In short it is a state of agony postponed which will require spending cuts (which may be forced by the markets) or increased taxation (though the tax-paying goose may be reluctant to lay more golden eggs). Alternatively accidental or intentional inflation may dilute the massive levels of government borrowing. The palliative measures of governments and central banks have also served to mask the full gravity of the crisis which we have faced and continue to face.
Just look at the chart below on the number of US bank failures - they may have peaked but we are still at unprecedented levels.
Recent events in Europe haven’t helped the overall global economic situation and recovery. With apologies to George Orwell, the financial markets are discovering that all Euros are equal but some Euros are more equal than other. Thanks to the IMF/EU/ECB funding package, Greece will be able to roll over its debt for the next three years. But the problem is not just illiquidity it is insolvency and after three years the Greek national debt is forecast to have grown to 150% of GDP. Which assumes that the austerity package can be implemented. Is it realistic to ask an Athenian nurse earning Euro 1300 per month to accept a salary cut to Euro 1100 per month? The classic IMF prescription for a sovereign funding crisis has always been the provision of liquidity at concessionary rates; negotiation with creditors, which can range from debt extension to a haircut or a managed default; massive internal retrenchment and a devaluation. In the case of Greece many of these ingredients are missing: the EU funding is at usurious rates; no one officially dares mention debt renegotiation for fear of contagion and some say that exit from the Euro is not an option.
There are a few rays of hope for the British economy, since unlike Greece (for the time being), the UK has a freely floating currency, which can reflect its impoverishment and help its competitiveness (exports are at a fifteen year high). The UK’s national debt has an average maturity of 17 years. Retrenchment and pain will follow and the IMF’s final ingredient of devaluation has already begun.
