Waiting for Clarity on a Greek Bailout

As most of you already know, Greece is in big, big trouble.  Its deficits are enormous, its debts are larger, and its credit quality is so shaky that it may set a world record on the Richter Scale. For a while now, the consensus has been that larger, more solvent members of the eurozone would bail the country out. Greece's creditors are saying, in effect, "Nice eurozone you've got there . . . shame if anything happened to it."



And it would be.  There's no real mechanism for a country to exit the eurozone.  That is, from all accounts, deliberate--a currency zone doesn't work if you start with the assumption that countries may exit at any time.  The problem is, if a country is forced to exit, the process is . . . well, let's just say it's disorderly.  If Greece leaves the currency union, the best case scenario is a local bank run and a sharp jump in interest rates for euro-denominated debt, particularly that issued by weaker members, as lenders start pricing in currency risk.  The worst case scenario is that Ireland, Spain, and Portugal also suffer bank runs, forcing them to exit as well, which fatally weakens the whole project.

This is why almost everyone expects the richer members to eventually come through.  The problem is, there's also no mechanism for delivering a bailout.  Greece can't ask for one, because it thinks this would undermine the credibility of its plan to reduce the deficit.  (Note to Greece:  this is like Paris Hilton worrying that buying an Amy Tan novel might undermine her reputation for intellectual seriousness).  And Germany, the obvious candidate to lead a bailout, is not eager to do so.  So while everyone knows this is going to happen, no one is quite ready to say, "Hey, we're going to hand Greece a bunch of money and get little in return except, well, not having our currency zone broken."

No one has the authority to do the obvious:  swoop in with a bunch of cash, in return for which the Greek government gets put on a serious diet.  I mean, they can tell Greece to get its fiscal house in order, and negotiations over this sort of thing are part of the reason for the delay.  But while they can force Greece to agree to austerity measures, they can't actually enforce them, other than with a set of fairly pitiful sanctions.  Which is why Greece is running such huge deficits in the first place, even though the rules of the monetary union say that deficits aren't supposed to exceed 3% of GDP.  Since it is entirely possible that Greece will find itself in the same pickle ten years hence, no one's exactly enthusiastic about making this sort of committment.  Giving Greece money also gives markets the idea that Greece is Too Big to Fail, which means that if Greece does end up in trouble again, a bailout will be even more necessary. 

None of the choices are good.  Thus we wait until everyone, including the Germans, reluctantly concedes that there is no other way to get out of this than to funnel money into the eurozone's most profligate government.