Greece to inspect the progress in regards to the budget cuts schedule previously proposed.

If the government doesn’t carry out the timeline proposal agreed by both the government and the troika, it is very possible the latter will not give Greece a vital loan to allow the country to continue with its normal activity. Without that loan, the government will go bankrupt and, therefore, neither Greece’s bonds investors, civil servants, pensioners, and the like will not be paid on time.

For those reasons, the troika, a group comprised of experts from the International Monetary Fund, the European Commission, and the European Central Bank, started to examine the national accounts to verify that the schedule was being followed on September 28.

After September 2, they decided to leave Greece because the government was not applying the measures agreed upon by both parts, thereby putting Greek leaders under more pressure. One of the measures agreed upon was reducing the number of civil servants by 30 percent before 2015 with the immediate layoff of 30,000 employees out of 900,000 employees.

Other measures prescribed will reduce civil servants’ wages and salaries up to 25 percent and include compulsory retirements. These cuts will affect all public services from the health system to education and transportation. Those cuts have caused a deep sense of unease among the Greek population who decided to mobilize themselves to preserve whatever they could from public expenditure cuts.

For instance, the group had to change the place and hour for a meeting with the Transports Minister, Yannis Ragoussi, because some civil servants were protesting against mergers and acquisitions of public companies with private ones, which would result in a decrease in the number of employees by about 10 percent and the liberalization of truck and taxi driver licenses.

In Greece, an unusual day is one without demonstrations. A few days ago, a group of 250 retired soldiers took over some offices in the Ministry of Defense until the minister himself, Panos Beglitis, threatened to resort to the use of force to make them flee. Another example is the students’ strikes, which have taken over more than 400 schools and 100 faculties to protest against cuts in the education system.

All these tug of war games are creating a complicated situation in the country. On one side is the troika, always asking for more and more cuts and new measures to reduce public deficit. On the other side are civil servants who feel as if they are on the verge of being fired, and citizens who see more and more cuts day after day that are worsening the public system.

In between is a government with feet of clay, coping with ministers’ resignations every month, social strikes, and the pressure of the troika. The government is playing a dangerous game: promising a high performance to the troika that they know is impossible to carry out in real life and watching the time pass day after day without being able to find solutions to satisfy both sides.

 
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After being told that Dexia’s credit rating would be downgraded by credit rating agency Moody’s, on October 3, 2011, the bank’s shares dropped sharply. By the end of trading that day, one share was approximately one euro ($1.32), the lowest level the bank has ever seen. The situation did not improve the next day: at one point, shares dropped by as much as 40 percent.

Trading was suspended on October 6. It will resume trading on October 10. On Tuesday, October 4, the bank’s board met in an emergency meeting to discuss solutions to the problem. At a press conference after the meeting, caretaker Prime Minister Yves Leterme of Belgium said that the Belgian and French governments will each have a hand in propping up the bank.

“We are giving a new government guarantee and will take all the initiatives necessary for Dexia Belgium to consolidate. We still believe it has a future,” he said.At the meeting, a plan was formulated. First, Dexia would set up a “bad bank” fund where its troubled assets would go.

Second, the French municipal loan book would be given to La Banque Postale, a French bank, and Caisse des Depots et Consignations, a French financial institution. Last, Dexia would be split up, and would seek buyers for its healthy assets. Discussions for options about the split up of Dexia continued throughout the weekend.

This is the not the first time Dexia has needed government assistance. In late 2008, Dexia was bailed out by the Belgian and French governments and its shareholders. Belgium and France invested 6.4 billion euros into the bank. Each country owns 5.7 percent of the bank, while three Belgian regional authorities own a combined 5.7 percent of the bank.

Some bankers outside of France and Belgium are concerned about the split up of Dexia. “The government has to reach a deal this weekend, or we’ll see trouble on the interbank market next week,” said Michael Rohr, a banking analyst with Silvia Quandt Research GmbH in Frankfurt, Germany.

Some inside France are concerned about how the split up will affect France’s credit rating. According to French economist Jacques Delpla, the split will not harm the country’s credit rating “Rating agencies judge the sustainability of a country’s debt. This would be a one-off investment that could yield big profits, so even if France spends a huge amount recapitalizing the entire bank system, it should not affect its rating,” he said.

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