For members of the key eurozone economies, the debate surrounding a potential Greek bailout culminated on Monday with the extension of a lifeline to the Greeks, should they in fact request one. Totaling $40 billion in loans at five percent interest, the eurozone Greek bailout supplements the $20 billion the International Monetary Fund has made available at an even lower interest rate.
The Greeks, at the end of May, have 20 billion euros (roughly $27 billion) of national debt coming due. They have been scrambling to gather enough cash by borrowing from the commercial markets — a task made infinitely harder by market fluctuations. The Greeks had no money to pay off debt in May, let alone enough to offer 7.5 percent annual percentage yield on it to investors. With the uncertainty of a eurozone lifeline and rapidly escalating concerns of Greek default, interest rates on Greek debt skyrocketed as the Germans, among others, held steadfast against a Greek bailout … until Monday.
This aid package is ultimately a game of diplomatic and economic chicken. By voicing their support both politically and now economically, the eurozone is hoping to stabilize markets, to lower interest rates on Greek debt and to enable Greece to borrow enough from the commercial markets to meet its debt obligations come the end of May. Eurozone nations, particularly Germany, do not want to have Greece use the emergency funding — if for no other reason because it would set a precedent to other struggling European nations such as Italy, Portugal and Spain that austerity is optional, and that bailouts are now euro zone modus operandi.
By making the $40 billion available, the group of 16 is hoping it creates a situation whereby it never has to be used. The Germans, as the euro zone's strongest economy, were staunchly against any form of Greek bailout, so the only way Germany could have been brought aboard was an understanding that presenting the option of a bailout would stabilize markets and resolve the Greek question at minimal cost, at least for now.
The eurozone may be best served to remember, however, how the Greeks got into this mess — horrid macroeconomic mismanagement, an early retirement age with lavish benefits and an inability to collect taxes. Even if the Greeks are able to borrow enough, they will only be keeping their heads above water temporarily. Added cash doesn't change a broken economic system, nor does it ensure effective austerity measures are enforced.
Furthermore, it's not good politics if you, as a euro-zone leader, agree to a $40 billion aid package for Greece — rewarding economic recklessness that enables Greeks to still retire before most in your country, and very comfortably at that. When every nation has had to deal with the global recession, why should your precious cash reserves go to supporting a country that spent and mismanaged its way into this dire situation?
Why? Because the consequences of doing nothing are too dire for global markets. Greece is not a majorly important global player, either politically or economically. But if Greece were to default, the chances that the major economies of Spain and Italy would follow Greece to the financial brink would dramatically increase.
Next could come the undermining of the euro and, in turn, major instability in the eurozone economy and global markets. Though a bailout is never ideal, the other option — letting the Greeks slide into default — is too risky for regional and global economic stability. Besides, the bailout may never need to actually take place, anyway. Just the mere presentation of the bailout plan has already begun to stabilize markets and significantly lower interest rates on Greek debt as of yesterday. The eurozone's game of "bailout chicken" may just work to perfection.
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Teddy Minch is a senior majoring in political science. He hosts "The Rundown," a talk show from 3 to 5 p.m. every Friday on WMFO. He can be reached at Theodore.Minch@tufts.edu.
