by James G. Neuger
Bloomberg
June 23, 2011
George Papandreou was staring into a 20 billion-euro ($29 billion) hole.
It’s common for freshly minted leaders to discover that there’s not enough money to pay for their campaign promises. So when Papandreou’s new Greek government woke up to a looming budget disaster within days of taking office in October 2009, the alarm bells were slow to ring in European capitals.
Don’t “overrate” the problem, said German Chancellor Angela Merkel, later to play a pivotal role in the debt saga that continues to rock the 17-nation euro area. “There are deficits in other parts of the world as well.”
That initial reaction foreshadowed European leaders’ failure to tame a crisis that is entering its 21st month and has world leaders growing anxious over the prospect of a new financial tsunami as they shake off the effects of the last one. On June 7, President Barack Obama told Merkel it was her job to stop an “uncontrolled spiral of default.” China’s central bank warned on June 14 of a “major risk” incubating in Europe.
“This has unravelled badly,” said Paul de Grauwe, an economics professor at the Catholic University of Leuven in Belgium and a two-time candidate for a European Central Bank post. “The most favorable scenario is that we can bridge the next six months. The less favorable scenario is this gets out of control.”
The 256 billion euros in aid committed to Greece, Ireland and Portugal have done little more than buy time against a looming default, says Andrew Balls, Pacific Investment Management Co.’s head of European portfolio management. The cost to insure senior debt of 25 banks and insurers has climbed to 162 basis points from 120 on April 8, according to JPMorgan Chase & Co. prices. Insurance against a sovereign default, the most expensive in the world, indicates a chance of more than three in four that Greece will be forced to restructure its debt.
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