Greek debt is relegated to junk status. Portugal sees its credit rating downgraded. Shares across the world fall. All that glistens is gold. Where will it all end? Is it Lehman Brothers all over again?

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” Or so said Andrew Mellon, US Treasury Secretary during the onset of the Great Depression. A man now vilified by economists.

Hank Paulson seemed to have a Mellon moment in the autumn of 2008 when Lehman Brothers went bust. He denies this of course, and says it was regulatory barriers that stopped the bail out of the bank, but still the suspicion lingers. Banks needed a lot less moral hazard. But the bank went, the banking crisis followed, and we came within a bailout of returning to the Stone Age. (And by the way, you can say Gordon Brown partially caused the recession, but his action during that autumn was actually spot on, and for a while he led the world out of potentially cataclysmic crisis.)

Now the danger relates to a country. Its government debt has been relegated to junk status by Standard and Poor’s, sending its credit rating from BBB+ to BB+. Greek bonds are now below investment status, or junk status, the first time an EU member has suffered this fate since the formation of the single currency. Yields on three-month bonds are around 10 per cent. Markets fear Greece may be forced to restructure its debts, and Standard and Poor’s warned that investors may get only 30 per cent of their initial investment back.

The credit ratings agency also downgraded Portugal to A-.

German opinion is analogous to the views held by Mellon. They hate the idea of a Greek bailout. But without it, contagion will spread. The euro will crash. Markets will turn on the other troubled Eurozone countries. Portugal will follow. Ireland, Spain and Italy will then find they are in the spotlight. France will feel the heat. If the euro survives, it will be a miracle.

The UK’s problems will seem trivial in comparison. Sterling may well rise against the euro, killing off the export led recovery.

It is time we stopped talking and took action, said one EU leader. “I agree,” said another, and spent three hours saying the time for speeches is over. It is like that scene from The Life of Brian. The EU are to have an emergency meeting on May 8 to discuss this. An EMERGENCY meeting on May 8? Greece needs economic bread, and the EU rows over cake.

And yet, a Greek rescue may solve nothing. Riots in Greece show the country is not willing to accept the austerity German money will require. Why should your average Greek suffer because of the dishonesty of its government that fiddled the books, and employed a certain well known bank to help it. Just like the people of Iceland, who are unwilling to accept decades of poverty for errors made by someone else, the Greeks are rebelling.

An EU bailout may not be enough. Default on the bailout is a possibility.
Even if the bailout occurs, the euro may still be beginning its death throes.
When the UK was ejected from the ERM it was seen as a crisis. But a golden age of growth followed. The best outcome for the eurozone economies could ultimately be an end to the single currency.

Greek debt is defined in euros. If the drachma returned and it crashed, Greek debt measured in its currency would grow. This is the downside of ejection from the single currency.

The horrible truth is that there is no easy answer. Maybe the end of the euro is nigh, and maybe that is a good thing. But if that happens, it seems Greek creditors still have a severe debt haircut.

© Investment & Business News 2013