Cancer is a formidable disease. It starts with a few small, isolated cells. Early detection and removal of the malignancy ofte leads to recovery. But left untreated for too long, the malignant cells spread to engulf and destroy the entire organism.
In a similar way, untreated financial dysfunction can engulf and destroy entire economies. Early in 2010, it became clear that Greece – with its out-of-control deficits, bloated and militant public service, business crippling bureaucracy and endemic corruption – was far too diseased to recover. News that the Greek government had fraudulently gained entrance to the euro zone by hiding real debt ratios (which were well beyond the limits required for European Union membership) gave Brussels ample justification for cutting Greece away before the disease could spread. Instead, the EU and the International Monetary Fund opted to pour €110-billion ($149.7-billion)down the dark hole that is Greece's terminally ill economy. Now, with Greece having burned through that money in little more than a year, comes a €109-billion injection.
Theodore Couloumbis, a professor of international relations at the University of Athens, rightly diagnosed the root cause of the country's malignancy when he said: "The big problem of Greek society is the tendency to consider somebody else responsible for everything that goes wrong." Given its fraudulent entry and entrenched irresponsible behaviour, the really puzzling question is why other euro-zone countries would transfer the hard-earned wealth of their taxpaying citizens to bail out the ungrateful and often rioting Greeks. We can only imagine how perplexing and frustrating this question must be for German citizens, who are footing the bulk of the bailout bills.
The euro zone's failure to cut away the Greek cancer when it had the chance has turned the prospect of a Greek debt default into a pathogen threatening the 17-member zone. And the reason for that has everything to do with who holds Greek debt. Greece has a sovereign debt of €340-billion, more than half which is held by French, German and British banks along with the European Central Bank. German banks hold about €40-billion in Greek government bonds, British banks hold about €19-billion and the ECB holds €49-billion. French banks have the greatest exposure at €65-billion. (No wonder French President Nicolas Sarkozy let out a sigh of relief when his Finance Minister, Christine Lagarde, was chosen as the new head of the IMF.)
At more than €30,000 for every man, woman and child, Greece's debt greatly exceeds the value of the country's assets. And it's a deadbeat debtor with negative future prospects. Without euro-zone backing, the market value of Greek bonds would fall to almost zero, wiping billions of euros off the balance sheets of European banks whose health is critical to the region's faltering economic recovery.
Even as the cost of Greek life support moves to €219-billion, it's apparent that won't be enough to save the patient. Given the costly and politically divisive struggle to save the comparatively small Greek economy, financial markets are understandably skeptical that the euro zone could help much if any of its larger members were to edge toward debt default. This contagion fear has seen bond ratings collapse in both Portugal and Spain. The sovereign debt disease has now entered a dangerous new phase as Italy, the zone's third-largest economy with a debt of more than five times that of Greece, moves under the market's microscope. Together, these four countries represent a whopping 40 per cent of the zone's economy.
Sadly, these events were easy to predict, and to prevent. As I concluded in a Feb. 22, 2010, column: "There is a much better way to ensure the Greek … pandemic doesn't infect the whole euro zone: Cut them loose. … The economic crisis has triggered a series of bailouts protecting companies, individuals and unions from the consequences of their actions. Now countries themselves are expecting to be relieved of that responsibility. An EU bailout of Greece would surely lead to the rampant spread of moral hazard disease deadly to the future of the world's largest economic zone."
The moral of this sad saga is that whether it involves personal, corporate or national health, failure to act decisively when we have the chance almost always leads to lasting regret, and sometimes to complete demise.