Is Greece Fragility Squared?

Canceling 100 billion euros ($113 billion) of Greece’s debt would enable the country to cut the load in line with targets set by the international authorities that bailed out the nation, the country’s debt adviser, Lazard Ltd’s Matthieu Pigasse, said in a radio interview Tuesday.

 European leaders on Monday urged Greek Prime Minister Alexis Tsipras to pare back his ambitions for easing the financial pressure on his people, saying they would go against the conditions attached to the country’s bailout. Greece’s public debt currently stands at more than 320 billion euros, or about 175 percent of GDP, making it Europe’s most-indebted state when measured against output.

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 My view:

Austerity has failed in Greece.

The population knows this as the experiment of the Troika has produced third world living standards for many Greeks and 25% unemployment for 5 years.

The amount of debt has climbed to the unbelievable high level of 175% of GDP.  This level is more than double the maximum amount serviceable in an efficient advanced economy.

As unpalatable as a write down is to creditors, debt that can not mathematically be repaid will simply never, ever be paid back. 

The real issue here is twofold.

1) The major German bank Deutsche Bank holds huge amounts of Greek debt that could cause bank insolvency in the event of default or write down.

2) Other debtor nations of the EU (Spain, Portugal, Italy, and even France) would look for similar write downs which would impair other banks.

The Greeks are desperate and determined.  The Germans are defending the largest German bank.

This situation looks like a Gordian knot - rather difficult to untangle.

While at this point a bridge loan will likely be negotiated for a band aid solution, this summer we can anticipate more fireworks over the unworkable austerity measures afflicting the Greek, Spanish, Portuguese, and Italian economies.

The question of exiting the Euro is one of when rather than if.