Can the Greek bailout contain the oil slick of sovereign debt?

Martin Vander Weyer’s Any Other Business

The downside of globalisation is contagion. That was the lesson of the Icelandic ash that damaged the livelihoods of Kenyan rose-growers, and it’s the lesson of this week’s Greek bailout. The deal that will see Greece’s euro partners stump up E80 billion, plus E30 billion from the IMF, touches millions of people who have never given a thought to the parlous state of Greek public finances. Crude oil blipped up on ‘buoyant sentiment’ while the Mexican peso looked perky, reflecting a view that riskier assets might be back in fashion. US Treasuries dipped as institutional investors felt less need for the refuge of US government paper — but gold perversely strengthened, habitual doomsters in that market still seeing the need for a safe haven against the threat of a wider sovereign-debt crisis. And hard-pressed Irish taxpayers, who have lately set an admirable example of fiscal discipline, found themselves lending E1.3 billion to Greeks who would rather riot in the streets than accept reasonable austerity measures.

Yet none of these reactions would have happened if Greece had not been allowed to cheat its way into the euro and pile up debt on the strength of membership — and the urgency of the bailout has been far more about fear of contagion across southern Europe than about solidarity with a delinquent partner. Even if profligacy and corruption had still led Greece to ruin, outside the euro, the ensuing default and drachma collapse would have been localised and relatively easy for monetary experts to address using methods learned in Latin America in the 1980s. As it is, like the oil-slick in the Mexican gulf, the sovereign-debt threat is still out there and spreading: no one knows whether the containment will work, or where the poison will come ashore.

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