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.
