Foreign Perspectives

The basic problem that Greece seems to have is that it has never really properly adjusted from the days when it could devalue the Dracma every couple of years.

In such an environment, you don’t really need to worry too much about creating a real economy as you can always pull in more tourists by reducing the value of your currency every now and again. Since that hasn’t been an option for ten years, what they did instead was to borrow more and more money to balance the books until they reached the point when they could borrow no more.

The problem now is that they have no economy to generate the money required to repay all those loans and neither can they devalue to reduce the value of the loans. Instead, what’s going to happen is that they will have to have those loans renegotiated to reduce their value directly. Snag is that this just pushes the refinancing out to the organisations which provided the loans who in turn need to be refinanced. The bigger problem is the sheer scale of the loans which, built up over ten years, amount to a significant proportion of Germany’s GDP. Proposals to privatise the debt just relocate the problem.

The current refinancing is essentially just lending more money to allow them to make the debt repayments without fully recognising that the capital needs to be repaid too. That’s, naturally, where the problems are going to mount up.

And, of course, that’s just Greece with Spain, Italy, Portugal and Ireland not too far behind them.

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