Global Economy

The rapid growth of European sovereign debt can be traced back to the adoption of the euro in 1999. That shift to a single currency caused a sharp drop in inflation in countries like Greece, Italy and Spain. The lower inflation rates caused interest rates on their bonds to fall sharply. Governments responded to lower interest rates by borrowing more to finance expansions of their social programs.

it is hard to commit today to practice fiscal rectitude tomorrow. Official debt caps, such as the Maastricht fiscal criteria and the Stability and Growth Pact (SGP), failed because they were unenforceable.

The introduction of Eurobonds – joint, aggregate eurozone liabilities – could be part of the solution, if designed properly. There is certainly demand for them in China and other major emerging countries, which are desperate for an alternative to low-yielding US government securities.

ECB President Mario Draghi, one of many policymakers gearing up for trouble after Sunday's vote in Greece, said his bank was ready to step in and fund any viable euro zone bank that gets in trouble.

In New York and London, banks have set up dedicated crisis teams, and rehearsed elaborate responses.

Citigroup has $84 billion in loans, bonds and other types of exposure to troubled European countries, plus France. The bank’s filings indicate that all but $8 billion of that exposure is offset with collateral it has collected and hedges on the portfolio.

Some banks are testing their systems to deal with the possibility of new currencies and preparing guidance for clients on how to operate in such an environment.

"As we approach the last few days before the elections I expect deposit withdrawals to rise further," he added. "And I wouldn't be surprised if by Friday we saw outflows of €1 billion to €1.5 billion."

Since the start of Greece's debt crisis in late 2009, Greece's banks have lost about one-third of their deposit base as nervous savers have taken their money out of the banks and either sent it abroad, or else stashed it away for safekeeping.

In the past two years, deposit outflows have generally averaged between €2 billion and €3 billion a month, but have spiked during periods of political uncertainty.

"I was amazed at how quickly and easily this guy was able to open the door," Peter said. The locksmith told him that locks are on doors only to keep honest people honest. One percent of people will always be honest and never steal. Another 1% will always be dishonest and always try to pick your lock and steal your television; locks won't do much to protect you from the hardened thieves, who can get into your house if they really want to. The purpose of locks, the locksmith said, is to protect you from the 98% of mostly honest people who might be tempted to try your door if it had no lock.

What we have found, in a nutshell: Everybody has the capacity to be dishonest, and almost everybody cheats—just by a little. Except for a few outliers at the top and bottom, the behavior of almost everyone is driven by two opposing motivations. On the one hand, we want to benefit from cheating and get as much money and glory as possible; on the other hand, we want to view ourselves as honest, honorable people. Sadly, it is this kind of small-scale mass cheating, not the high-profile cases, that is most corrosive to society.

If Greece still had its own currency, it could, in parallel, devalue the drachma to reduce imports and raise exports, cutting the 15 per cent of GDP trade deficit. The level of Greek GDP and employment might then actually increase if the rise in exports and decline in imports added more to domestic employment and output than was lost through raising taxes and cutting government spending. But since Greece no longer has its own currency, it is not free to follow this strategy.