Things are heating up between Greece and the rest of Europe and time is quickly running out without a solution.
There are really only two solutions: Greece either 1) leaves the Eurozone and returns to the drachma which will rapidly lose value as they once again have the ability print as much as they want, or 2) they remain in the Eurozone but write-down the existing debt to a level their economy can handle. These are the only two solutions that will allow Greece to eventually return to a path of growth (after a very painful but quick adjustment). The current arrangements with the European Commission (i.e. Germany), ECB and IMF have been and will continue to be a slow death to Greece. There’s absolutely 0% chance of their economy ever recovering under these conditions of austerity which means they’ll never be able to pay off the debt owed. Germany doesn’t like this but option #2 is probably the cleanest solution for Europe.
I’m sure Germany understands that they’re crippling the Greek economy. At this point, I believe they’re sacrificing Greece as a relatively small pawn to buy time for the ECB to buy enough of the worthless European bonds from bank balance sheets so that the whole European banking system doesn’t implode in the event of a default – that’s what this is all about and I don’t think the people of Greece will take kindly to this once it becomes evident.
Owners of Greek government bonds are about to (once again) find out why government bonds are the worst long-term investment you can make. You’re either repaid with dollars that are slowly inflated over time, rapidly inflated via currency devaluation, or the debt is written down and you don’t even receive your full investment in return. Nations have a never-ending track record of doing this.
If you’re interested in a rather detailed history of the global financial system and why government bonds are the worst long-term investment you can make, check out The Creature from Jekyll Island, a Second Look at the Federal Reserve, by G Edward Griffin. It’s a real eye opener! I don’t necessarily agree with all of the author’s final conclusions but the book is one of the best accounts of history from a financial perspective.
-Nick