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Greece closer to defaulting on its debt

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By Paul Hodges on 23-Jul-2011

Sisyphus.pngGreece is about to become the first developed country to default on its debts since 1964.

On Thursday night, Eurozone leaders finally agreed to reduce Greece’s €350bn debts, if only by 21%. They also agreed to take the first steps towards the creation of a European Monetary Fund.

After more than a year of defying the inevitable, this marks some progress towards recognising reality.

But will it prove ‘too little, too late’? The blog hopes not. But the signs are not promising:

• The European Central Bank resisted the default until the very end
• It took a 7 hour French-German summit to finally broker the agreement

The leaders did talk about a Marshall Aid Plan for Europe to promote growth. But equally, the final agreement called for deficits to be reduced outside Greece, Ireland and Portugal by 2013.

Yet as Pimco’s Bill Gross warned on Thursday, “debt is the disease, growth is the cure“. Pimco, the world’s largest bond fund managers, originally developed the New Normal concept back in 2009. And in their view, Europe and the USA now share the same problem:

• The burden of debt is still far too high
• Commodity prices have been allowed to spiral out of control
• Growth has become dependent on China

As a result, Pimco continue to warn that Western growth rates will reduce to 2%, or ‘stall speed’. This creates a vicious circle. Companies don’t invest, because growth is so low. Unemployment therefore remains too high. Central banks then create liquidity in place of the missing capital.

The ancient Greeks, of course, had a myth that describes the position. It is of Sisyphus (pictured) endlessly trying to push a massive rock uphill.

If policymakers recognised we are entering the New Normal, new forms of growth could be encouraged. The Shared Value concept is one powerful example. But if they stick with current thinking, the outlook for the next few years is not promising.