With the financial crisis in Greece so much in the headlines, I’ve been watching the news more closely and trying to figure out what’s going on. And the answer is pretty nasty. It’s the U.S. financial crisis all over again, with policy geared to protect the interests of the big banks, which themselves propelled the increased risk for all through their lending practices. When things go south, it’s the regular people who pay the price through enforced austerity, slashed pensions, and high unemployment in order to keep those big banks from failing, or even paying their share of the cleanup.
Start with a good syndicated column yesterday by economic Joseph Stieglitz (“How I would vote in the Greek referendum“).
We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems. The IMF and the other “official” creditors do not need the money that is being demanded. Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece.
Paul Krugman’s column this week in the New York Times took a similar tack (“Greece over the brink“).
Yes, the Greek government was spending beyond its means in the late 2000s. But since then it has repeatedly slashed spending and raised taxes. Government employment has fallen more than 25 percent, and pensions (which were indeed much too generous) have been cut sharply. If you add up all the austerity measures, they have been more than enough to eliminate the original deficit and turn it into a large surplus.
So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.
But there’s another layer here.
Just as the U.S. housing depression was caused by negligent lending and the leveraging power of derivatives pushed on clients by the big banks and investment firms, Greece was also taken in by promises made by financial giant Goldman Sachs.
Several years ago, the Goldman deals with Greece were already drawing criticism.
The NY Times reported on this back in 2010 (“Wall St. Helped to Mask Debt Fueling Europe’s Crisis“).
As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.
In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.
Here’s Bloomberg Business in 2012 (“Goldman Secret Greece Loan Shows Two Sinners as Client Unravels“).
Greece’s secret loan from Goldman Sachs Group Inc. was a costly mistake from the start.
On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.
I’ve lost track of the article which speculated that one reason why debt relief by the European Union isn’t considered a viable option is that the secret terms of the billions in derivatives marketed by Goldman and others would treat that as a default and send the huge derivatives market into a tailspin like the 2007-2008 banking crisis.
An article in Bloomberg yesterday minimizes that risk but doesn’t mention the Goldman derivatives, leaving the total outlook a bit murky (“Default Seen Averted in Swaps by Greek Failure to Pay IMF“).
Anyway, the point here is that squeezing the people of Greece further doesn’t get at the roots of this crisis, which may lead right back here to our own banking industry.
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you can only blame the lender for a failed loan? sounds fishy. the person who takes out the loan is also to blame. defending Greece for being a victim of banks would mean Greece — the origin of western philosophy — is too stupid to manage its own budget. blaming Europe and the US for Greece’s own greed is equally pointless and ridiculous.
“So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.”
the word “largely” is hogwash here. Greek Prime Minister Alexis Tsipras failed to deliver alternative economic reforms that he promised. chances are, he’s not going to last much longer, especially if he takes a Neil Abercrombie approach.
bottom line: it takes generations to change an outdated culture; bailouts can’t do that. Greek’s underlying problem is not financial. the world is changing and Greece refused to get on board. until Greece takes genuine responsibility, this story is going to repeat. it already has repeated.
Let some banks fail. The sky didn’t fall when Bear Stearns failed.
reality might — might — be settling in for voters in Greece.
http://www.irishtimes.com/business/economy/greek-referendum-yes-side-has-four-point-lead-in-latest-poll-1.2270112
“A slim majority of Greeks are set to vote against their government in Sunday’s referendum, according to the latest opinion poll that gave the Yes camp a four-point lead over the No side.
The survey, conducted by GPO for BNP Paribas bank, put the Yes vote on 47.1 per cent and the No side on 43.2 per cent. It also found that 60 per cent of those asked believed Greece should remain part of the euro zone, not matter what the cost.
In contrast, an earlier poll, conducted for the Efimerida ton Syntakton daily, put the No camp ahead on 46 per cent, with the Yes side trailing by nine points. However, the same survey also found that support for a No vote had slipped from 57 per cent after the imposition of the capital controls and the closing of banks, which political analysts believe will be one of the key factors in determining the outcome of the plebiscite.”
Ian Lind wrote:
“Anyway, the point here is that squeezing the people of Greece further doesn’t get at the roots of this crisis, which may lead right back here to our own banking industry.”
Count me as one person who doesn’t think there’s no further room for Greece to make further sacrifices in their standard of living in order to be deserving of debt forgiveness.
I mean really,… does anyone sympathetic to Greece think it is okay for their citizens to retire as early as age 58 while Germans (their biggest creditor) can’t even qualify for early retirement until 65, with full benefits not kicking in until 67? No one else finds it morally repugnant for Germans to have to work until their late 60s, while some of their hard earned tax Euros are being used (in part) to finance pensions for Greek citizens nearly 10 years younger?
And what the billions upon billions of tax revenues that go uncollected by the Greek govt.? I’ve seen estimates that place the figure of uncollected taxes as high as €30 billion annually. Once again, does anyone else find it totally outrageous and unacceptable for PM Tsipris and the ruling Syriza party to default on a €1.5 billion payment to the IMF and begging other nations for a bailout, while not going after the tax scofflaws in their own country? Collect even a fraction of the owed taxes, and Greece could bail itself out from defaulting.
The cold hard truth is that Greece has been living beyond its means, clinging to a standard of living that can only be maintained by borrowing. Merkel’s got it right. There’s no point in giving Greece yet another bailout if their leadership doesn’t have the guts to implement serious reform that includes raising the minimum retirement age to at least the mid-60s and making a serious effort to collect from tax deadbeats. Without the political will to institute plans toward sustainability, Greece will just blow through however many billions of Euros they get in another bailout package. And this whole episode will repeat again and again and again.
Apparently the interest rate Greece is being charged is way beyond what’s needed or ethical.
Thanks for an excellent piece.
Reuters:
“With Greeks asked to decide whether to accept or reject the tough terms of the bailout, three opinion polls had the ‘Yes’ vote narrowly ahead; a fourth put the ‘No’ camp 0.5 percent in front, but all were well within the margin of error. “
Slashing interest rates alone would only slow down (not stop) Greece’s descent into the debt hell hole. Greece needs to implement meaningful reforms before their creditors will even talk about reducing interest or, better yet, retiring past debts.
Jeez, I can imagine a German reading anti-Merkel comments and thinking to themselves, “Arrogant Americans. Lecturing to our nation about excercising fiscal responsibility.”
London Telegraph: It looks like Greeks have voted by a large margin to reject the austerity terms of an aid package from international creditors.
With more than 20 per cent of referendum votes counted, the ‘No’ vote led by more than 60 per cent of the vote.
Greece now enters unknown economic and financial territory, with no clear path to continued European aid and banks closed since Alexis Tsipras suddenly abandoned talks with creditors to call the referendum a week ago.
The country’s immediate fate lies with the European Central Bank, which may take its cues from European Union leaders as to whether it can keep emergency loans flowing to a country without the prospect of a bailout package.
“If confirmed, the ‘no’ would not put Greece on autopilot towards Grexit,” Holger Schmieding, an economist in London at financial group Berenberg, said by e-mail. “But it makes it much more difficult to still avoid that fate.”
Greece’s fate depends heavily on the manner in which Tsipras handles negotiations with the Eurozone. The referendum shows that the man is a steely campaigner, with his brash talk and bold promises to the Greek voters. But come next week, he won’t be preaching to the choir anymore. with the European leaders, he’s going to have to replace the tough talk with a voice that establishes trust and credibility with the other nations. If Tsipras and the Syriza party can’t establish that trust, then they’re not going to get that elusive third bailout. Rather than drum the out of the Eurozone immediately, the EU might just keep the ECB’s purse string sealed shut and see how the Greeks react when the banks literally run dry of cash. The europhia of victory that Tsipras and his supporters are riding high on now could very quickly collapse when the reality of an ecomony grinding to a dead stop hits the people. For those Greeks who have been doing an honest day’s living and paying all of their taxes, I really feel sorry for them.