Not too far from exciting Malta is quiet Greece.

Baseline Scenario takes a very hard look at what is happening there – and what looks to be now unavoidable:

What if Greek interest rates rise to, say, 10% – a modest premium for a country which has the highest external public debt/GDP ratio in the world, which continues (under the so-called “austerity” program) to refinance even the interest on that debt without actually paying a centime out of its own pocket, and which is struggling to establish any sustained backing from the rest of Europe? 

Greece would need to send at total of 12% of GDP abroad per year, once they rollover the existing stock of debt to these new rates (nearly half of Greek debt will roll over within 3 years). 

This is simply impossible and unheard of for any long period of history.  German reparation payments were 2.4 percent of GNP during 1925-32, and in the years immediately after 1982, the net transfer of resources from Latin America was 3.5 percent of GDP (a fifth of its export earnings).  Neither of these were good experiences…

The French and Germans are apparently actually encouraging banks, pension funds, and individuals to buy these bonds – despite the fact senior politicians must surely know this is a Ponzi scheme, i.e., people can get out of Greek bonds only to the extent that new investors come in. 

At best, this does nothing more than postpone the crisis – in the business, it is known as “kicking the can down the road.”  At worst, it encourages less informed people (including perhaps pension funds) to buy bonds as smarter people (and big banks, surely) take the opportunity to exit. 

While the French and German leadership makes a great spectacle of wanting to end speculation, in fact they are instead encouraging it.  The hypocrisy is horrifying – Mr. Sarkozy and Ms. Merkel are helping realistic speculators make money on the backs of those who take seriously misleading statements by European politicians.  This is irresponsible.

That’s the cheerful bit. Read the rest.

Then have a look at a map helpfully prepared for us by a senior Swiss military officer showing countries at risk in Europe from different strategic challenges.

Could all this start to get seriously out of control, far faster than we are all able to cope with it?