Greek debt tragedy coming to a tipping point

European finance ministers have failed to reach agreement to release the next tranche of debt relief to Greece and have instead thrown the problem back to the Greek prime minister who now has to secure further budget tightening before any more money will be made available.

So much for German chancellor Angela Merkel’s support last week. The blame for the inaction is widely spread, and avoiding blame is what European democracy often seems to come down to these days.

No confidence

There will now be a confidence vote in the Greek parliament which will be very difficult for the government to win. If the prime minister loses and goes to the country for a general election then the opposition will win. They will be highly unlikely to be able to agree to measures that would win more financial support from the European Union.

Thus an exit from the euro by Greece looms and a default on its huge debt mountain. French banks have the highest exposure at $56.7 billion, Germany follows at $33.9 billion and the UK at $14.7 billion with the US next at $7.3 billion.

Large though these numbers might appear they are not losses that cannot be handled by the global banks. The Lehman bankruptcy was bigger than the total Greek debt of $485 billion. However, Greece is hardly the only EU country with a debt problem. Spain and Italy come next followed by Ireland, Portugal and even Belgium.

Gobal financial crisis II

If a crisis in the European banks forces up interest rates across the board, as it will, then all these countries face higher interest payments that will require more public spending cutbacks, and push them into a situation very much like Greece today.

Which country will be the next to default rather than make painful spending cuts and behave in a responsible fashion? Unfortunately once the precedent is set it will be very hard to prevent these countries taking the rather easier path than austerity.

That leaves the world with the prospect of a major crisis in the European banking sector, probably far bigger and more widespread in impact than the Lehman bankruptcy almost three years ago that triggered the global financial crisis.

This is part 2 of the global financial crisis in which the catalyst comes from Europe and not the US. It makes rather a nonsense of Wall Street’s fiddling with housing data while Rome burns.