Slippery slope of Greece

The mainstream US media tends to emphasize stories that often bring about passion from their directed audience. Americans are often disconnected from important world events. The cause of this international detachment is our relative large size or isolation from the largest Europe/Africa/Asia landmass is a topic of long debates. In either case, economic events in Europe may be powerful enough to reach our sovereign shores soon. It has to do with national debt of the commonly referred to PIIGS, (Portugal, Italy, Ireland, Greece and Spain) and its influence on the economic entity the European Union (EU). We are going to specifically focus on the current hot spot, Greece.

Greece is facing debt on the order of 120 % of its gross domestic product (GDP). It would take over 1 year and two months of the country's complete economic output to pay off this whopping total. This is one of the highest debt loads in the world. It grew to this large size through many avenues, some of them legal and others illegal underneath the Treaty of Maastricht forming the EU. Greece was supposed to limited its yearly deficit to just 3 % GDP by treaty terms. It seems the the Greece government has been cheating on this promise in many ways. I will avoid details here. What I am going to discuss are potential international responses to this mess from best case scenario to worst case scenario. I call into question any "best case" options though.

Option 1: EU bails out Greece with emergency loans at low rates and Greece implements austerity budget spending.
Results: If the money comes in from the other EU members, it will give Greece a little breathing room to fix problems. This requires the most powerful EU member's, Germany, blessing. If the money does show, I rather doubt Greece will do more than superficial changes to government spending. Greece has cheated on its obligations in the past, thus, why should it change now? EU members know this. The cash influx would last about 6 months and nothing structurally would have changed. Greece would be where it started. Even if the austerity measures were fully implemented, Greeks make is a national past time to protest. The economy would face a decline in productivity resulting in further economic problems.

Option 2: Bailout from the US Federal Reserve in low rate loans
Results: Same as in option 1. The advantage of this scenario is it could be kept secret. For Europeans, it is the best option since Europe do not have to pay. American taxpayers get the bill when option 4 below occurs.

Option 3: International Monetary Fund (IMF) steps in and gives emergency loans to Greece.
Results: Same as option 1 again. Two negative aspects loom here. One, I believe this would break terms of the EU. Other EU states would retaliate, dumping on Greece in various ways. Greece might get thrown out of the EU. Two, the spending restrictions the IMF imposes during its assistance programs are harsh. Greece will enter into an economic downward spiral as socialist union workers shut the country down from mass protests.

Option 4: Greece defaults on sovereign debt
Results: It is impossible to determine what will occur after the actual fact. Greece would enter into a severe depression though. The key is membership within the EU. Will it remain a full or partial EU member? Will it keep the euro as a currency? I am guessing the IMF would step in here and impose their will. Greece would have to accept a bitter pill.

Reviewing the four options above, unfortunately they all will lead to option 4. The amount of debt Greece has accrued is too much. Greece is not positioned towards a future booming economy in their current political and economic position. The bailouts (options 1-3) lead to just more debt down the road, thus, they default eventually. To put in prospective, if they pay 4.5 % annual interest on their 120 % GDP debt (~$340 billion USD according to Wikipedia) that translates into $18.4 billion (5.4 % of all economic activity) annually to service their debt interest alone. This value does not include debt principle repayments (much higher value). In recent Greek bond issues, the interest was north of 6%. They are paying significantly more than just outlined!

We are just using Greece as an example of the debt problems facing all the PIIGS. The other oinkers are much larger nations and have similar debt problems. How this will effect world bond, commodities and equity markets will be determined over the next few weeks to months. The time frame depends on if one or more of the initial three options occur, delaying the event.