Reining in Europe’s Debtor Nations
With international investors no longer willing to finance Greece's external deficit, and even shying away from refinancing its existing debt, only three options remain, all of them bad: permanent EU subsidies, a Greek depression, or a Greek exit from the euro. The lesson is that a currency union needs ironclad budget discipline to avert a boom-and-bust cycle in the first place.
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MUNICH – The eurozone countries have now agreed to provide some €80 billion in cheap loans to Greece over the next three years, and hope that the International Monetary Fund will provide another €15 billion at the least. But the interest rate that Greece must pay buyers of its government bonds has shot up to a record-high level of nearly 9% – 5.9 percentage points above the benchmark rate paid by Germany. That translates into an additional €16billion per year in interest payments on Greece’s current debt of €273 billion. Obviously, markets still believe that Greece will default on its debt.