But the real worry is that this whole sorry saga is too reminiscent of the early days of the sub-prime crisis for comfort, when (to UK eyes) slightly obscure US lenders started to go bust until eventually the whole system began to implode. Even when Bear Stearns was bailed out and taken over, most observers continued to downplay the extent and consequences of the crisis. With sovereign debt now clearly the new sub-prime, the fact that one can see a similar lack of urgency among many supposedly rational investors and commentators truly beggars belief. Bailout money from the IMF and EU will only buy time and help with cash flow; what matters is tackling levels of public spending that are out of synch with the size of economies.
Greece and Portugal may be small, relatively manageable fiscal basket-cases, though any default would hit Eurozone financial institutions badly – but many other, much more systemic issuers are also close to the danger zone, such as California and Spain. Britain and America are not there yet but as the Institute for Fiscal Studies confirmed yesterday all three UK political parties are hiding from the public the massive size of the fiscal tightening that will be required after the election. This is a scandal; and it confirms a phenomenon common to all fiscally-challenged nations: if you treat voters like children, and constantly promise them free money and handouts, don’t be shocked when they throw their toys out of the pram when cuts are forced upon them when economic reality becomes impossible to ignore any longer. That is what is happening now in Greece, with endless riots, demos and strikes; it is what is likely to happen in Britain when voters are finally told the truth by our supine, vote-craving political establishment.
Yet the difference between the sub-prime crisis and the sovereign crisis is that in almost all cases it is still not late to stave off disaster: large and credible cuts to public spending should do the trick. To their great credit, Lithuania and Ireland are two countries that have taken the plunge successfully over the past year or so.
One problem is that many less sensible nations assumed that they would be able to tap Germany as a lender of last resort. But its public is implacably opposed to bailing out the Greeks or anyone else; most Germans believe such a course of action would be illegal under the rules that set up the euro. They also rightly feel they have been conned: they reluctantly agreed to give up the Deutsche Mark, crippling their beloved, inflation-fighting Bundesbank but only after being assured they would never have to pay for more profligate countries. Eurosceptics warned that the promises the German public were made in the late 1990s were worthless; the Cassandras have been proved right. So it remains a real possibility that Germany will never agree to a bailout, even after its elections. Until Athens and Lisbon make real progress, investors should shun Greek and Portuguese government bonds like the plague.