Robert Samuelson writing in the WashPost:
There’s an Orwellian quality to Europe’s latest financial rescue. Words lose their ordinary meaning. Greece, for example, has clearly defaulted, but no one says so. In July, private lenders agreed “voluntarily” to accept an estimated 21 percent reduction in their loans to Greece. Now that’s been pushed to 50 percent, and private lenders’ consent is still described as “voluntary.” Well, it’s about as “voluntary as when one hands over one’s wallet in response to the choice of, ‘Your money or your life,’ ” notes Douglas Elliott of the Brookings Institution.
Initial reaction to the package was favorable. American stocks soared after the announcement. But details are murky (regarding the bond insurance and the SPVs, for starters), and skeptics abound. “I’m surprised that the markets are so relaxed,” says economist Desmond Lachman of the American Enterprise Institute. Two large problems loom.
The first is the specter of default. Greece crosses a line, because many European leaders long maintained that no euro-using country would be permitted to default. Now that this has happened, some investors may sell other weak European bonds and set up the feared chain reaction. The extra bank capital may not provide much protection. Elliott fears the added 100 billion euros is too small to be reassuring.
The second problem is austerity. Like Americans, Europeans face a contradiction: To reduce budget deficits, they need to cut spending and raise taxes; but more taxes and less spending may depress their economies, increasing budget deficits. Higher bank capital ratios pose a similar problem. One way to increase those ratios is to raise capital from private investors or governments. Another way is to cut lending; the size of the existing capital increases in relation to loans. But less lending would hurt the economy. “They’re setting themselves up for a credit crunch,” says Lachman.
What Europe really needs is a massive, though temporary, global bailout that would give it time to adjust. Lacking that, it’s unclear whether the latest package is a genuine solution or just a stopgap.