A sick game of financial sadism is currently being played in Europe. The European Central Bank, IMF, and World Bank are the tormentors, and Greece is their victim. With the way things have proceeded, you'd think that the banksters want Greece murdered, but they don't have the heart to do the deed. Instead, they're hoping that the Greeks commit suicide
Greece isn't "ready" to default or leave the eurozone, at least for now. A huge percentage of the Greek population has been led to believe that if Greece were to exit the euro, it would be the end of civilization. But at the same time, an ever growing number of Greeks are comparing their current situation to life under the generals of the coup, or the bad old days of Nazi occupation.
Behind the scenes it's easy to find euro banker/racists in $2000 suits in the major banks disparaging Greeks for being lazy and shiftless. They blame the Greeks for phony bookkeeping, lavish pension, civil service, and union rights as the one cause of the problem., denying the fact that Goldman Sachs came to the Greek government with the proposition of cooking Greek books. The banksters have stomped on Greek hands holding onto the train in the course of the negotiation for the current tranche of financing. But they can't come out and publicly fess up to what they'd like to see happen. Instead, more and more punative provisions are imposed on the Greeks, even as a total conciliatory tone and policies (wink,wink, nudge, nudge) are given to "firewall" countries like Italy and Spain.
You can't help but thinking that the negotiators for the EU are getting ready for Greece to finally throw in the towel one way or another in the near future -- perhaps in April when there are national parliamentary elections. On balance, possibly a majority of EU officials probably want to see Greece stagger on. Given the choice, policymakers nearly always want to buy more time.
There's no question that European financial authorities have taken a variety of steps to quarantine the possible bad effects in the world market if Greece falls/jumps off the train. The European Central Bank has swapped bad Greek debt for low interest ECB paper, much like a mechanism that the US Federal Reserve uses. In addition, banks have been marking down the value of Greek assets in their portfolios and setting aside additional reserve funds. The ECB has been capitalizing Spanish and Italian banks quite richly, making them look much less likely to catastrophically swoon in the event of Greek failure. The world stock markets are now looking at Greece as some kind of isolated, special case.
You can debate how far the Greek domino will affect the finances of the rest of the PIIGS. Interest rates on Italian and other benchmark government bonds has fallen dramatically in a short period of time, reflecting the fact that much less risk premium is priced into failure. And the outstanding value of Greek paper has declined to 80B euros now, as compared to 200B euros in 2009.
The prospect of keeping Greece on track is looking a lot worse, especially if you're one of the northern European politicians who always thought that aid money to Greece was like pouring water down a gopher hole. For them, pulling the plug on Greece would send a powerful message. Beware any country that would put the welfare of its citizens before the financiers and plutocrats who want their interest and dividend payments. The market must rule!
But the other half of their brain is telling them, "What about that Lehman Brothers thing that Hank Paulson pulled in early September, 2008?" Shortly thereafter, Bank of America, Citigroup, Washington Mutual, Countrywide Capital, Merrill Lynch et. al. were in a helluva pickle. Cause and effect. And so this ineffectual dance continues, but not for long.
It's not good form to propose a cure for anorexia by having the patient go on a restricted calorie diet. And this is exactly what piling austerity program on top of Greek austerity is doing. Sooner or later, either the patient will die or rebel 100% against the treatment. And then we will see the financial markets do the equivalent of trying to shift gears in a speeding truck going down a winding mountain road without any brakes or clutch.
*Much of the material in this blog came directly from Stephanie Flanders' latest post as economic correspondent for the BBC. But I've larded my language throughout hers.