Hopes for a Greek bailout were dashed this weekend, or at least deferred, as EU finance ministers delayed approving a $17 billion package slated for July.
The $17 billion tranche was part of the original 110 billion euro ($154 billion) Greek bailout approved last year by the EU-IMF, which proved only a temporary reprieve to Greece's core issue: They don't have enough money to repay their debts.
Without the funding, Greece will likely default on a debt payment due in mid-July. By withholding the funds, EU ministers are hoping to force Greece to adopt a package of big spending cuts and higher taxes. Greek Prime Minister George Papandreou is asking Parliament to support the austerity package, provided his government survives tomorrow's scheduled vote of confidence.
Judging by the fates of ruling parties in Portugal, Ireland and other parts of the EU, the survival of Papandreou's government is by no means certain, although a cabinet reshuffling last week was designed to shore up support.
For the past 15 months, the hope in Europe — and the financial markets -- was the original bailout would build a "ring fence" around Greece and buy time for Portugal, Spain and Italy to get their fiscal houses in order. Unfortunately, the ring fence is starting to crumble: On Friday, Moody's said Italy's debt rating could be downgraded, citing concern that Greek's debt crisis will drive up borrowing costs.
As Henry and I discuss in the accompanying video, it's become increasingly evident the best course of action would be for Greece to exit the EU. Monetary union is preventing countries like Greece from using currency devaluation to address big deficits, while simultaneously forcing taxpayers in Germany to help pay for the spendthrift ways of the so-called "Club Med" countries.
But taking Humptey Dumpty apart is proving almost as difficult as putting it together and fearing of a European banking crisis is preventing policymakers from forcing bondholders to take their medicine, something many believe is long overdue.
As The Telegraph reports, some U.K. banks, including Barclays and Standard Chartered, have "radically reduced" the amount of loans they're willing to make to eurozone banks. This makes perfect sense for the U.K. banks but echoes the counterparty-risk concerns that were so central to the crisis of 2008. That's a big reason why U.S. Treasury yields continue to fall despite widespread concern about Fed policy and America's own huge debt and deficit problems.