Vor Reise der EU-Troika nach AthenGreece is back in the headlines. This should be surprise no one. It was naïve to think that Greeks would accept being debt slaves forever. Despite all the rumblings that Greece will be forced to leave the Euro, there is in reality no mechanism by which EU countries can force a Eurozone member to exit the currency union. It really is all a bluff. This is a standard scare tactic used by governments to induce people to give up freedom for a little security. Greece currently owes a little over 300 billion euros to various creditors. About 200 billion is owed to the EU institutions, the European Financial Stability Facility (EFSF), and the European Stability Mechanism (ESM), that raised funds based on EU guarantees. The remainder is owed to the IMF, ECB, and private creditors. If Greece were to default, it would probably be mostly on the debts owed to the EU. To get Greece down to a manageable debt level, a default of at least 150 billion euros is necessary.

Of course, such a default would mean that the guarantees would then kick in. Government officials in Europe are currently in panic mode since this would likely be another Lehman moment. Spain, Italy, and France have guaranteed about 50 percent of this debt. A default would mean an important increase in the debt load of each of these countries. This would likely be the tipping point for Italy which has a current debt to GDP level of over 130 percent and several decades of essentially no growth. Italy is too big to bail out. Bail-ins and ensuing bank runs would then become an increasing possibility. The ECB would probably step in to essentially monetize the debt of these spendthrift countries. The pressure on Germany to leave the euro would then be overwhelming. Greece is actually in the driver’s seat. It is currently running a primary surplus, historical evidence shows that once a country reaches such a situation it is likely to default within the next two years. In 1947, Time Magazine attributed the following quotation to Keynes, “If you owe the bank thousands, then you have a problem. If you owe the bank millions, then the bank has a problem.” In the current situation, it is the EU that has a problem. More