- The Washington Times - Friday, September 16, 2011


Treasury Secretary Timothy F. Geithner hopped over the Atlantic to meet with his European counterparts Friday. Things are so desperate in the eurozone that the idea of a leveraged bailout fund, similar to the one used in the United States when it was hit by the collapse of Lehman Brothers in 2008, is on the table to address Europe’s ongoing financial crisis.

Such a scheme won’t help the Old World any more than it did the New. It’s just another short-term gimmick that postpones the inevitable and leaves long-term structural problems unaddressed. The bottom line is that European nations, most notably Spain, Portugal, Italy and Ireland, have been living beyond their means for decades, and the bills are due.

Greece is going bust. If the next tranche of bailout loot, worth $11 billion, is not released in October, the birthplace of democracy will not have money to pay bloated government salaries and pensions. European Union inspectors will be visiting Athens on Monday to satisfy themselves that deficit-cutting goals are being met before any of the funds are released.

Handing over suitcases full of cash just means the inevitable collapse will happen further down the road. The Greek government already has gobbled up $152 billion in bailout funds, and progress has been minimal. The austerity program is behind schedule; privatization has barely gotten off the ground; and the tax-collection apparatus is hopelessly inept, especially since salary cuts took hold.

Credit-default swap prices suggest a 90 percent probability of default within five years. If that happens, the contagion could spread quickly. French banks in particular have considerable exposure to Greek sovereign debt - estimated at $9.4 billion. Societe Generale, which is considered “too big to fail” by the French government, and Credit Agricole both own retail banking subsidiaries in Greece. Greek default could well trigger a crisis in the French banking system.

As a sign of how bad things are in the EU, Italian bond yields hit their highest rates in 19 years. China’s interest in purchasing some of this debt has been hailed recently as a sign of a white-knight rescue. Unfortunately, even if it wanted to, the Middle Kingdom lacks the capacity to buy enough debt to pull Italy, let alone the entire EU, out of this crisis. More borrowing doesn’t address Europe’s overspending problem. It just puts off collapse for another day.

The remaining rescue options are few, as the Eurobond is off the table. The German Constitutional Court has held that a Eurobond, backed by the EU, cannot be issued without a change in Germany’s Basic Law and the adoption of a new treaty. For that, German taxpayers should be thankful. They are the ones who would have been on the hook had such bonds been issued.

It’s likely that Greece will get the next tranche of aid. Europeans may even take up Mr. Geithner’s leveraged bailout scheme. Doing so will only increase the pain when the temporary fixes expire. None of the options in the works reduces the probability of default. The EU, the European Central Bank and the International Monetary Fund ought to focus on dealing with the very real and the prospect of an orderly default by Greece.

The Greek experience teaches an important lesson about the folly of unbounded government. Politicians can only borrow from future generations to fund present-day operations for so long before the cash runs out. While Greece is small enough that it can - for a time - turn to its neighbors for a handout, the United States will not have the same luxury. Congress and the president need to reverse their reckless spending before we end up joining Greece in the bankruptcy line.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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