My Big Fat Greek Bailout

A week and a half ago, financial luminaries in Europe (and in the U.S. Federal Reserve Bank) decided to give bankrupt Greece a larger line of credit to bail them out of their financial crisis.

In simple terms, Greece, like many US families, went into debt by spending more than it produced. In fact, it's debts totaled 125% of its total national production.

That essentially means that if everyone in Greece put all of their annual income to paying off the national debt, they still wouldn't have enough to keep Tony Soprano's goombahs from breaking their kneecaps.

The total bailout for Greece is somewhere around $1 trillion, a jawdropping number for such a small country. But the bailout also came with a few provisos, the "austerity measures" that we've been hearing about and that the Greeks have been rioting about. "Austerity measure" is a nice term for "you've been eating more gyros than you can afford, and now it's time for some budget cuts."

I'm not going to go into an opinion on bailouts. I've done that before. Rather, I'll note that the Greek bailout is interesting because of how common and wide spread the circumstances are that have lead to it.

The Greek government, in order to get reelected, promised everything to the voting public. Government jobs, high salaries, pensions, health care, digital converter boxes... anything to garner votes from Androcles Q. Public. And the governed didn't really worry about how (or whether) all those bribes would be financed.

Anyone who was around two years ago during the "Hope and Change" campaign will recognize this. The "two" parties in the United States were falling all over each other to see who could promise more government bribes to voters.

The same has happened in other European countries. Spain, Portugal, Italy and Ireland are also in dire financial straits. In fact, the Greek bailout was seen as a way to forestall a financial domino effect that would leave those countries' economies in ruin as well. Even the U.K. is struggling, with some estimates placing it's debt at over 103 percent of its GDP.

Scott Mather, head of global portfolio management at Pimco (one of the largest bond buyers (i.e., "loaners of money") in the world) put it this way in a recent interview with NPR,

Most of the developed world is screwed. That makes this crisis particularly different from anything we've seen in our lifetimes.

The countries that aren't screwed are the emerging market countries. They have low levels of debt. The emerging market world is lending money to the rich world so the rich countries are continuing to spend more than they've made.

Mather noted that there is no easy way out of the debt mess. Bailouts like this only delay the day of reckoning. The only way to reduce debt is to either cut spending or default on your bonds.

This is going to happen in Greece and the rest of Europe. It will happen in the UK and in the US as well. People have to develop a better connection with what government spending means for them personally. We've had the better part of a couple of decades where people have lost that connection. [Government money] is viewed as manna from heaven and it's an entitlement, something that is deserved and shouldn't have an impact or repercussions on them.

When the country was discussing the "health care reform" bill a few months ago, one of the so-called arguments was that, as one of the richest nations in the world we can afford to give everybody great health care. After all, if Europe can do it, we can too.

Well, it turns out that Europe can't do it. We probably can't either, not without making serious sacrifices in quality of life. And let's face it, we're due for some drastic quality of life downgrades anyway. We've just had it too good for too long.

I don't know how much longer the strategy of bailout-bubble-burst will last here in the US. Hell, even now it's considered safer to lend money to Iraq than the State of California.

I do suspect that we will have the illusion of an economic recovery over the next two years or so. But you don't have to be Dave Ramsey to know that the party will eventually turn into a pretty serious debt hangover.

When that happens, it won't be just a Greek tragedy.

tagged: Greece, Europe, Greek, bailout, EU, Pimco, Scott Mather