21 January 2010
Why all the kerfuffle about Greece?

There’s some sort of EU commission into Greece’s finances.  Or is it the IMF?  Or both?  And Greek Prime Ministers and Finance Ministers keep getting interviewed on CNBC.  And the whole issue keeps making the number one slot on the financial news.  And there are ominous rumblings about Greece being chucked out of the Euro.  The sort of ominous rumblings that can turn into ominous realities really quickly in much the same way that that ominous and ludicrous rumbling about sterling leaving the ERM all those years ago turned out to be ominously and ludicrously prescient.

But the deficit is “only” 12.7% of GDP.  And it’s the overall debt level that matters.  When that gets up to 200% then you’re in trouble.  I don’t know where Greece is.  And apparently, neither do they - lots of dodgy statistics and off balance sheet accounting making things very foggy.

But, hey, who cares?  If Greece cannot finance her debts eventually no one will lend her money and she will simply have to stop spending the stuff.  Problem solved.

At least, you would have thought so.  I mean, at least I would have thought so.  But all this activity suggests that something’s up.

I wonder if the fear is that if Greece goes bust, the Italians, Spanish, Portuguese and Irish might start to think they’re next.  When that happens they might warm to the idea of the ECB printing money to pay off their debts (monetizing the debt as it is known) hence creating inflation.  And they might lobby for it.  If you’re German there’s a good chance you don’t want to pay for Greek pensions through inflation and perhaps you feel that now would be the best time to draw a line in the sand.

Thought:  this shows that the real purpose of central banks is to finance government debt.  In normal circumstances that is done by selling bonds.  In extreme circumstances that is done by printing money.

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