Why the loans didn't save Greece

[luzribeiro.livejournal.com]

In October the European Commission, the ECB and the IMF reached an agreement with Greece about reforms that would return Greece on the right track. The details of the rescue package included losses for the banks involved in giving loans to Greece, plus increasing the European fund for financial stability. The purpose of those measures was to stop the spreading of the Greek crisis into Europe.

But why in the world has Greece sunken so low? Well, it's no secret that Greece has lived well beyond its means long before it had even joined the Euro zone. The Greek government started taking fatter loans and spending even more after the country joined the Euro. The public expenses skyrocketed, the salaries in the public sector were practically doubled within the last 10 years. At the moment Greece has  more than 340 billion Euro of debt, and all that, with a population of 11 million!

While the money in the state treasury was running out at an amazing speed, the revenue from taxes was taking an abrupt plunge due to the mass tax evasions. And so, when the global financial crisis struck, Greece was utterly unprepared for dealing with the consequences.

In May 2010 the international creditors gave Athens another loan of 110 billion Euro, which was supposed to help it out of the difficulties. But this never happened. And in July 2011 they had to approve yet another rescue package of 109 billion Euro. It also turned out insufficient as Greece proved incapable of carrying out the reforms it needed to seal the holes. the money just kept leaking through. So last month in Brussels another meeting was convened, which was supposed to put an end to the Greek saga once and for all.

But the Greek crisis is far from over. It won't end with taking another and then another loan. The purpose of the first loan was to contain the crisis, but it didn't happen. Portugal and Ireland also needed financial support because of their debt. After this the second loan for Greece was imminent. In July the Euro leaders proposed a plan that would see the major private creditors "voluntarily" scratching off 20% of the loans they had given to Athens.

Meanwhile the interest rates on the public bonds of Italy and Spain continued growing. This lead to concerns that these two large economies could also be needing an urgent loan infusion soon. Some extra oil into the fire was poured from Dexia, the French-Belgian bank which became the first victim of the Greek crisis, and it had to be put on life support by the French and Belgian government (as much as there's any government in Belgium at the moment). The reason? Because this bank and some others around it possessed the largest amount of Greek bonds. Hollow bonds with no real backing.

The gloomy scenarios about the Greek debt crisis and its spread across Europe have caused fears that the 400 billion Euro of the European fund for financial stability wouldn't be enough either. Last month an increase to 1 trillion was agreed. Another agreement with the creditor banks will see a scratching off of 50% of the Greek debt. But this sets a precedent where a number of other countries in trouble would expect the same. Tricky situation, but still solvable.

But... to make things worse, just a week after things were starting to look somewhat optimistic, the Greek prime-minister Papandreou threw the bomb, shocking the European creditors when he suddenly decided to conduct a public referendum about the rescue package! In result, Germany, France and the IMF announced that Athens wouldn't be getting the next installment of the loan, until the results from the referendum were clear enough. All this insecurity put additional pressure on Papandreou and caused more tension on the markets. He made a huge political gamble, a thing he wasn't shy of doing even from day one since he stepped back into power, and he preferred to play this game alone and without the support of the opposition and of large chunks of the Greek society - which is never an advisable scenario in such situations.

So after a few days of huge drama, Papandreou eventually quit his plans for a referendum. Instead, he'll now be stepping down and the Greeks will have to show some maturity and work out a way to lead their country out of the deep water by forming a consensus government, and trying to work together for once.

Still, the big question remains - what would happen if Greece really defaults? Why is everyone so worked up about this prospect? Well, the European banks have bought vast quantities of Greek debt. A controlled default means that the payments on these debts will have to be deferred indefinitely and they could get protracted for decades ahead. On the other hand, an UNcontrolled default means that a large part of this debt would never be paid back. Both cases are extremely painful for the banks and the shareholders (mostly ordinary EU citizens), and some of them are unwilling to swallow it (Finland for example), because they feel it's unfair that they've maintained a high financial discipline all along, and will now be punished for it by having to bail out those who haven't.

The Greek banks are unprotected from the influence of public debt. They'll need fresh capital. Those who cannot deal with this situation will have to be nationalized. In result, probably the crisis in the public trust in the financial system will reach a new level, and people will start withdrawing their money from the banks en masse, which will additionally aggravate the situation.

The most obvious next step is Greece leaving the Euro zone. This looks more inevitable with every next day, especially in case the country defaults, be it through a controlled or uncontrolled default. But then the next pressing question would be - what would happen to the other countries in the Euro zone, who also have huge public debt? We could well see another 2008 situation, when Lehman Bros defaulted and dragged the whole world economy down with itself, causing a recession on both sides of the Atlantic.

So, don't think even for a minute that Europe is just some country far away on another planet that doesn't matter. Regardless of where you are, this will reflect on you, too. Directly or indirectly. The story isn't over yet, far from it.

Comments

[eracerhead.livejournal.com]

Only 11 million people and they're going to cause a global recession? That's like saying the State of Ohio defaulted and the ripples were felt worldwide. I'm constantly underwhelmed at the size of European countries.

The press here in the US is that the Greek government is in this situation largely because of entitlements. If that's true it's easy to fix, just go on a diet.

Generally though, it is not good policy to throw good money after bad. Kick them out of the EU, or put them in receivership and let the chips fall where they may. Responsible members of the EU must prevail if there is going to be an EU.

[htpcl.livejournal.com]

A diet sounds nice, but try telling that to a Greek. Any Greek.

[eracerhead.livejournal.com]

Having been to authentic Greek restaurants, (and Italian, and German) I don't understand why the US is the only country with an obesity problem. :-)

[lai-choi-san.livejournal.com]

Or worse : a right-wing Greek.

[a-new-machine.livejournal.com]

Ohio is not one of the backers of one of the world's most prominent trade currencies, though. It's hardly just that Greece defaults that is the problem, it's what that means for the Euro as a whole, and how the investment world views other problem Euro Zone countries. Like it or not, all of that debt going south and being repaid at 0.5 or 0.25 would seriously dent the global economy.

[eracerhead.livejournal.com]

I don't understand this. Ohio doesn't back the US dollar?

[eracerhead.livejournal.com]

All the more reason why the EU should cut their losses and abandon them.

[luzribeiro.livejournal.com]

The problem is that in Greece's case, the crisis is not just financial, it is political. In fact the political dimension of the crisis is much harder to amend. It has become so deep that the elite of the country is unable to drag it out of the pitch where it has systematically pushed it over the years. A default used to be a taboo word until very recently, but now it looks like the most likely outcome. And I mean uncontrolled default. It looks like a matter of just a few weeks. And unless Europe manages to find an urgeny scenario for the Euro, they will have to carry on without Greece, leaving Greece in the wild. And this makes the whole idea of the EU pointless, because if they abandon one of its members in times of hardships, then no member can rely on support any more, and they will start leaving one after the other. If anything, even in the best case scenario the whole thing with Greece will re-define what EU is all about, and this is big enough for anyone to pay attention. Because, ultimately, the EU is one of the major trade, political and strategic partners of the US, whether you like it or not. Or whether you care or not.

[eracerhead.livejournal.com]

It's more than hardship, they committed fraud when they joined the EU, so any contract at this point could be considered void.

I don't like seeing a country default and I understand it will be painful, but sometimes you have to allow bad things to happen before they get better.

Cutting out the deadwood would make the EU a stronger trading partner.

[allhatnocattle.livejournal.com]

Not a debt crisis so much as it is a currency crisis.

When California announced how deep in debt they were it dragged the entire USA's currency down with it. The solution was never about kicking California out of USA but maybe it shoulda been.

[johnny9fingers.livejournal.com]

Thing is the considerable proportion of the Greek debt is held by EU institutions. If Greece defaults in an uncontrolled fashion, the EU is going to stall at the very least, as it has to write-off the Greek debt which it holds.

The EU will not emerge stronger from this slow motion trainwreck we're all watching. The Powers-that-be have got to be hoping they can divert the Greek economy down a siding, isolate it from the main body, and then allow it to lose it's downward momentum on some gradual incline.

But even should they manage that, Spain, Portugal, and Italy, are still all open to speculative assaults. The betting is that the EU emergency fund with assistance from China has just about more reserves than any serious speculator/cartel of speculators. The speculators have to get the market as a whole to turn upon the next-in-line crash test dummy national economy, else it seems stability will return to the markets and the EU won't fall apart.

Of course, organisations in the markets could refrain from participating in the open season on money-making at the expense of national economies, but then as individual limited companies or limited partnerships within the market they'd be failing in their duties to shareholders, the principal one being maximising profits, always accepting the laws of whichever territories they do business in.

The next few weeks will be telling. I wouldn't bet more than a farthing on it going one way or another.

[luzribeiro.livejournal.com]

With all that inflation, chances are that a farthing could be worth a fortune today!

[allhatnocattle.livejournal.com]

What happened to Iceland anyway?

[airiefairie.livejournal.com]

A very good question (http://politicalirony.com/2011/08/24/why-iceland-is-not-in-the-news-anymore/)!

[ghoststrider.livejournal.com]

They told the banks to go the hell and are doing fairly fine.

[telemann.livejournal.com]

All the investment bankers went back to their fishing boats (according to that guy who wrote about the financial crises and was on Jon Stewart and Colbert).

[luvdovz.livejournal.com]

Something relevant:

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[ghoststrider.livejournal.com]

I don't think the banks should get their stuff paid back. They gambled and lost. That's kinda how gambling works.

Free banking.

[montecristo.livejournal.com]

In for a penny, in for a pound. The problem is that the world has bought into the banking system so heavilly that we'll all suffer the withdraw if banking goes legit. Of course, that would be better in the long run, but the average Boobus Mundis still thinks the long run means his grandchildren's generation.

Here's what we're told:

[squidb0i.livejournal.com]

http://www.gregpalast.com/lazy-ouzo-swilling-olive-pit-spitting-greeksor-how-goldman-sacked-greece/#more-4977



"Here's what we're told:

Greece's economy blew apart because a bunch of olive-spitting, ouzo-guzzling, lazy-ass Greeks refuse to put in a full day's work, retire while they're still teenagers, pocket pensions fit for a pasha; and they've gone on a social-services spending spree using borrowed money. Now that the bill has come due and the Greeks have to pay with higher taxes and cuts in their big fat welfare state, they run riot, screaming in the streets, busting windows and burning banks.

I don't buy it. I don't buy it because of the document in my hand marked, "RESTRICTED DISTRIBUTION."


I'll cut to the indictment: Greece is a crime scene. The people are victims of a fraud, a scam, a hustle and a flim-flam. And––cover the children's ears when I say this––a bank named Goldman Sachs is holding the smoking gun."

Re: Here's what we're told:

[luzribeiro.livejournal.com]

I do remember a post by abomvubuso here about it - yes, Goldman Sachs is an accomplice in a crime that the Greeks felt very OK about committing. Let's not throw all the blame on the facilitator of the crime, because, without the actual drug addict, there would be no drug dealer.

Re: Here's what we're told:

[ghoststrider.livejournal.com]

I agree, and would just like to add: the same bank whose executives found cushy jobs (http://globaleconomicanalysis.blogspot.com/2009/10/where-hell-is-outrage.html) in the Obama Administration.

Re: Here's what we're told:

[mikeyxw.livejournal.com]

So, it was the $250 million in fees that GS collected on a $2 billion deal that caused Greece to run deficits of 6% - 9% for a decade and hide the fact? GS was one deal in a cover up. Their actions were actually legal, not ethical, but legal.

Some other factors could be that there are more Porsche owners in Greece than people who list their income at over 50,000 euro on tax returns. The Greek government could save money if they shut down their train system and paid for taxis for all of the passengers to go to their destinations. Greece understated their deficit every year they were in the Euro Zone. If they did not, they would not have qualified to enter and did not keep their debt under the limit on any year they were in the Euro Zone.

GS did not behave ethically, but their part in this is incredibly small and legal. The Greek government is holding the smoking gun.

[underlankers.livejournal.com]

This is what the EU gets for letting in poor former dictatorships that financially haven't been not-in-default for the last bit since the 1830s and hoping without any evidence that it is so that this was somehow going to change. The Greek monarchy and military dictatorship never really established a firm financial system out of a bunch of shepherds revolting over too many taxes, so the EU knew what it was getting into. Unfortunately now the EU can't kick them out, as it's doomed, it can't keep them in, as it's doomed. Even more unfortunately the EU resides in the same capital which has spent 513 days without a government and prefers to ban Muslim religious practices to wow the masses with their racist populism to cover up that these idiots can't even work together.

[squidb0i.livejournal.com]

You sure know how to pack a sentence, U-Dawg.