Turbo-charged fiscal crises

The crisis in Greece shows just how quickly a fiscal crisis can blow up. Just two-and-a-half weeks ago, Greece was able to raise several billions in financing, with demand for almost 25 billion of their debt in an auction. The very next day, their bond market collapsed and the rout began. Just ten days later, they were turning up in Brussels with a begging bowl, and inviting the European Commission and IMF to Athens to start making their tax and spending decisions.

There can be nothing worse for a government than having your economic policy dictated by the markets, and then other governments, as access to finance disapears. All you can do is rush out announcement after announcement, promising tax hikes and spending cuts, and pray that the market pressure eases up. While the usual weeping and wailing about evil speculators and short-sellers hits the headlines – a familiar ruse to those in the UK from the bank collapses – the reality is that the willingness of international markets to lend further has been exhausted.