The problems in Spain cannot be denied any longer. In fact, the crisis that hit the Eurozone is something that cannot be hidden.

Since the credit crisis that began in the U.S. a few years ago, countries and their banks have fallen like trees, showing black holes that had been hiding for years, as well as very bad practices that did nothing but make what was already a big problem worse.

Now that the complete rescue is about to come to Spain– the first one was only for the banks, although it counts as government debt– many authors and writers of Spanish newspapers question the competence of the European Central Bank (ECB), and wonder what prevents the ECB from saving us from total disaster by buying public debt of states that are worse off. In these writers’ speeches they explain that the ECB should act as the International Monetary Fund (IMF), and provide financial resources to those who need it.

Are they wrong asking for this? Absolutely. The answer to the question of why the ECB does not act as the IMF is this one: because they are not the same. Despite the fact that, apparently, both agencies have similarities, the truth is the objectives for which they were created are completely different in each one, and the way they respond is not the same. That is why it is advisable to make a couple of clarifications on the differences between the two entities, in order to understand why the ECB is not a “European IMF.” It was not intended to be one.

The IMF was created in a completely different context, when the consequences of the Great Depression could be still felt. Its creation reflected the attempt of several countries to avoid repeating the disastrous measures that weakened economic activity during those years.

Meanwhile, the ECB, successor to the European Monetary Institute, was created in 1998, but it did not make full use of its powers until the entry of the euro in 1999. The creation, established in the Maastricht Treaty, responded first to the oversight of the transition of member countries from their national currencies to the euro and, second,  the need for the existence of a bank for this currency.

With these completely different contexts it is logical that the objectives of both entities are not the same. Thus, the main function of the IMF is to oversee the smooth running of international economic policy, and to encourage it, acting as a fund where countries can ask for help when they need temporary financing.

However, the main objective of the ECB is to maintain the price stability in the euro area by maintaining the inflation at low levels, leaving other objectives subordinates to this first and foremost. Broadly speaking, it seems that we can define the IMF as a fund that lends money to countries who need it, and the ECB as that one who ensures the proper functioning of the Eurozone. So, the role of the first one is active, while the second one’s role is rather passive.

Now the big question is: if the euro is not working properly and there is a risk of its disappearance, can the ECB not protect it through the purchase of public debt? The answer is, again, no. Why? Because of the statutes which regulate it.

Since it was created, the ECB defined itself as completely independent from the member countries of the Eurozone– which has been questioned in recent years, especially by the suspect origin of the last directors of the ECB– and the measures should not respond to the national interests of any country. In the same way, the European institutions and national governments are required to respect this independence, and this means that there is no mechanism by which a member state may compel the ECB to act in one way or another.

This is the main reason why the ECB cannot rescue any Eurozone country. Besides this, there is another powerful reason that we forget sometimes: the conditions for being a member of the Eurozone are strict. It is not enough to wish to adopt the currency, there are steps to follow before completing the transition.

The ECB is responsible for safeguarding the proper functioning of the euro because it assumes that other institutions– created for that purpose– have been responsible for verifying that the candidates have the specific requirements for entry. If someone has not, whose fault is it then?

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Globally, the drive to reinstate economic normalcy got more pronounced when, recently, China reduced its interest rate for the second time, and Bank of England injected small monetary dose in the system.

The Chinese Central Bank announced to cut its interest rates from 6.31 percent to 6 percent, a move to boost economic activity after China recorded its steepest fall in economic growth rate during the last three years.The Chinese economy grew at 8.1 percent annually, a direct impact of slow-down in exports to troubled European countries.

The stock market in China responded negatively to this latest package launched by Chinese Central Bank, with stock prices of major banks falling due to this unexpected action.Shares of the Bank of China, the China Construction Bank and the Industrial and Commercial Bank of China are likewise moving into negative territory.

Recently, the Bank of England jumped into the rough waters and signaled that it would extend its quantitative easing program in an attempt to bring back stability and pull back the economy from the roughness of recession.

Chris Williamson, Chief Economist at Markit said, while referring to English economy “The Economy is showing signs of renewed stress, with GDP likely to fall for a third Successive quarter. Even the Purchasing Managers Index, PMI surveys, the strength of which in first quarter was seen as a key factor behind the bank of England holding off on further Quantitative Easing, have not fallen to an extent that would normally be consistent with further stimulus, based on historical relationships between PMI and policy.”

He believed that quantitative easing program may not produced any formidable impact, but said that at July meeting Monetary Policy Committee might inject money into the system boosting consumer confidence. The Bank of England injected £50 billion euros of electronic money into the system, a move that might help the off-balanced economy to re-balance itself.

And, to expand the drive of monetary stimulus, the European Central Bank joined the other banks by announcing a reduction in key lending rates from one percent to .75 percent. Globally, central banks are more cautious in safeguarding their economies from the venoms of recession, which are high sensitive to events that occur in different regions and circumstances.

Over the last few years, debt crisis in the Euro Zone and financial mayhem that erupted in the US has became the prime factor for weakening and destabilizing economies in other parts of the world. All economies are inter-connected and inter-related in forms and degrees.

Theory tells us that reduction of interest rates will lower the cost of borrowing, and thus will be able to draw the borrower an inch closer to borrowing  and effectively turn policy into real remedy. With fall in interest rates corporations find it easy to rely on borrowing because repayment will be less burdensome, since now corporations are required to pay lesser then earlier and finally leading to rise in production.

The hope is that monetary aid extended by central banks in various countries and diverse regions of the world might help the wheel of economic activity to gain velocity.

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Spain has received a 100 billion euro ($125 billion) after denying it needed it for several weeks. Although the announcement of the bailout originally had the global markets opening high, the uncertainty surrounding the details and implications of this bailout have caused the enthusiasm to disappear. Investors are still worried about spending money on Spain and they are also worried about what this bailout means for Italy.

The rating agency, Fitch downgraded Santander and BBVA – two of Spain’s largest banks – from As to BBB+s. This downgrade, in addition to uncertainty in the markets has caused investors to sit on their money rather than risk spending it. Fitch claimed the lower rating was caused by its worries that Spain will “remain in recession through the remainder of this year and 2013 compared to the previous expectation that the economy would benefit from a mild recovery in 2013 which directly affects the banks’ volumes of activities in Spain.”

The exact amount of emergency funds for Spain are still unknown, but the amount will be announced later in June after the Spanish banks have been audited. Many Spaniards were surprised about the bailout after their government insisted it did not need the money. There were several demonstrations on June 10 against the bailout after the announcement was made.

The Spanish government insists that the banks are the ones that need the bailout and are receiving the bailout, not the government itself. However, the bailout money cannot go directly to the banks, as Spain wants it to be, and must go through the Spanish government. A troika will also be created to oversee the financial management of the money in Spain just like in the bailouts for the Republic of Ireland, Greece and Portugal.

The bailout was meant to alleviate the concerns within financial markets that Spain itself was unstable and would go down with its banks. According to Richard Hunter of Hargreaves Lansdown stockbrokers, “some much-needed time has now been bought in Spain, which will allow the market an – at least temporary – sigh of relief.” However, the bailout seems to be its own worst enemy. The uncertainty surrounding the exact amount, the outcome and the mechanism of the bailout have not led to more investing.

Most of the bailout funds will come from the newly founded European Stability Mechanism that was formed specifically to help alleviate the Eurozone crisis. The funds are considered a loan that the Spanish government will eventually have to pay back, meaning this bailout makes Spain even more in debt. However, the fund itself will be considered a “senior” creditor which means that it will be paid back first if Spain defaults on its loan. Many investors are worried that they will not get paid back if they invest in Spain by buying its government bonds because everyone would be second to the Mechanism fund. Therefore, the Spanish bonds that were over 6% previous to the bailout are now almost up to 6.5% after the bailout according to the BBC.

Spain was still unsure about receiving a bailout but European finance officials pushed Spain into receiving help for its banks.

Moody’s rating agency has also said that Spain’s banking problem, “is not likely to be a major source of contagion to other euro area countries, except for Italy.”

 Italy

Many are now worried that if Spain’s bailout does not succeed, Italy may be next to need help – if it’s not already too late. Italian bonds are up to 6%, meaning that investors see these bonds as high risk. The Italian GDP dropped 0.8% in the first quarter of this year whereas Spain’s only dropped 0.4%. Most predictions show the Italian economy shrinking at least another 1.5% this year. This is Italy’s fourth recession since 2001 and consumer spending and exports are down.

The Italian government has recently been practicing austerity measures under the government of Prime Minister Mario Monti. The Italian Economic Development Minister, Corrado Passera stated, “this great discipline that we have imposed on ourselves in terms of public finances makes us one of the countries best equipped to confront the financial turbulence that Europe finds itself in today.” Passera also claimed, “in the past months, Italy has done, from a financial point of view, everything that needed doing to save itself.”

Italy currently relies heavily on funding from the European Central Bank, which could hurt it in the long run. However, Italian banks have not suffered as much as Spanish banks because they did not suffer from the same housing bubble. Italy’s unemployment rate is also half of Spain’s and its borrowing costs are lower. Italy’s deficit for this year is lower than Spain’s but its overall debt is higher. Still, Italy is in a fragile position.

Sovereign debt expert Nicholas Spiro has warned that too many are linking Spain’s problems to Italy. “Where Spain goes, there is the perception that Italy will follow, which is terrible because it is like comparing apples and pears.” Spiro claimed that Italy’s economy was “infinitely better” than Spain’s, particularly because Italy did not have to deal with the same housing crisis as Spain.

Although it looks as though Italy may save itself, investors are still too skittish. Currently many reforms are still necessary and will have to be passed over the next year. Prime Minister Monti had the support to push through these reforms but he seems to be quickly losing it.

Monti and newly elected French President Francois Hollande are both in favor of Eurobonds, bonds that are guaranteed by all of the Eurozone. These Eurobonds would help alleviate Italy’s debt and would mean its bonds would not be as high a risk to investors. Hollande and Monti will meet on June 14 to discuss the possibility of Eurobonds. However, Merkel has already announced that she is against them and Germany’s support will be necessary for Eurobonds to be successful at all.

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According to a report put out by the European Central Bank on Wednesday, May 30, 2012, none of the eight countries that are waiting to join the euro currency are ready. Most countries in the group have only been waiting since 2004 or 2007 but Sweden has been waiting since 1995.

Bulgaria, the Czech Republic, Latvia Lithuania, Hungary, Poland, Romania, and Sweden are the eight countries that are members of the European Union but are not a part of the Eurozone – meaning they are not using the euro as their currency. Seventeen countries are currently using the euro, including Greece, although there have been discussions that it may have to leave the Eurozone. Currently the United Kingdom and Denmark are not using the euro either – instead they are using the pound sterling and krone respectively – but the decision to not use the euro was theirs, not the European Central Bank’s.

The United Kingdom opted out of the euro by negotiating an exception within the Maastricht Treaty of 1992. Joining the euro was heavily opposed by most of the United Kingdom, although its close neighbor, the Republic of Ireland, has adopted the euro. Denmark was able to opt out of the euro as one of the four conditions of the Edinburgh Agreement in 1992.

The European Central Bank must report on the progress of these eight countries every two years. So far it appears as if only Latvia will be able to join the euro currency by the next assessment in 2014. According to the bank, “in none of the eight countries examined, [is] the legal framework fully compatible with all requirements for the adoption of the euro.” They also claimed, “incompatibilities remain regarding central bank independence” in all of the countries.

Additionally Latvia and Lithuania are the only two countries of the eight currently taking part in the exchange rate mechanism II for more than two years which is required to be a part of the Eurozone.

Many of the countries’ economies are doing better than current eurozone countries. Seven of the eight countries – the exception being Hungary – have a debt-to-GDP ratio under 60% which is the Eurozone limit. Currently Greece’s ratio of debt-to-GDP is 165.3% and Italy, Ireland, and Portugal had ratios last year above 100%.

According to a statement from Prime Minister Donald Tusk of Poland earlier this May, Poland is still interested in joining the Eurozone even though the euro has been damaged by the current debt crisis.

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In recent weeks Spain’s banking crisis has gone from bad to worse. Spain’s credit rating has recently been downgraded from an A to BBB+ by Standard & Poor’s because of the debt it will most likely take on from its banks and regional government failures. Spain is the fifth largest economy in the Eurozone, leaving many worrying about the ramifications of these recent developments on the rest of Europe.

Currently Spain’s deficit is too high for the Eurozone. The European Commission says that Spain can be given more time to reduce their deficit from the 8.9% of the GDP – as it stands currently – by 2013. However, the high deficit in Spain is causing fewer individuals and countries to risk investing in the country.

Bond yields in Spain are up to 6.7% meaning that they are high risk. Yields on bonds are higher when they are riskier because investors want a higher return if they are putting money into something that is unstable. In contrast the German and US bond yield is at 1.28% and 1.64% respectively. Therefore, instead of investing in Spain’s government bonds more people are investing in the US and Germany. However, this high bond yield also means that Spain will accumulate more debt and have to pay a higher interest when borrowing money.

Despite all recent efforts the Spanish economy is expected to shrink 1.8% this year alone and another 0.3% next year. However, Prime Minister Mariano Rajoy insists that Spain will not require a bailout like Portugal, the Republic of Ireland, and Greece have needed; Spanish banks, on the other hand, have already asked for bailout money.

Bankia, a recently formed banking group of seven banks, asked for a 19 billion Euro bailout. Bankia originally reported a 309 million Euro profit for the year of 2011 when it actually had lost 2.98 billion euros. It is unknown as of yet how Spain will get the bailout money when it is already struggling under its own deficit.

The President of the European Commission, José Manuel Barroso, has suggested that they use the Eurozone’s new 500 billion euro stability mechanism to inject some capital into the banks, but Germany, Europe’s largest economy, has already rejected the plan. Another option is for Spain to give Bankia government bonds to then trade with the European Central Bank (ECB) for money.

Although it has been reported that the ECB has already rejected this plan a recent article by the BBC claims that these reports are false and that the solution is not yet off the table. The European Commission has also suggested creating a “banking union” to monitor all Eurozone banks in the future.

In addition to struggling with the mounting bank debts, Spain is also forced to rescue several regional governments who are no longer capable of borrowing money. Several regional governments have gone bankrupt and rating agencies, such as Standard & Poor’s, have put these regions at junk status. Most recently Catalonia, the wealthiest autonomous region in Spain, has asked for help from the central government; Catalonia accounts for one-fifth of the Spanish economy.

Spain is giving these regions government-backed bonds which they can then use to borrow money. However, as stated previously, these bonds are at a high yield which makes this solution temporary. A Spanish economy ministry spokesperson stated, “the goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not ale to borrow on the market.”

Regional banks have tried to strengthen each other through mergers. Ibercaja, Liberbank, and Caja3 merged in late May to become more resilient. This merger created the seventh biggest lender in Spain with 120 billion euros in assets. Liberbank and Caja3 were previously mergers of four and three regional banks respectively.

Spain’s unemployment as of April is at 24.3%, the worst in the Eurozone – even worse than Greece. It is expected to climb to 25.1% by 2013 even with the recent precautions taken by the newly elected center-right government. Prime Minister Rajoy has made several labor market cuts including cutting back on severance pay and restricting inflation-linked increases in salary; these decisions have been unpopular with unions and workers. Spain’s high unemployment also means that there are fewer people who are paying higher tax rates or even paying taxes.

Spain’s economy is heavily tied to the economy of Italy, the fourth largest economy in Europe. These close ties lead investors to worry that if there is a run on the Spanish banks there will also be a run on the Italian banks, throwing both countries into a deeper crisis. Italy is now borrowing at a rate over 5.66%; borrowing at a consistent 7% rate is considered unstable and has triggered the bailouts for Greece, Portugal, and the Republic of Ireland in the past.

The Spanish debt crisis was not caused by irresponsible government spending such as in Greece. Spain ran a balanced budget every year until the recession hit in 2008. The problems were planted when Spain joined the euro in 1999 and interest rates fell because Spain’s economy was good and other economies, such as the German economy, were not.

Investors wanted to invest in Spain which is what drove the interest rates lower. While the Spanish government resisted taking out more loans because of the cheaper interest rate the Spanish people did not. The country experienced a long housing boom that also affected the construction sector. When the recession hit, the housing and credit bubbles burst leaving many banks with toxic debt – debt that was unlikely to be repaid.

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Paul Krugman, one of the most famous economists in the world, recently claimed in an interview with the BBC that Greece’s best option is to leave the Euro. Krugman stated, “Greece was seriously, seriously irresponsible even during the good years.” He compared Greece’s spending to those of the US and other European nations and claimed that the irresponsible spending was “not to the same extent.”

Krugman explained that the problem for Greece is that it cannot print its own money which gives it an “enormous vulnerability.” Therefore Greece has two options: accept the demands that Germany is imposing on them in regards to lending or to leave the Euro. Krugman declared, “Greece must and will leave the Euro.”

However, Krugman also points out that it is difficult for any Greek politician to say that Greece should leave. In fact, Krugman believes “whoever says, ‘that’s it’ will have ended his career.” According to Krugman, Greece leaving the Euro could happen in a couple of weeks depending on the outcome of the Greek elections. The other option is that the European banks will eventually refuse to lend to Greece which will force it to create its own currency again.

Ultimately Krugman claims that this is the most desirable thing for the Greeks and for everyone else in the Eurozone. He believes that the main ramification will be the fact that the Euro membership is reversible. The greatest worry is that there will be a run on the Spanish and Italian banks. However, as long as the European Central Bank is willing to supply the Euros for this run there should not be a major problem.

In another interview with the Independent, Krugman also went more in depth as to who should be blamed for the Eurozone crisis. Krugman believes that the Maastricht Treaty of 1992 is what originally caused this crisis because it led the way for the use of a single currency in Europe.

Michalis Sarris, chairman of the Cyprus Popular Bank also commented on the possibility of Greece leaving the Euro on 17 May 2012. Sarris claimed that Greece leaving the Euro was not “inevitable” but was a “clear possibility.”

 Ultimately Cyprus hopes that Greece will recover without leaving the Euro because many of its finances are tied up in Greek investments. Sarris reported that the Cyprus Popular Bank suffered a loss of about 2 billion Euro do to the financial crisis in Greece. Sarris is hopeful and remains positive that Greece will be able to find a way out of this crisis without having to leave the Euro.

Paul Krugman is winner of the Sveriges Riksbank Prize in Economic Sciences (informally the Nobel Prize in Economics), Princeton professor, and a columnist/blogger for the New York Times. His books include End This Depression Now! and The Return of Depression Economics and the Crisis of 2008.

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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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Italian Prime Minister Silvio Berlusconi has resigned amid catastrophic levels of debt that potentially endangered the fate of the entire Euro Zone. Many countries are engulfed by exorbitant public debt that has put mere functioning of government in serious questions from Ireland to Greece. There is an exclusively high rate of uncertainty hovering over the minds of people in and around the Euro-Zone.

The biggest question remains whether Berlusconi’s exit brings good fortune to Italy’s economy and unquestionably to world economic growth prospects in future. Now the fate of the Italian economy solely resides on how effectively President Giorgio Napolitano forms new government under the leadership of Mario Monti a former European Commissioner and most widely discussed candidate for the top post!

The parliament has just passed austerity measures to break the country out of the debt death spiral. The package foresees to save 59.8 Billion Euros from a combination of spending cuts and tax increases.

1 percentage point increase in VAT to 21 percent from 20 percent,stalling of public-sector wages till 2014. Special tax on Energy Sector.They also include increasing age of retirement, reforming employment law, privatizing state corporations and the like.

Austerity measures imply planned reduction in state expenditures on services and benefits in an attempt to reduce deficit spending. Austerity measures does not at all represent moves to realign the fiscal system or to provide with long-term prospective reforms that are needed the most to debt laden countries.

Rather short-term focused which might ultimately prove to provide relief on a marginal scale seriously under representing the whole cluster of fiscal turbulence.

Austerity measures basically tend to lower the intensity of ballooning deficit rather than finding out a constructive and effective way of dealing with it in the future.

According to the Daily telegraph “indeed the euro-zone is reaching a point of no return and it’s becoming a disaster for the global economy in an editorial recently. Pundits also claimed that in order to rescue Italy, almost all the funds in the European Financial Stability Facility (EFSF) would be needed. (1 trillion Euros)

According to Organization for Economic Cooperation and Development (OECD) Gross Italian Debt is up more than 110 percent from the last ten years, in the year 2001 it stood at 120 percent of Gross Domestic Product and even in the year 2005 it was 119.9 percent and again it followed a similar trend in the year 2010 when it reached 118 percent of Gross Domestic Product.

Emma Marcegaglia, head of the Italian Employees association, Confindustria said structural reforms demanded by European Central Bank and European Commission are imminent now, and further said reforms are the only thing that can take us out of current situation.

Image courtesy of the Huffington Post

The real threat to Italian Economy according to a few economists is slow growth rate over the last fifteen years. The above figure illustrates that in the course of fifteen years Italian economic growth rate has been less than the rest of Europe.

Putting any economy back to normal conditions requires stable growth rate and stable growth prospects, these two vital ingredients are missing in Italy’s case, so moving forward into an era of economic unease might continue for quite a few years. The hope is that through these measures, the Italian economy grows at faster rate and the burden of debt is lessened in the near future.

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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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