Lillian: A few years ago investors bought bonds from Greece thinking that Germany would pick up the bill in case Greece couldn’t pay. They were in for a surprise, Germany doesn’t want to become responsible for the Greek debt. In deed on a NYT April 9 2010 article Paul Krugman wrote: “What can be done? The hope was that other European countries would strike a deal, guaranteeing Greek debt in return for a commitment to harsh fiscal austerity. That might have worked. But without German support, such a deal won’t happen.”
Jane: I think that the Greek economy represents only 3% of the European Union GDP and that is rather small amount; however Spain’s GDP is 12% of the total.
Lillian: You are right if Greece, Spain, Portugal, Ireland and Italy default on their debt the Euro will probably disappear.
Jane: Yeah the Euro zone doesn’t even have a mechanism that allows for money transferences among its members.
Lillian: You are right although if Germany and France wanted to they could save Greece anyhow.
Jane: To ensure that countries belonging to the Euro zone could have a state of solvency their rules for the zone where that no Euro zone country could exceed a 60% debt of their GDP or a fiscal deficit beyond 3% however few of the countries respected the rules.
Lillian: I really think Germany and France should help Greece with their debt problem otherwise they are running the risk of a domino effect taking place with other vulnerable countries like Portugal Spain, Ireland and Italy. In that case the future of the Euro zone will be in danger.
Jane: Yes and the new austerity rules that the Greek government had to impose in order to pay the debt are very tough I am not sure they will be able to comply with them. As Krugman mentioned recently “the debt crisis in Greece is now in a point of no return.” God only knows what will happen.