Last Thursday, the Federal Reserve, in concert with the central banks of Japan, Switzerland, and the United Kingdom, started to supply dollars to European banks so that they would be able to repay dollars they had borrowed earlier and so they would be able to continue to extend loans to U.S. companies and consumers. Will the various central bankers, finance ministers, multilateral organizations, etc., be able to keep Greece's solvency crisis from becoming an international financial panic?
In an extraordinarily revealing statement, Germany's Economy Minister Philipp Roesler wrote in the German newspaper Die Welt that he and other officials were contemplating, as one possible outcome, “an orderly default for Greece if the necessary instruments for it are available.”
Apart from the challenge of a sovereign default being any more "orderly" than a train wreck, the key word in Roesler’s statement was "if." When the economy minister of the key country in the euro zone doesn't even know whether there are any policy "instruments" that could cope with a sovereign debt default, it indicates that the top officials are "winging it" as they try to prevent Greece's solvency crisis from triggering liquidity crises throughout Europe.
The official position of European governments is that they have the situation under control. On Saturday, Luxembourg’s Finance Minister, Luc Frieden, declared, "The situation ... is not worrisome. All the instruments are in place to make sure the financial system continues to work properly." (Frieden’s assurance of "instruments" being "in place" appears consciously designed to disavow the earlier verbal slip by the German Economy Minister, who expressed doubt about appropriate "instruments" being available.)
In private, though, according to notes of discussions between government ministers obtained by Reuters, "contagion has spread across markets and the crisis has become systemic."
The effects of a Greek default could ripple (or rip) far beyond Greece’s borders. The situation remains critical.