Editor's Note: We've been trying all week to put up an excellent video of Peter Schiff talking to the OWS protestors. Peter has mad that tougher by sending us excellent written commentary everyday on compelling events in finance. We finally stick the video on the tail end of this peice on the Greek debacle because you just have to see it. Oh, and thanks Peter for saying what we are all thinking.
In an agreement announced overnight, the European Union offered $100 billion to stem an imminent Greek debt default in exchange for a 50% haircut to Greek bondholders. This is a bittersweet victory for those of us who believe in the power of the free market.
When the US government undertook its largest round of bailouts in 2008, it bought nearly worthless assets at 100¢ on the dollar. At the very least, European authorities have recognized that taxpayers shouldn't be responsible for shouldering the entire burden of bondholders' investments. However, Brussels is still committed to making taxpayers bear some of the losses - and this is still fraught with moral hazard.
In the absence of continued EU bailouts, Greece would have been shut out of international credit markets years ago. The purpose of European "assistance" has been to keep the Greek debt market liquid enough for Greece to continue borrowing a little bit longer. In theory, this was supposed to buy the Greek authorities time to get their house in order - but, in actuality, it has removed the very incentives necessary to make them reform.
Take Ireland as a counterpoint: they're undergoing a true, painful, and arduous austerity program, and as a reward, they still have to pay back their bondholders at par and are receiving only a fraction of the EFSF bailout funds that are being offered to Greece. It's no wonder that, in the wake of today's news, Ireland has called for another round of EU subsidies and permission to impose haircuts on its bondholders.
German Chancellor Merkel stated that the goal of the latest accord is to help Greece achieve a debt-to-GDP ratio of 120% by 2020. In essence, they're trying to take the patient from death's door back to a coma. Does this really solve the problem? Who is going to lend to Greece now, in the wake of a 50% haircut and with a target debt-to-GDP that would make most countries blush? None of the underlying spending problems have been resolved by this deal, and Greece is still by any measure a basket-case.
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