The new government in Greece is staring down the European Union over the money they owe.
What happens when a debtor can’t pay and owns no assets that would cover the debt? Typically, the debtor should go bankrupt. That can be bad for him but it can also be bad for his creditors. After all, the way that people with money try to stay ahead of inflation is by loaning that money out so that they get some interest. If my net worth on paper looks significant only because it is believed that I will be paid back with interest on the loans I have made, then I am going to fear any public acknowledgment that my debtor cannot pay back my money.
Thus, Greece is now holding Europe between two undesirable options. They can either let Greece default and admit that none of the loans made to Greece will ever be secure. Or they can continue to loan Greece money even though they can’t pay it back.
The voters in Greece got tired of having austerity imposed on them by other countries. They voted in a regime that would side with their nation over against the rest of Europe. Reuters now reports on the showdown: “Greek finance minister says euro will collapse if Greece exit.”
Greece’s new leftist government is trying to re-negotiate its debt repayments and has begun to roll back austerity policies agreed with its international creditors.
In an interview with Italian state television network RAI, Varoufakis said Greece’s debt problems must be solved as part of a rejection of austerity policies for the euro zone as a whole. He called for a massive “new deal” investment program funded by the European Investment Bank.
“The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse.” Varoufakis said according to an Italian transcript of the interview released by RAI ahead of broadcast.
The euro zone faces a risk of fragmentation and “de-construction” unless it faces up to the fact that Greece, and not only Greece, is unable to pay back its debt under the current terms, Varoufakis said.
“I would warn anyone who is considering strategically amputating Greece from Europe because this is very dangerous,” he said. “Who will be next after us? Portugal? What will happen when Italy discovers it is impossible to remain inside the straitjacket of austerity?”
It is too bad that these newly elected leaders of Greece don’t simply leave the European Union rather than trying to maintain their position in that country. But either way it doesn’t matter. As economic blogger Mish stated recently, “What cannot be paid back won’t.” A debt that cannot be repaid will not be repaid.
What will be the economic consequences? I am sure they will be felt on both sides of the Atlantic. Debt leads to poverty. Sounds like we are about to get a lesson in Tea Party reality.