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The · Psychohistorian

Why Greece shouldn't matter

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The Greek debt crisis has been much in the news recently. Basically the Greek government took advantage of low interest rates on European Union governments' debt to give out lots of money to their population, both through handouts and by refraining from enforcing taxes. Now Greece is realizing they're overextended.

In the normal course of things, this wouldn't really matter that much. Greece might end up defaulting on some debt, and then perhaps restructuring it, forcing bond investors to take a loss. Investors would then realize that being an EU government doesn't guarantee full repayment, and would require higher interest on Greek debt in the future - which would force Greece to adopt more realistic fiscal policies, while giving them years to make the necessary adjustments as their bonds gradually rolled over. As in the case of California, there might be a few painful adjustments as the locals learned to live within their means, but the impacts on global markets would be minimal.

So why "shouldn't" matter rather than "doesn't" matter? Because it's possible that bailouts from the EU will send the message to other governments that it's beneficial to wait for a bailout rather than make sound fiscal choices. Thus far, it looks like the Greek bailout package doesn't do that - partly because it looks like Greece will still have to default on some debt - but there's always the opportunity to make things worse.

A good summary, which incidentally seems to indicate that Geithner is again in the "make things worse with bailouts" camp:
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On May 7th, 2010 07:56 am (UTC), izmirian commented:
I have to admit that I have a hard time getting too upset about these situations, even for California where I live. I do wish that the governments did a better job of smoothing out the economic ups and downs by saving in the good times so the cuts weren't quite as severe in the bad times. It's especially severe in California since so much of the revenue comes from income taxes which go up and down dramatically with the economic cycle. I wonder how many cuts to services the voters in California are willing to take before raising taxes becomes an option.
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