THE BLOG

'Evil Back Upon Itself Recoils'

05/18/2015 05:15 pm ET | Updated May 18, 2016

The eurozone is playing a dangerous game with Greece. Officials are treating the Greek crisis of payments as a liquidity problem. And that's true as far as it goes. But Milton's famous line from Paradise Lost in the title of this post may still be true for the European Union.

Greece nearly couldn't pay its debt to the International Monetary Fund (IMF) last week. Greece was able to pay the IMF only by withdrawing its own emergency funds left on deposit at the IMF. Obviously the IMF gained nothing from having Greeks withdraw money they had deposited in the IMF in order to pay the IMF.

Nevertheless, eurozone officials and financial reporters keep referring to Greece's problem as a payment-on-time problem. That kind of problem is indeed what set off the toppling of the U.S. financial system at the start of the financial crisis of 2007.

But it isn't the same with a sovereign nation like Greece. Greece simply has no more money to pay anyone -- ever. That, my friends, is insolvency, or, more popularly put, imminent bankruptcy, not merely a liquidity problem. The IMF, European Central Bank (ECB), and European Union are trying to squeeze Greece when it has no more juice left.

Without European loosening of restrictions on the country, Greece will not only default; it may lead to the default of three other countries in the European Union: Italy, Portugal, and Spain.

A ranking of the debts of national governments can be seen easily using the debt-to-GDP (gross domestic product) ratio of each nation. The lower the ratio, the healthier the country's economy. A government-debt-to-GDP ratio of over 90 percent, however, is deemed as being in the "danger zone."

In 2015 Greece's debt-to-GDP ratio is 177.1 percent -- after rising steadily every year except 2013 from 100 percent back in 2006.

Three other countries out of the five in the eurozone that have been contemptuously labeled with the acronym "PIIGS" also have debt-to-GDP ratios near or over 100 percent.

Italy's ratio rose to 132.1 percent in 2015, up from 105.9 percent in 2006.

Portugal's ratio ascended steeply upwards to 130.2 percent in 2015, up from 62.8 percent in 2006.

Spain's ratio grew to 97.7 percent in 2015, up from 43 percent in 2006.

Clearly the austerity policies demanded by the European Union of Greece haven't worked for these three other countries either.

The remaining PIIGS country, Ireland, is the only nation that seems to be heading into the black. Ireland's debt-to-GDP ratio grew from 27.2 percent in 2006 to 123.2 percent in 2014. But so far this year Ireland's debt-to-GDP ratio has dropped to 109.7 percent.

The possible bankrupting of at least three more eurozone countries after Greece is perhaps the prospect that impelled Mario Draghi, the head of the ECB, to start buying short-term bonds of these other three failing eurozone countries through quantitative easing (QE).

Analysts say Draghi hopes to raise prices of Spanish and Italian bonds in particular, thus helping these countries finance their debts at lower interest rates.

Yes, QE worked for the United States, but the U.S. was not facing insolvency. In 2006 the U.S.'s debt-to-GDP ratio was 63.3 percent. In 2008, the U.S. government-debt-to-GDP ratio was only 65.8 percent.

As the crisis began, the Fed simply needed to backstop the private financial system that couldn't pay its debts on time. The Fed and other government agencies did this through government purchases of debt from corporations deemed "too big to fail." But they didn't need to bail out the U.S. government itself.

U.S. QE involved purchases of bank debt, mortgage-backed securities, and Treasury notes. The Fed ultimately bought $4.5 trillion in these long-term debts. Draghi, on the other hand, seems to have been anticipating serious short-term fallout from Greece's imminent bankruptcy in buying shorter-term sovereign debt from eurozone countries.

But here is the lesson for Europe from the United States. After the Fed took onto its balance sheet $4.5 trillion, our U.S. government-debt-to-GDP ratio grew steadily from 65.8 percent in 2008 to 101.53 percent in 2014.

While the U.S. debt-to-GDP ratios for the years from 2012 to 2014 have all hovered close to 100 percent, the U.S. too is clearly now a nation in the "danger zone" when it comes to paying its debts.

So is the eurozone playing with fire? Can the ECB really afford to take on the debt of at least three other PIIGS countries while casting the Greeks loose to face a fate as unpleasant as that of Odysseus and his crew in ancient times?

Will the new Greek Odyssey have a happy ending, or could Greece take the rest of Europe down with it?