On August 2, 2011 President Obama signed into law the bill that Congress passed to
raise the nation’s debt ceiling. The President’s executive action closed, for  the time being, the fractious debate over the nation’s debt. The parties are  now beginning to align themselves for the next round of debates over  national spending priorities. The United States has  relinquished center stage  on the sovereign debt crisis back to the European continent.

About two weeks ago leaders of the Euro zone (EZ) enacted measures to restore
stability in their financial markets. The minister’s enacted these measures as
part of the continued rescue of the Greek economy.  It is no surprise to anyone that the EZ now plots a rescue of the Italian and Spanish economies.

Are the EZ finance ministers better politicians than they are financial managers?

An analysis of the Greek problem helps us answer this question.

After much debate and anguish European leaders agreed about two weeks ago to lend Greece an extra 145bn to solve its economic problems.  In order to attract support for the plan the EZ pledged the creditworthiness of its stronger members such as Germany and France. In layman terms the EZ is guaranteeing that Greece will meet its obligations. This rescue plan is ambitious, though misguided, in that it sets in place a mechanism for future bailouts of other troubled EZ economies.

What is different about this particular bailout is a designated program for  private bondholders. The hope is that current private bondholders will swap their existing bonds for longer-term and more secure notes. The EZ acknowledges that the real return on the new obligations might be lower than the return promised on the exiting  notes.  The banks and investment  companies that now hold Greek debt will be under tremendous political  pressure to take part in this program. The EZ hopes that a debt swap would cut the amount of the cash needed to finance Greece’s debt.

It is not  difficult to understand why a holder of current Greek debt would prefer to paid on it obligation instead of being forced to swap it for new debt.  Most people can recognize a bad investment when  they see it. It is sound financial practice to unload debt that is not likely to be paid. It is obvious that the EZ has structured a rescue package that foremost seeks to solidify the euro’s credibility and then address Greece’s  economic problems. More than anything else this latest bailout is an effort to rescue the EZ from possible demise. Will this tremendous amount of money actually solve Greece’s problems or only delay the inevitable? Should the taxpayers of financially viable EZ countries pay the costs of the financial rescue of member countries who do not belong in the EZ? I do not believe that these taxpayers should shoulder this burden. The EZ should have drawn a line in the sand with Greece. If ever there was  an EZ country that does not deserve a bailout, it is Greece.

The EZ now chooses to ignore its own history. It is a well-known fact that many economists and financial experts suggested that Greece was not economically viable and too politically unstable to become  a member of the European Union (EU). Upon these grounds French President  Mitterand opposed Greece’s admission. Although it was not universally welcomed Greece  became a member of the European Union in 1981.