At a meeting of the International Monetary Fund in Washington this past weekend, European government leaders said they would significantly step up their response to the eurozone’s spiraling debt crisis. With the world economy hovering on the edge of a double-dip recession, European leaders had to acknowledge that their efforts so far have not been sufficient. A default of Greek debt is quickly moving from a threat to a reality, with Group of 20 sources saying that it is likely that up to 50 percent of the face value of Greece’s 350 billion euro debt will have to be written off, but only after European leaders have vastly shored up an existing bailout fund, the European Financial Stability Facility.
European Union leaders had to acknowledge that a second 109 billion euro bailout created by Europe and the International Monetary Fund in July has failed to solve the debt crisis. They must now spend the next six weeks seeking to boost the bailout fund, the European Financial Stability Facility (EFSF), by nearly 5 times it current size. Currently the EFSF can make as much as 440 billion euros, or $600 billion, in loans to troubled nations and banks. On Saturday, Olli Rehn, the European Union’s monetary affairs commissioner, said that there is “increasing political will” among European leaders to address the fears of investors and increase the bailout fund, so that it can insure a few trillion euros in loans.
US Treasury Secretary Timothy F. Geithner said in a statement on Saturday that “the threat of cascading default, bank runs and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally.” The Obama administration has been putting the pressure on Europe, especially Germany — Obama has met or spoken with chancellor Angela Merkel 28 times since he has been in office — to intensify efforts to prevent contagion from Greece’s debt crisis spreading to the other weaker eurozone economies of Italy, Ireland, Portugal and Spain. On Sunday, Merkel spoke of erecting a “barrier” around Greece so that, as she said, “we can in fact let a state go insolvent” if it can’t pay its bills
Continued instability in Europe might undo not only the “fragile,” sputtering US economy but Obama’s re-election prospects if investors, watching one European country’s economy after another fall under its debt burden, hastily pull out their holdings and set off a credit crisis like the collapse of Lehman Brothers — only on a global scale.
Growing Economic, Political, Societal Crisis in Greece
But investors remain deeply unsure if even these measures can save Greece from default. Greece’s debt is $360 billion, totaling 150 percent of the country’s GDP and 5 times that of Argentina which defaulted on $95 billion of debt in 2001.
Photo taken in Athens on September 22, 2011, by mkhalili
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