THE BLOG

Why the Greek Crisis is a Failure of the Lenders

06/30/2015 05:16 pm ET | Updated Jun 29, 2016

As Greece hurtles towards a default on its IMF loan this week and an exit from the euro, it's easy to point the finger of blame at the Mediterranean nation. After all, no one forced Greece to borrow as much as it did, and the intransigence of the government towards instituting spending cuts is a direct factor in bringing about this tragic flash point.

But convenient as it might be to saddle Greece with fault here, it's important to remember the EU and the IMF are just as culpable. While the lenders may be posturing and adopting the moral high ground right now, the reality is that it's their irresponsible actions that have led to Greece's troubles as much as the nation's own lack of fiscal discipline.

Much like the subprime mortgage lenders who happily lent money to borrowers with questionable credit as long as the interest rate was high enough, the EU and the IMF pumped money into Greece despite a lack of transparency on the spending side and based on unrealistic (and possibly even disingenuous) forecasts of economic growth. The results should have been predictable.

If the lenders were really that concerned about the nation's ability to repay its debts, why didn't they mandate stricter controls from the beginning, and more importantly, why didn't they monitor them over time? Greece's financial problems are not the result of a few bad months of overspending but bad macro planning, but that was the responsibility of the lenders to oversee. With the proper oversight, they could have conceivably put the nation back on track before things could boil over.

They failed, and now a whole nation, the very seat of human democracy, is on the brink of collapse. That is an abomination for which the EU and IMF should have to pay the price.

The price in this case will be the inevitable default by Greece on its loans and its exit from the euro. It's an outcome that will certainly hurt the nation itself, but will also send shock waves of retribution throughout the EU, as investors flee the markets across the continent, banks raise interest rates to prohibitive levels, and other PIIGS nations like Italy and Spain themselves come close to collapse. The colloquial description for this is cutting your nose to spite your face, and that's exactly what the lenders are doing right now.

As this momentous week progresses, we'll see how pragmatic (or not) the Europeans prove to be, but if German Chancellor Angela Merkel's stubbornness is any guide, Europe could be in for a very rough ride. By playing hardball at this moment in time and sticking to their obsession with austerity measures, the lenders are practically ensuring a catastrophe. That's bad news for investors everywhere, including in the U.S.

Let's hope the lenders realize their own role in creating this whole mess and soften their holier-than-thou stance before its too late.

Kumar is a tech and business commentator. He has worked in technology, media, and telecom investment banking.