The hope after the European Union and the International Monetary Fund finalized a $146 billion bailout for heavily indebted Greece was that such a grand display of resolve would stop the contagion beginning to seize financial markets from rampaging through Europe, and from there, the rest of the world. Well, that hope now looks more like wishful thinking. Stock markets around the world are swooning, the euro hit a one-year low against the dollar, and yields of some European sovereign bonds are rising again. The big bailout is proving a big bust in the contagion containment department. Nerves in financial markets are so frayed that the prime minister of Spain had to personally dismiss rumors that his country was seeking a bailout of its own. He called the chatter “complete madness.”
Madness just about sums it up. Why hasn’t the Mt. Olympus-sized Greek bailout calmed investors? And if that isn’t working, what will?
In a post a few days ago, I warned that IMF bailouts are no instant remedy to debt crises. They didn’t work to appease investors during the 1997 Asian economic crisis, so I’m not surprised the Greek bailout hasn’t done the trick today. The problem now, as in Asia 13 years ago, is that there are still too many uncertainties facing investors. Will the assorted, and obviously reluctant, EU countries approve the bailout funds? Can the Greek government implement its gut-wrenching austerity plan against fierce domestic opposition? Is the bailout big enough?
European officials aren’t making sure these questions are answered. They continue to thoughtlessly blabber out statements that undermine confidence rather than building it up. Slovakia’s Prime Minister Robert Fico proclaimed that he didn’t believe the Greeks could adhere to their promised austerity plan. Such talk is the financial equivalent of yelling fire in a crowded theater. This is the time Europe has to show its full support for Greece and the rescue program put in place. It dumbfounds me that Europe’s leaders haven’t figured that out yet.
But the bigger problem remains that Europe still hasn’t acknowledged that it is facing a continent-wide problem, not just a Greek debt crisis. Investors are obviously nervous that other Eurozone countries (especially Portugal and Spain) will fall into the same decrepit financial state as Greece. On purely fundamental grounds, those fears, at least at this point, are probably unfounded. Spain isn’t in the same bad shape as Greece. But that’s not how nervous investors behave. It may be unfair, but when it comes to money, who says life is fair? Until the Eurozone takes steps to deal with the wider debt problem, the contagion could continue to spread.