ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The Trouble with Europe

European banks and rating agencies are exploiting moral hazard and have brought the Eurozone to its knees.

Unless European governments pull together and agree on one more rescue package for Greece, the Eurozone is heading for a breakdown. Greece would be forced to default on its sovereign debt and will have to exit from the euro. But the problem would not end with a default. The damage the default would have on banks elsewhere could deliver a second edition of the global financial crisis.

The problem Greece faces is well known. A government that had accumulated debt to sustain growth and welfare finds itself in a debt trap. The private sector that had financed that debt without due diligence has suddenly woken up to the problem, and is willing to lend more, if at all, only at exorbitant interest rates. The International Monetary Fund (IMF) and some European governments offered help a year ago, but only in return for austerity. Those austerity measures are limiting growth and constricting revenues, making sovereign default a real possibility. The situation calls for some intervention that breaks the cycle by reducing Greek debt and lowering interest rates.

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