Greece and the European Web of Debt & Deceit

8 May 2010


Over the last few weeks the newspapers, TV news channels, Bloomberg and others have been full of endless gloomy reports about the Greek financial crisis and the risk of contagion spreading to other countries in Europe. The spotlight has fallen mostly on Greece and everybody seems to blame the country for the resultant fall-out, the weakening of the Euro and the ensuing instability in the global markets with sharp declines in European, American and other stock markets. A panoply of pundits, all of them futurists, speculate that the Greek crisis may lead to the possible future dissolution of the eurozone and could even cause the eventual unraveling of the entire EU. Images of violent riots and protesters flooding the streets of Athens have not helped matters and there must be legitimate fears about the longevity of Prime Minister George Papandreou’s socialist government. Greece is lined up in everybody’s sights as the first euro zone country to potentially default on repayments on its old debts.

It must be pointed out however that Greece is not the cause of Europe’s and the world’s present financial woes but merely the catalyst. Greece is not alone. 25 out of 27 European countries are currently running deficits in excess of 3% of GDP. According to the Economist France is over 8% and even Germany is close to 6%. Now the EU has announced a new loan plan of just over a hundred billion Euros and further steps to support eurozone countries in distress. A closer examination of various cross-holdings and the much higher debt burdens of other euro zone members, puts the whole issue into perspective and may hopefully, cast a different light on matters. Greece’s total debt is the lowest at $236 billion, Portugal is next at $286 billion, Ireland $867 billion, Spain $1.1 trillion, Italy carries the highest debt burden of $1.4 trillion. The grand total is a staggering and incomprehensible $3.689 trillion in debt, excluding the debt of newer EU members in eastern and central Europe. The “delinquent” euro zone countries were until recently referred to as the “PIGS”, or if you exclude Ireland the “Club Med” countries. Now the politically correct term for these countries is “SWEAP” (South West Euro Area Periphery). You can have a lot of fun in Brussels inventing new names and acronyms for all sorts of things. There must some well-staffed and well-paid department at the European Commission HQ which takes care of these things. Why not take it a step further and recognize Spain and Portugal’s insistence that their situation is different and lump them into a separate club called the “chorizo belt.”

The Italians and especially the haughty Spaniards, who since the Spanish Inquisition have taken themselves far too seriously, will remind us with some disdain that their large economies are more diverse, better managed and cannot possibly be compared with a struggling minnow like Greece. The first part is true; the last two parts are complete rubbish. Spain has an unemployment rate running at 20%, much of this stemming from the real estate bubble bursting and the collapse of the overheated construction and property development sector. Italy owes $511billion to French financial institutions. French Banks are the most exposed with close to $900 billion owed to them. Runaway debt is runaway debt no matter how you cut it. A man who earns $10 000 per annum and owes $100 000 is in the same position as a man who earns $1 million and owes $10 million. The principle is the same. This is clearly a sovereign debt issue which is not going to go away for a long time to come.

The diagram clearly shows that this is a European debt crisis and not simply a Greek tragedy masquerading as a debt crisis. Greece has been used as a convenient and easy scapegoat to drive down the value of the Euro which ultimately favours German manufacturers and businesses, the world’s second largest exporters of goods and merchandise after China. In a way Greece opened itself up to ridicule and condemnation when Prime Minister George Papandreou spilled his guts to all who would listen and admitted to the corruption, fraud, duplicity and lies of past Greek governments. He meant well and naively believed that his television confession and this new type of transparency would be well received by the international community. Unfortunately it wasn’t. Alarmed Greeks and several leaders of other European countries privately thought that Papandreou had gone mad. Let’s hope the poor man survives in what must rank as the worst job in the world. He won a poisoned chalice and took a job nobody else really wanted. But he should have known better, and learnt from the mistakes of his grandfather and father, both former prime ministers of Greece. In Greece politics is a viable and lucrative family business. It’s about creating dynasties with the Karamanlis, Papandreou and Mitsotakis families taking turns to compete for the honours. George junior should have learnt from the sins of his womanizing and corrupt father Andreas that in politics even though there are leaks, everybody talks or might suspect where the skeletons are buried, nobody openly admits it to the world. Every country like every family runs on a few secrets. Some matters like marital infidelity are best kept in-house as own affairs. Papandreou no doubt influenced by his US upbringing and education, thought that by coming clean, he could beg for forgiveness in public, in the full glare of the lights and cameras, just like Jimmy Swaggart the tearful American pastor and televangelist did, when his sex scandal involving prostitutes and strippers made headlines. In both instances the world was neither impressed, convinced or in a conciliatory mood. It’s a case of being damned if you do and damned if you don’t. As a former Greek Socialist politician and economic advisor pointed out, Greece has never been trusted since the Trojan Horse incident.

There is no question however that a succession of past Greek governments, socialist and conservative must bear the responsibility and partial blame for getting Greece into this mess. The money was spent mostly on the bloated public sector, to give jobs to cronies, to pay unproductive Greek civil servants and to buy arms including submarines from Germany. It’s a strange irony however, worth mentioning that Germany calls for strict measures and financial discipline to be imposed on Greece while at the same time lobbying for new weapons sales.

Jean-Claude Trichet is the President of the ECB, European Central Bank. The immediate problem here is that nobody is really sure what he does or for that matter what the ECB does, but he has tried to reassure the markets that a default is out of the question. The markets are not convinced. The EU has a foreign minister of sorts but does not have a Treasury Secretary like the USA who can print as much money as he likes. Messieur Trichet blames European governments for failing to impose tougher budgetary controls. Fair enough but in all this, nobody blames assorted European banks for flooding Greece and other European countries with cheap and easy credit from 2001 onwards. All the countries in the flow chart below borrowed at ridiculously low interest rates. The behaviour of the banks was reckless or negligent to say the least and they must also bear part of the blame for this unfolding European catastrophe along with the profligate governments.

The behaviour of the banks was akin to giving children truckloads of cash and then letting them run amok in toy and candy stores at the local mall. Where were the Eurocrats in Brussels in all this? Why was there no regulation? The Eurocrats obsessed with the flawed idea of building an empire turned a blind eye. Any attempt at regulation in the early years of this decade was killed at the outset by EU countries including the big boys, France and Germany because they too were busy breaking the rules and playing with deficits themselves. It was politically expedient at the time for France and Germany to allow this to happen. France had visions of glory and envisaged a leading role for herself in a greater European state while Germany needed to rehabilitate and absorb East Germany at enormous cost. There was active finessing and collusion between political and economic forces. It’s not surprising then that as a result political, financial and corporate elites all over the world are facing a huge crisis of legitimacy. Ultimately the Euro favoured Germany the most with its value-add export driven economy.

It is only since 2008 that Nicholas Sarkozy jumped on the regulation bandwagon, seized the idea and attempted to make it chic again. Financial sanity in Europe gave way to the myth of political unity. And when political unity proved to be elusive among so many countries whose citizens in reality only wanted to preserve their own culture, identity and autonomy, then at least we’d have the Euro to bond and unify us. Like a business which grows too fast, the single currency idea went too far, too big, too quickly allowing in countries like Greece which did not really belong in the euro zone heavyweight division alongside an industrial giant like Germany.

At the heart of the problem in this ambitious idea of a greater Europe, were two conflicting philosophical ideas about what a united Europe should look like. The thinkers and writers at Gavekal, Charles Gave & Anatole Kaletsky explain that the first being “the Roman Empire Model”, favoured full integration under centralized state control, eventually leading to a giant highly interventionist European Super state run by technocrats in Brussels. The second they call the “Catholic Christian Democrat Model” which preferred decentralization, less intervention from the centre; allowing diverse political systems and structures to co-exist alongside each other without surrendering too much of their national sovereignty.

Where does this leave Greece? For a start you cannot cure old debt by getting deeper into new debt at astronomic interest levels of 15% demanded by bond markets. It seems however that Greece has more of a structural problem and less of a liquidity problem with a very weak economic sector outside tourism and shipping. The Greek tax system unfairly rewards the banks and the rich with their inventive schemes to dodge liability and disproportionately penalizes the poor. The vast wealth of the church also needs to be taxed. Greece cannot solely rely on implementing the 38 billion Euros in tax hikes and unpopular spending cuts to solve its problems. Greece has been in an undeclared tax revolt since Ottoman times. Back then it was a matter of survival and the patriotic duty of every Greek to defy the sultan’s tax collectors but today it’s a different story even though a succession of Greek governments have squandered public money. The present government has to find ways to reverse this culture of defiance, crack down and collect the 30 billion Euros lost annually to tax evasion. Greeks at all levels of Greek society, in all trades, professions and occupations share the blame and responsibility. The mechanic, dentist, doctor or lawyer who charges more if he/she is asked for a receipt and writes it in the book and the civil servant who agrees to pay cash and does not ask for a receipt. Greece is a classic example of the destructive power of the “slippery slope” argument at work. This is what happens when not just a small minority of people but an overwhelming majority of citizens collectively decide that the rules and laws do not apply to them.

The 110 billion Euro joint IMF and EU “bailout” plan may buy Greece some time, a year or two at the most but it does not solve the underlying problem the country faces. Is the Euro a viable lifeline for an economically weak country like Greece now that Euro subsidies have been misspent and dried up? One suggested strategy calls for Greece to stop clinging to the Euro. US analysts continuously talk of the euro zone being forced to “cut Greece loose” rather than risk sinking the whole EU system. Maybe this is not such a bad thing. Greece will either exit the Euro on her own volition, revert to her own currency like the UK as a last desperate act or Germany will lose patience, flex her political and economic muscle and force Greece out. There is even a remote possibility that Germany decides to go it alone and leave the Euro if that is what German voters decide in the future. In any case a schizophrenic duality has always existed about the whole European concept or question. Greece became an early member of the EU in 1981 long before Portugal and Ireland, yet before and even after this happened, the Greeks always believed that Europe was something separate or apart from them and their Balkan neighbours living in a rough neighbourhood. They somehow felt inferior and everything European was considered smarter and more sophisticated even though “Europe” is a Greek word. Will the EU collapse as some predict? It seems doubtful in the short to medium term because for the time being at least, Germany and France have vested interests. They need the system to work with or without Greece. No doubt further expansion of the club will be delayed and in time we may see that the smaller and weaker states are included politically as junior partners but excluded economically because their markets or contributions are deemed insignificant and not worth the trouble.

Greece is not the real risk here but an early symptom that is scaring the markets in anticipation of a much larger calamitous event or collapse. Markets are forward looking. Looking at the debt levels of the other SWEAP’s, if I were Greece I would try to get out of the Euro. But at this stage it is clear that Greece’s sovereignty and autonomy has been severely curtailed by the bigger members of the club. On the downside of the whole scheme, lurks the crippling burden of trying to pay back not only the older maturing debt but also the new top up debt which together with the governments spending cuts will kill any prospect of economic growth. This will push Greece into a deep and protracted recession if not outright depression with some less sanguine estimates predicting a 25% contraction in economic output or activity.

Greek civil servants are worried about their pensions, and complain about pay freezes and cuts of their 14th cheques and bonuses. An estimated 51% of working Greeks are employed by the unproductive public sector. It’s not them we should be worrying about. The remaining 49% of mostly self-employed Greeks run small and medium sized family businesses. This is the economic backbone of the country. It is this group we should be worrying about. These people or businesses will be the first to fold under the new austerity measures. It’s a double edged sword. Tax revenues will fall further and Greece will have no choice but to eventually restructure or delay its debt repayments.

The Greek public has a right to feel outraged. There is public pressure on the Greek government to walk away from subsidiary debt to banks which is being converted into sovereign debt. It may set a bad precedent but ordinary citizens everywhere always lose out when dealing with large institutions and corporations like banks, insurance, health care and petro-chemical giants. Legitimate protest is a democratic right. Too often the public is cocooned in the dangerous comfort and apathy of complacency. It is wrong however to set buildings alight and kill innocent people. The mob has again been allowed to hijack and discredit the process. It is plain stupid to attack policemen and close down essential services like hospitals.


So as the experts at Gavekal point out, the question for Europe should not be how they can get a highly indebted and unproductive country like Greece to service its debt. It may prove a pointless exercise to throw good money after bad. Rather the question should be how will Greece achieve an improvement in its income statement? One way is to drop the Euro. The solution Gavekal propose is to allow the exchange rate to fall to a level where Greek assets are cheap for foreigners. But unlike the USA and the UK, Greece is trapped inside the Euro straitjacket and cannot devalue its currency nor can it print more money to buy itself out of trouble. Iceland has devalued the Krona and now claims to be in a better position than Greece. An added advantage of this strategy ties in with the one sector that if properly revived, offers some hope or salvation for Greece to emerge out of its troubles. Greece should do all it can to become a viable, affordable and competitive tourist destination again. After 2001 when Greece dropped the Drachma and adopted the Euro, the cost of living soared for most Greeks and the country became too expensive for tourists. Greece is a country blessed with beautiful islands, each one with its own unique character. The country has magnificent beaches, safe waters, no pirates, no malaria, a long and varied coastline, rugged mountains, beautiful villages, lakes and rivers in the interior. The Greek weather, easy laid back lifestyle of sidewalk cafés and taverna’s is ideal for tourism. The country offers museums, ancient sites, history, treasures, monuments and archeology. But more importantly a change in attitude is also needed in the country. Greeks need to revive and embrace the time-honoured traditional Greek values of filoxenia, the legendary Greek warmth, enthusiasm, curiosity and hospitality towards strangers.

The only salvation really is for government policies and efforts to remove obstacles and free up the vital tourism sector which has been crippled by red tape and a lack of adequate world class facilities at market friendly rates. Red tape chokes the life out of every initiative because everyone has a finger in the pie, from entrepreneurial priests to corrupt local politicians and mayors. Even billionaire developers with unlimited resources at their disposal and lots of political clout, spend 15 to 20 years to see a project or resort with huge tourism potential come to fruition. As a result Greece loses out to its immediate neighbour Turkey which offers a similar product and superior service at more affordable rates. Greece needs more world class golf resorts, health spas, hotels and marinas built in an environmentally friendly or sensitive way to attract mid-level and up market visitors and not the beer, ouzo and retsina swilling (often simultaneously) Scandinavian backpackers of the 1980’s. Greece also needs to learn from the mistakes made in Spain where rampant or unchecked property developments, with cheaply built apartment blocks and housing estates now lie empty. Greece should have the confidence to say “local is lekker” and offer a first rate, authentic Greek experience and not third rate misspelt English breakfasts. The true spirit and patrimony of Greece is not found in the cities but in the countryside and mountain villages where people celebrate festivals, dance in the plateia, bake their own bread, make their own wine, olive oil, cheeses and sausages, and grow their own fruit and vegetables.

For Greece being a member of this European club is not everything. Old enemy Turkey next door does it alone and has a booming economy. I’m not in favour of rewarding bad behaviour and critics will cry foul, citing “moral hazard”, but what Greece needs right now is partial debt forgiveness or write-offs, not new unsustainable levels of debt which will most certainly enslave the country’s citizens even more for generations to come to foreign interests. The critics and there are many will say, you brought this upon yourself. That may be true but Greece had a lot of outside help to push her into the abyss from the likes of Goldman Sachs and other predators seeking to make a quick kill from the endemic weakness of the Greek system. The situation is dire but all is not lost. It’s not the end of the world. Argentina, Russia and the Asian countries had defaults and faced similar challenges. They not only survived but even came out stronger with bull markets. Greece can learn and take courage from their example. Greece understands hardship and adversity more than most countries but unfortunately in its difficult history Greece has also sometimes been a willing pawn of the big powers and danced to their tune to her own detriment.

As governments all over the world run out of options and print more and more money in a vain attempt to delay the inevitable day of reckoning, the flight to safety makes gold increasingly look like a viable option for many global investors. In a previous article I jokingly wrote that Greece should outsource the economic management of the country to German financial polizei. A friend and fellow pavementista, while sipping his cappuccino and poring over the morning newspapers, remarked that if he was Greek, he’d brush up on his German. Looking at the massive debt levels of the other SWEAP’s, if I were them; I’d start learning
Cantonese.


Costas Ayiotis
Pavement Philosopher