Citigroup’s (NYSE:C) Mark Schofield, global head of interest-rate strategy in London, said concerning the Greece sovereign debt debacle that “We’re seeing contagion.”
He is referring Portugal, Spain and Italy, and I would add Ireland is right up there too, although they and Italy probably aren’t the immediate concern, if we can trust numbers being thrown around by the governments. Ireland has taken some preemptive steps, and may be affected less than their counterparts at this time.
Just yesterday the amount of the budget deficit of Greece was revised upwards, signifying they’re either still hiding how bad things are, or they’re incompetent; possibly both.
When talking about the contagion, Schofield is referring to the potential collapse of the bond market, which is starting to happen in Greece, as investors are now acting as if there is no escaping a debt default by Greece, the reason Greek bonds have been rising so quickly.
Earlier in the month this seemed to be contained in other EU countries, but over the last several days that has changed as Portugal and Spain have their spread rising quickly, with Portugal’s rising to 1.83 percentage points from 0.83, and Spain to 1.38 percentage points from 0.82 on Thursday.
The problem with looking at the bond markets is we’re seeing the effects of the sovereign debt crisis while potentially losing the sight of the cause, which was enormous budget deficits from these countries promising their people what they couldn’t afford to give them.
Now the outrage is coming out because many people and programs will have to be cut back in order for the countries to survive economically. This is why Germany rightly is so opposed to the bailouts, as what happens once Greece is bailed out and a growing number of nations in the EU stand in line to get their share?
This all goes back to socialism and redistribution of wealth from the productive to the non-productive. It’s not rocket science, and some economists have been warning about this for decades; the model isn’t sustainable and never has been.
How can a country simply guarantee wages for people with limited contributions to the workplace? How can they offer pensions that the rest of the population must feed their money to in hopes they’ll get one some day?
The answer from Europe is this: they can’t.
This is why countries must learn to get out of the way and let the free markets take care of this. Governments and central banks, as so obviously seen from this debacle, aren’t able to do it, and aren’t meant to.
Others are saying concerning bailing out Greece that even that wouldn’t help them now, and there would need to be another one in a year or two down the road.
This could ultimately bring down the euro and the European Union, as there is no way to sustain the practices of these countries, and Europe probably can’t handle more than Greece. If Portugal and the others fall as well, there’s nothing that can save them.
The alternative would to go international with their plight, but as the reasons behind the debt is unveiled, who in their right minds would bail out people and countries who have developed a culture of entitlement, and are outraged when it even brings their country to the edge of ruin, and now expect other countries to support their entitlements.
As noted by many, this has become a vicious cycle in these nations, and until they deal with the foundations of that cycle, it won’t matter how much money is thrown at it, it’ll come back time and time again until it is.
This is why government must be limited and central banks ultimately closed down, as the promises made to people of these countries come from the temporary interference from both this entities in order to gain favor with their people, but as we see here, in the end it can destroy them and those countries around them.
Think of how deep this really is. If the European Union is balking over tiny Greece, and Greece is worst off than originally thought, and a challenge to EU, how could other countries like Portugal, Spain, Italy and Ireland even be thought of as being able to be helped in light of that?
The answer is they can’t. Until free markets, entrepreneurship and innovation are released in these countries, along with the removal of economic props which aren’t sustainable, there won’t be any medicine applied to their circumstances which will work.
The EU and the IMF now realize that, and they’re becoming more hesitant to enter the fray which is sure to become a contagion which will lead to a domino effect, which is already beginning to happen.
