There’s a lot of teeth-gnashing going on in Europe about the Greek election. The Hellenic State put the far-left leaning Syriza party in power, which immediately negotiated a ruling coalition with a far-right nationalist party, which would be like the Tea Party joining up with Elizabeth Warren.
What makes the strange pairing work in Greece is that the two have a common enemy — the euro… or more precisely, all the European meddling in the affairs of Greece. Both parties have called for leaving the common currency and repudiating all debts owed to foreigners, which is striking fear into the hearts of European central bankers.
I’ve got a question. What did they expect?
Greece has been an opaque basket case of half-truths and misdirection since WWII…
The CIA helped install a hardline government immediately after the war to stop Greece from aligning with Russia. This lasted about 20 years until a military junta took power in the late 1960s.
While Greece enjoyed economic growth and increased trade under military rule, the people weren’t so crazy about the concentration of power. In 1974, the junta was kicked to the curb and Greece went on a spending spree of social programs.
During the 1980s and early 1990s, the country used devaluation of the drachma as the main tool for dealing with increasing debt. There were only four short years, 1996 to 1999, when the Greeks had a relatively sound fiscal and monetary policy.
They qualified for inclusion in the euro zone in 1999, and officially started using the currency in January of 2001. By that time, all bets were off. Greece was running big budget deficits and telling no one.
Time to Come Clean
It was the era of free money.
Greece was part of the euro zone, so investors mistakenly thought that government bonds issued in euros were somehow safer — and deserved lower interest rates — than old Greek bonds in drachmas. Since Greek banks paid higher interest rates and capital was free to flow across borders, capital flowed into the country at a rapid pace.
Banks with swollen deposits made loans fast and loose, which turned out to be a problem when the property craze crashed.
Eurostat, the agency tasked with reporting the condition of all euro zone members, regularly traveled to Athens from 2004 through 2010 in search of good data on Greece’s finances, on both the private and the public side. They walked away with nothing but guesses.
Meanwhile, as everyone later found out, the Greek government was busy working with Goldman Sachs to borrow money in such a way that the debt would not show up on its books. By 2009, debt was growing fast and economic activity was stalling.
The 2009 budget deficit was first reported in 2010 at 6% to 8%, but was later revised to 12.7%, which seemed horrible, until it was later revised to an uglier 13.6%. This being Greece, even that terrible number wasn’t reality. When Eurostat finally got good data and calculated the real deficit for 2009, it was a massive 15.7%.
Claiming they wanted to solve their financial issues, the Greeks brought in all new people to measure and report their finances. That did not turn out well. In 2013 Andreas Georgiou, the new head of statistics in Greece, was charged with inflating the deficit of the country in order to make Greece look bad (this is not a joke!).
Eurostat defended Georgiou, pointing out that his calculations were within the guidelines of euro zone reporting regulations. That didn’t matter to the courts. The 2012 deficit was too high, and it was clearly the fault of the messenger!
By this time Greece was already taking bailout funds from the troika, the lending trio of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF). Along the way, Greece defaulted on its government debt that was held by private sector investors.
Oh, strike that. The International Swaps and Derivatives Association, which gets to decide who defaulted and who didn’t, claims that private sector investors “willingly” worked with Greece to lower what would be repaid, therefore no default occurred. This is a story for a different day.
In order to get the bailout bucks from the troika, Greece had to agree to cut government spending on social programs, pensions, and employees, as well as raise taxes and actually go about collecting taxes.
The Greeks cut social programs, as well as government pensions and employees. As for going after huge tax evaders and reforming business dealings that rewarded a small circle of the very rich… not so much.
All of this left Greece with crippling taxes, including a value-added tax of 23.8%, skimpy social safety net programs, falling employment, and shrinking GDP. No wonder they are angry!
The newly elected officials have put a stake in the ground. They’ve called on the troika to renegotiate (which means lower) the amount of Greek debt that must be repaid.
All Bets Are Off
Leaders of the ECB and the IMF have both said Greece must repay all they owe, as well as stick to their austerity programs. This is fabulous hypocrisy coming from the same people who applauded Greece when it “negotiated” with private investors to reduce the country’s debt outstanding.
If Greece doesn’t stick with its austerity medicine, the troika has threatened to withhold the next installment of bailout money. The funny part of such a threat is that the next round of bailout money doesn’t even go to Greece. It gets counted as more debt for Greece, but the funds actually flow back to the troika as debt payment.
It’s like a bank issuing you a loan just big enough to make a payment on a different loan you already have outstanding. The money never gets into your hands, the whole exercise just puts you further in debt.
The Greeks are running a primary budget surplus, which means they have a surplus before they make payments on their outstanding debt. From the point of view of Greece, if they simply stop paying their debt, then everything is fine.
What’s not to love about this approach?
I’m not saying Greece should risk exiting the euro by stiffing the troika, but Greece seems to be in a much stronger bargaining position. If Greece leaves the euro zone and doesn’t suffer economic collapse, it would be a roadmap for other countries that fall on hard times… like Spain, or Italy.
Why take all that economic pain when you can simply call for a debt “mulligan,” leave the euro, and start over?
This would shatter confidence in the euro and leave the economic bloc in limbo. The euro might get stronger as weak countries leave, but who knows? If the euro did shoot higher, it would drag down exports from the remaining countries, which would have the biggest effect on Germany.
It looks like the troika will have to negotiate with its unruly child, Greece. Until they’ve worked out their family problems, I’d keep my money well clear of the continent.
We’re taking hard look at the euro today and Adam has another perspective for you to explore in today’s Ahead of the Curve.