Articles

The Greek Spiral: Two Lessons for the Rest of Us

Jun 29, 2015

As the Greek debt situation continues to spiral down, there are two lessons for the rest of us.

2015 06 29 Greek debt Graphic

(1) Everybody is answerable to somebody.

That ‘somebody’, more often than not, is a banker.

Prior to the recent election of the Syriza government, the Greek economy was starting to show signs of improvement. Government payrolls were contracting; pensions were being rolled back; privatization efforts were underway; and there was international demand once again, albeit tentative, for the nation’s bonds, at a greatly reduced interest rate.

That was the moment when the European Union (EU), the International Monetary Fund (IMF) and the European Central Bank (ECB) should have been magnanimous and forgiven some of the staggering accumulated debt that was never going to be repaid in full anyway.

That’s not how lenders think, though. They see the danger in setting a precedent. They worry about the example being set for other borrowers (e.g., Spain, Italy, Portugal), who might become more inclined to try to back-out of their obligations.

(There’s a reason so many of us are intrigued by stories about organized crime. They reduce issues to their most elementary level. No, I’m not trying to equate the EU, IMF and ECB with the ‘mob’, but there’s a principle at work. When you borrow from the ‘Godfather’, there are no excuses that will free you from having to repay what you owe, with sizable interest.)

When a national vote was held in January of this year, Syriza’s leader, Alexis Tsipras, held out the promise that his Party could both reverse austerity and negotiate a better deal with creditors.

Since winning over the electorate, he has further pitched the notion that the EU, IMF and ECB should be responsive to his mandate.

Let’s examine this argument by means of a hypothetical example.

Say you’re the head of a family facing tough times meeting the bills. Your teenage and early 20-something children have been partying too much and costing you money. You go into a financial institution and negotiate a loan.

A period of time passes and you return to the bank with the following story. Your kids have cut back their number of nights spent at nightclubs from six to three – although never on Sunday. (Maybe you have to be of a certain age to understand that sly reference. ‘Never on Sunday’ is the title of a somewhat risqué, for its time, movie set in Greece starring Melina Mercouri.) 

You’d like to pass along the thoughts of your offspring. Feeling they’ve now done enough to help straighten out the family’s finances, they’ve taken a vote and decided the bank should back off.

“So let’s make a new arrangement,” you say.

The loans officer sitting across from you, trained to be polite, leans forward and says, “I’m sorry sir (or madam), that’s not the way things work.” And this is a shock?

Greece will be holding a referendum on Sunday, July 5, to determine whether or not its citizens are willing to accept creditors’ terms in order to stay under the Euro’s umbrella.

The timing, by the way, brazenly ignores the fact that by that date, with the June 30 debt-repayment deadline having passed, those earlier ‘terms’ will no longer be in place; but that may become an issue for further negotiation.

Preliminary polling indicates a favorable (i.e., ‘yes’) outcome. If so, then maybe the EU, IMF and ECB, feeling a great sense of relief, will be willing to accommodate a hitherto unacceptable degree of debt leniency.

If the vote goes the other way, however, look out. Today’s bank closings and capital controls may end up appearing like a light swell before a storm-tossed sea.   

There will be default, followed by Athens establishing an alternative currency with which to pay its invoices. Inflation will skyrocket; more investors will flee; and already excessive unemployment will worsen.

Greece, by far, will feel the worst effects, but the Euro itself will come under examination.

Tighter capitalization rules have made a domino-like collapse of the global banking system extremely unlikely, but that’s one of those theories no-one wants to test.  

(2) For political parties on the ‘left’ everywhere, where Greece currently finds itself is continuing to make an anti-austerity message a harder sell. Remember that it was profligacy and deeply buried expenditure surprises in the budget that initially sent the country down this path.

“When you want to buy something, it’s best to have some idea how you’re going to pay for it,” is the creed many politicians are now espousing.  

Even Napoleon Bonaparte, one-time nearly-Emperor of the world, appeared to believe this. To finance a planned invasion of Britain, he decided to sell off a big chunk of French-held real estate in the New World. Besides, a successful slave revolt in Haiti had deprived him of badly needed sugar-cane tax revenue.

Without the ensuing ‘Louisiana Purchase’ in 1803, there’s the possibility, although probably remote, as other contingencies most likely would have been pursued, that the United States might never have become the geographical entity that it is today.  

On the opposite side of the bargaining table, President Thomas Jefferson had to find the $15 million USD then, or the equivalent of $250 million now, to pay for the transaction.

But some opportunities are too good to pass up no matter what the expense – a story each of us has told ourselves at one time or another. In that instance, with a pay-off that resulted in a doubling of the land mass of America, it was true.  

Many economists, brought up on the Keynesian theory of deficit spending to jolt economies back to life, aren’t too picky about a reasonable level of debt.

Nevertheless, slowing population growth and aging demographic cohorts in many countries are implying higher government costs for social services that will need to be supported by relatively fewer workers.

Therefore, fiscal extravagance is being reined in and all support for economic growth is being offloaded onto central bank monetary action.

The Federal Reserve stepped up first with huge quantitative easing. The ECB and Bank of Japan have more recently taken similar action.

The world’s public sectors have entered a new era of off-kilter stimulus packages and nobody’s sure where that’s eventually going to lead. Interest rates can’t stay next to zero forever.

There’s an old saying that capital markets hate uncertainty.

That’s unfortunate because, increasingly, there seems to be no way to avoid such a circumstance.



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