- The Washington Times - Wednesday, May 18, 2011

The United States is just beginning to wrestle with its massive debt problem, but in Europe the debt crisis is advancing rapidly with worries about defaults and turmoil re-emerging in global markets.

Efforts to revive Greece, the first nation to get a bailout from the European Union and International Monetary Fund a year ago, appear to be failing as the country’s austerity program has sent its economy into a tailspin and worsened its budget deficits rather than cured them.

Analysts say the kind of a “debt trap” Greece has fallen into could also emerge in other debt-burdened states such as Ireland and Portugal, which was the latest to get a bailout this month.

With social and political resistance already intense to the deep budget cuts Greece has carried out in the last year, Greece is faced with two stark options: Either defaulting — that is, restructuring its debts and offering creditors partial payments to lower burdensome debt payments — or getting more loans from the IMF and EU, adding further to its huge and already unsustainable debt load.

Greece has reached the point where, under realistic scenarios, debt dynamics are unsustainable. The countdown to restructuring has started, in our view,” said Piero Ghezzi, an analyst at Barclays Capital.

Under its own efforts, and with help from the EU and IMF, Barclays estimates that Greece could achieve only about half the deficit cuts needed to become solvent again, he said.

As in the United States, debt payments constitute a large and fast-growing part of the budget in Greece, crowding out spending on other programs and making it even harder to curb the debt.

“Fiscal consolidation will need to be helped by an effective debt reduction” to get Greece out of this debt trap, Mr. Ghezzi said.

Expecting the worst

Barclays is not alone in believing that Greece is essentially bankrupt and has little alternative to reneging on its debts. Global financial markets have been bracing for the possibility for weeks, creating a major distraction that has helped take investors’ focus off the United States’ own big debt problems.

A survey by Bloomberg News found that 85 percent of investors worldwide expect Greece, Portugal and Ireland to default. Many even view that as the best alternative since further draconian budget cuts would only worsen such debt-strapped countries’ recessions and zap the revival of tax revenues needed to close gaping budget gaps.

But debt restructuring in Greece presents many risks. It could trigger a renewed crisis in global financial markets by forcing Portugal, Ireland and larger countries like Spain into the same kind of debt trap.

It also threatens the solvency of European banks that hold the majority of the outstanding debt of Greece, Portugal and Ireland and would be forced to take big losses on those holdings.

Because of the threat of contagion to the banks, European countries and global financial markets, Mr. Ghezzi expects European authorities and the IMF to try to postpone default by offering more loans and softening the terms on their existing $156 billion loan package for Greece.

“We expect contagion fears to continue to dominate EU decisions,” he said. But by early next year, “the status of Ireland and Portugal should be clearer” and the EU and IMF will probably bow to the inevitable and agree to a debt restructuring in Greece, he said.

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