Greek Ire

If troubles in Iceland reveal our civilization fraying a bit around the edges, the Greek uprisings do the same with a slightly more ominous overtone. While the Icelanders have kept their cool even while protesting their government, the Greeks are given to a little more passion. Today, Athens is no longer a pillar of our civilization, but it is still disheartening to see her streets burning.

Although the underlying causes of the riots are many, they certainly include economic trouble in Greece. It probably doesn’t help that Marxist propagandists are inciting youths to riot in hopes of toppling the government, but such is Europe these days.

Tensions between the Euro-zone countries themselves can only heighten as southern Europe struggles to adapt itself to what is essentially a German central bank. Long used to being able to inflate their debt away, countries with a more Mediterranean outlook on life find themselves at risk of defaulting on their debt as they are tethered to a strong currency. The German central bankers, on the other hand, are still haunted by the memories of the interbellum hyperinflation. “Never again” seems to be the ironic slogan of the German-dominated European Central Bank, as well.

Worse still, this disparity between northern and southern Europe is on display for everyone to see. Although all of the countries using the Euro issue debt in Euros, the interest rates vary from country to country based on the perceived risks. The more likely it is investors will not be paid back, the more interest they demand for loaning their money. Forbes reports:

…Yields get higher, roughly speaking, the further south you go: the Dutch 10 year bond has a spread that is 61 basis points above the German, Spain’s is 95 basis points above and the Italian 10-year is 137 basis points higher, according to Cantor Fitzgerald’s global portfolio strategist Stephen Pope. The Greek spread over German bonds has steadily widened over the last couple of months, to a whopping 2.25%…

European interest rates are now in serious danger of being quoted as relative to German interest rates, as the above quote shows. In other words, if you actually want your money back, lend it to the Germans. Seemingly serious countries are now needing to offer significant (if not outright embarrassing) premiums over the German government bonds. Since all of these countries are issuing debt in the same currency the only difference is the default risk.

Whether or not the European Central Bank would allow an Euro-zone nation to default on its debt is completely unknown, but we may find out in 2009. Sleep well…