Greek Bankruptcy

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I'm a little fuzzy on the details so I figured I would start a thread and let our European members educate me (and anyone else who cares).

From what I can figure out Greece owes a ton of money. Since they are in the EU they owe euros and that is preventing them from just "printing more money" as they can't print euros. Because of this some of the wealthier EU nations are loaning Greece the money, but only if Greece dramatically cuts spending and increases taxes. This has caused the citizens to go crazy.

 

Nobody wants to pay for what they think they "deserve." I hear ads every day on the radio to 'help people stop collections from the credit card companies.' They bought the damn stuff, they should pay for it. Don't even get me started of deficit spending....

 

Greece essentially cheated, tellingly with the avid help of the accounting wizards of Goldman Sachs, their entry into the Euro zone. The Greek didn't meet the monetary union guidelines. Total government debt mustn't exceed 60 percent. Greece was well beyond that. What Goldman Sachs did is to make Greek debt disappear from their balance sheet using so-called cross-currency swaps. That's essentially a credit disguised as a currency swap, which conveniently didn't have to show up in the Greek debt statistics under the Maastricht treaty. Now Europe, primarily Germany, bailed Greece out, and imposed austerity requirements on Greece - especially improving governance and accounting and to make spending cuts. Never mind that, the Greek are unhappy with that and we can expect a period of violent riots in Athens and other cities.

Because the Euro expansion was as much an economic as an political thing, there was political incentive to not look too close in order to not endanger the EU expansion and the idea of a greater Euro-zone. I wouldn't have any qualms at all to exclude anyone who doesn't meet stability requirements, but alas. There was a lot of complacency in Brussels.

And now Germany ends up paying for Greek incompetence at governing and their recklessness, which is to be exacerbated by speculators driving up the expense for credit for Spain and Portugal, which means that when we have to bail out them as well, it'll get more expensive, to the profit of gamblers. But that's the 'boon' of the Washington consensus for you - it is a real question whether and if, to which extent, nation states can still reign in globally operating banks and speculators, and protect their economies and electorates from the effects of their actions. The case of Greece shows that these actors are fully able and willing to gamble with entire economies. Personally, I have come to the view to view them as national security risks.

Greece's economic problems, hiring sleazy bankers aside, have their roots in large part in nepotism (someone in government would hire his or someone's nephew, then don't have work for him, and send him on paid leave and 'greek solutions' like that. A Greek acquaintance of mine told me that was pretty common), incompetent Keynsianism (the idea is anti-cyclic spending to boost the economy; it is not supposed to be permanent), crony-ism, and widespread tax evasion (they are apparently incapable of effectively organising tax collection or to enforce their tax code). In brief, Greece is one of Europe's banana republics, with Italy (at least southern Italy) and Belgium. I don't know enough about Spain or Portugal to make a call.

Q&A: Greece's financial crisis explained
Timeline: Greece's economic crisis

 

Well "deserving" might be in the right direction. There was an article on the NY times recently with some interesting info. About 25% of the economy is a shadow one: tax is evaded over 25% of the money transferred(!) and entire classes state their income below $13,300 which is, suprisingly, the lower limit for paying taxes.

Can't we just sell them to Turkey or something?

 

Rags has the most of it, but I think there was one more thing which ignited the current scandal - iirc in January Greece was found out to have submitted faulty statistics about its economy to the EU statistical bureau, EUROSTAT (http://abcnews.go.com/Business/wirestory?id=9632910&page=2) for the previous years, which might be due partially to the swaps but there were also allegations of political pressure. As you can imagine, that didn't go over well on either the political or economical level, and together with the country's already serious economic problems, caused a major crisis. Since Greece is a member of the EU and the Eurozone, this of course impacted everyone else.

As for protests, Greece has a strong tradition of civic protests for various causes, so anything as major as the spending cuts and measures imposed by the current government would naturally cause a strong reaction. At times, I almost envy that - here, people can't organize to defend their interests for anything, even if they have a good cause...

 

Ragusa, look on the bright side. You're lending the money at twice the interest rate you borrow it at! Ok, so maybe you won't get it payed back... ever. But it's a deal, I swear it is!

Honestly, this situation kind of reminds me of the feeling after Hurricane Katrina. The scope is just so large that you want to give up and let it collapse, but of course the consequences of that would be vastly worse. We in the US complain about our national debt all the time, but it's nothing compared to this (relative to our economy)!

 

On corruption in Greece:

Just another point is the way Greece ignores EU subsidy criteria.

NOG,
yeah ... right.

And for the second point, despite America's problems, America does have at least a tradition of governance. They also do (still) have an economy that relies on more than producing feta cheese and olives, or shipping, nice landscapes and ancient ruins that are attractive to tourists, or tax evasion.

 

I actually thought about writing a topic about this subject but eventually decided against it. The trouble here is that no one is supervising the compliance to the Maastricht agreement and the stability criteria, and therefore most countries within the monetary union (including Germany and excluding Finland and Luxembourg) have a debt well over the criteria without facing any sort of punitive consequences. If the eurozone is to survive this crisis a new set of rules is required to ensure that serious punitive measures including a possible expulsion from the union will be used on those breaking the stability criteria. Of course getting all the EMU members to accept tighter rules will be tricky since I'm sure the PIGS-countries (Portugal-Italy-Greece-Spain) will object, ironically they are also the ones most screwed at the moment.

If the Greek bailout fails and Greece defaults on its loans, we'll face a banking crisis which makes the fall of Lehman Brothers or even the great depression seem small, basically the entire banking sector would face a domino effect and I dread to even think how high interest rates would jump then. Then there's the worry if Portugal, Spain or Ireland can manage without the need of a similar bailout.

 

Ragusa has sum it right for most part. However, some notes on his comments:

As far as I know, the deal with Goldman Sachs didn't disappear debt but deficit. According to this bulletin of the Greek ministry of finance from December 2001 (see the second page of the bulletin), the Greek national debt was about 100% for 2001 and the estimation for 2002 was about 97%. So at least, as far as the debt is concerned, it was common knowledge that it was not below 60%. Also, if I'm not mistaken, that kind of deals were considered legimate by the EU that time, and the real problem is not with this particular deal, but with a similar deal made by the conservative goverment around 2006 or 2007.

You're paying because if Greece defaults, major German and French banks, which hold a large number of Greek bonds (around 70% I think) will collapse and the cost of the crisis will multiply. Also, the fact that Spain and Portugal (perhaps Italy as well) are in danger, IMO indicates that the Greek cheeting of 2001 is not the cause of the problem since they didn't cheat. In addition, gamblers will earn more if Greece collapse. That's why they are buying CDOs.

@Shaman

IMO, EU and especialy Barozo and Almunia knew this long time before, but they were covering Karamanlis (the former prime minister) for their own political reasons (see Barozo's re-election). When these reasons existed no more or when they felt that they could not cover him any more, they told him "Look, we can't cover you anymore, do something". What did he do? He made general elections two years before the end of his service, knowing that he would lose, left the hot potato to Papandreou (the current prime minister) and since October he is on permanent vacation.

Now, how have we reached this point? As I have said Ragusa has already sum it up pretty well. Nepotism and corruption, the ruling elites saw this country as their personal cow and milked it to death.

Why are the people rioting? Because they feel that the austerity measures are unjust, they drive the average citizen (who cannot evade taxes) to poverty, while the leave ruling elite and the tax evading businessmen and corporations unharmed. They are rioting because they see no tomorrow, nothing guarantees that the bail-out plan will be succeful and that it will not be followed by an unavoidable default. They are rioting because they act sentimentally with a mentality "we'll go down but we take them with us". And mainly they are rioting because they don't believe that the responsible for this will end up in jail.

Personaly speaking, I will lose about 2000- 2500 euros per year and that without counting the rise of the prices due to the rise of VAT and other taxes. I don't mind to pay, but I want blood. I want to see politicians, corrupted public servants and tax evaders led to prison and I want to see their properties confiscated.

The only thing that gives me hope is that we have enough fat for cutting. For example, I was watching a tv show about non governmental organizations, and they were talking about an organization called Research Center for Justice or something like this. This organization was funded by the greek ministry of foreign affairs with 5 millions euros for projects like Jamaica's state reform or social tourism in Syria.

 

Yeah - that would tick me off too. I guess that's one of the advantages of having an independent monetary system - when things go bad, it's your own damn fault.

 

There's a great graph here from the NY times showing the web of debt across Europe. It gives a great idea of how much trouble a default in a weaker state could cause in the banks of the larger states such as Germany.

That's not so funny for those of us who are nearly bankrupt ourselves. Based on the current yields the interest Ireland will be paying on the loan we take out for the money to Greece will probably be more than what Greece are paying back. Though to be honest we're all in favour of bailing out weak countries, we could be next .

I wouldn't blame the speculators in the financial markets at all for what's happening. For a lot of countries their figures are pretty stark. They can't pay back what they owe without serious cutbacks. Most haven't started yet and I don't think any have really got the chainsaw out up to now.

Kicking Greece out of the Eurozone isn't a runner. If a country exits in a crisis then their new currency will plummet on the financial markets as soon as it's introduced. But all their old debt will still be in Euro so their debt will immediately be multiplied despite the fact that they already can't pay. You'd be talking about a catastrophic meltdown in that case. Things would be a lot easier if the PIIGS could just devalue like Britain but unfortunately there's no way to do this without collpsing the country.

The current crisis is really giving me food for thought on the German economic model, which I used to really admire. It seems so stable with high savings and exports. But to keep it going it needs to keep lending these savings to reckless countries and have them spend it. So the model does have a lot of instability, it's just hidden in other countries. The underconsumption of Germany is just as much a cause of the instability in the Eurozone as the profligacy elsewhere. Not that I think that's an excuse for our profligacy. It was blindingly obvious our fundamentals were, well, mental but we refused to do anything about them and instead persued policies to make them worse.

Not that I remember but this is really a case of deja vu for Ireland. We spent the late 70s and nearly all the 80s paralysed with balooning budget deficits and an ever increasing debt burden. It was eventually brought under control with massive government spending cuts, for which the main opposition agreed to support the government. I think this explains why the spending cuts are going down easier here than in Greece, the public are more aware that they're necessary. Though as we started off the worst it's not as if the government had a choice either.

 

I hope this isn't true. This is from Senator Mike Pence. There is video at the link.

Spoiler

“Our country is weary of borrowing and spending and bailouts from Washington, D.C. so the American people deserve to know we are bailing out Greece and future Americans may be picking up the tab for as much as $50 billion in additional loan guarantees for the rest of Europe in the form of a bailout.

“Here’s how it works. The European Union’s members and the IMF recently pledged $145 billion in the Greek bailout. Forty billion dollars of that came from the International Monetary Fund. Since the United States pays 17 percent, we are the largest contributor to the IMF. American taxpayers are on the hook for $6.8 billion in loan guarantees from the IMF and it may just be a down payment.

“The EU this last weekend talked about a $1 trillion bailout plan that could put U.S. taxpayers on the hook for $50 billion in additional loan guarantees to bail out Europe.

“Look, the EU was formed to compete with the U.S.A., economically. It is simply not right to ask the people of the United States of America to provide loan guarantees to bail out an economic competitor in Europe. Nobody wants to see the EU fail, but we are not asking their help in New Jersey or California. They shouldn’t be asking our help with Portugal, Spain, or Greece.”

 

Wouldn't it be ironic if the way CA saves itself is by adopting Arizon's immigration law?

 

Indeed, arguably the very thing dragging down California is the issue of immigration.

 

You probably won't see it in Texas because it would almost destroy the local economy.

 

@TGS, the video is true but then the IMF has evolved to an organization which protects the stability of markets and tries to prevent governments from defaulting on their loans. If Greece fell the shock waves would be felt in the US and probably end up being more expensive for the US than the current bailout package. In a world of free capital mobility the dominoes fall fast. It's not the first nor the last bailout the IMF has issued though so it's not the first time the US government (along with others) comes to rescue the financial markets. Still the US part of the bailout is comparatively very small.

To say that this is EU's responsibility is slightly wrong, the EMU's responsibility would be more correct and even then it's not exactly the case. According to the growth and stability pact the Greek bailout is actually illegal, meaning that the EMU's part of the bailout goes against its founding documents and the "no bailouts clause". Technically this mess would be for the IMF to solve entirely but since the possible damage for the stability of the Euro is too great to bear the EMU is more or less forced to intervene.

 

Yes, and probably in the stock market, in which I have exposure at the moment (I just made some longer term moves, betting that things are getting better). That would piss me off.