In the past year, the European Union has bailed out Greece, Ireland and Portugal — by lending them more money.
That strategy works if a country has a short-term problem. A loan from the EU gives the country time to get its act together, start growing again, and pay down its debt.
But if a country has deeper, long-term economic problems, the loan-as-bailout strategy can amount to throwing good money after bad.
And at some point, the EU may decide that one of its members is in such deep trouble that it won't ever be able to make good on all its debts. If that time comes, the troubled country will have to default.
That's what's likely to happen in Greece.
Greece's economy is still shrinking. Its debt to GDP ratio is projected to hit 153 percent this year, Marketwatch reports.
There were rumors yesterday that a Greek default could come as soon as this weekend. Greece's finance ministry called for a criminal investigation:
The Ministry has sent to the Prosecutor an email from traders of an international investment bank that refers to the supposed restructuring of Greek Government debt over Greek Easter weekend.
Such rumours are of course devoid of any substance and verge on the ridiculous.
The "international investment bank" is Citigroup, the Guardian reports; the bank says it has done nothing wrong. And the email in question was sent after the market started moving against Greece, FT Alphaville notes.
Even if the rumor about this weekend is "devoid of any substance," there seems to be something approaching consensus that Greece ultimately won't be able to make all of the debt payments it has promised.
A few key points:
- Greece will have to restructure its debt in the next two years, 46 of 55 European economists polled by Reuters predict.
- Investors give the country a 67.4 percent chance of defaulting within five years (as measured by the cost of insuring Greek debt), Bloomberg News reports
- Greek two-year bonds are now paying 23 percent interest. By comparison, Germany's two-year bonds are paying 1.8 percent.
One final note: A default would not mean Greece totally abandoning its debts. Much more likely is a type of default known as restructuring.
Here's how Harvard economist Ken Rogoff explained restructuring to Planet Money earlier this year:
Restructuring is a form of default, in both theory and practice. Restructurings, if agreed by the creditors, constitute a more orderly default. The two sides typically agree to an extended time table for interest payments, often at a substantially lower rate.