February 1, 2015

Greek Debt Dustup: The Stuff of Greek Mythology.

by Hal Gershowitz

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Of Thee I Sing Heading AuthorsHomer would have relished the plot material provided by the dustup currently unfolding between Athens and the EU. Tension hasn’t been this high since Achilles  faced down the Trojan warrior Hector outside the gates of Troy. But this is real Greek tragedy playing out on the world stage – not mythology. The stakes are huge for everybody. There may be no winners. There is plenty of grief waiting in the wings to go around.

Greece is suffering from a man-made catastrophe – one of its own making. For years, actually forever, Greece has spent much more than it has taken in, and borrowed much more than it could payback. One would be hard pressed to find a country on the face of the earth that has, over the years, defaulted on its loans more than Greece. Perhaps only Ecuador and Honduras have out-defaulted Greece.  Greek politicians habitually bought votes by padding public payrolls and hoisting public salaries and pensions. Corruption has, historically, been endemic. An outrageous number of its citizens found a way to beat the taxman. They simply didn’t pay their taxes, and, it seems, no one much cared or did very much about it. That’s the way things have been in Greece for a long time.

Remember Dionysius, the ruler of the Greek city-state of Syracuse? He couldn’t pay the debts he ran up either, so he simply doubled the denominations stamped on all of the Drachmas in the land. That was sort of the Greek way of printing more money before there were printing presses. But Dionysius learned that inflating the currency didn’t make Syracuse richer. It made the Drachma even more worthless. We apologize for the outrageous redundancy, but we trust the reader gets the point.

Lesson learned, right? Well, apparently not. Greece has, over the years, turned abysmal credit worthiness into an art form. During much of the 186-year history of the modern Greek state, the country seems to have reneged on its loans in just about every generation. But we digress.

The dilemma Greece faces today is the most serious in its very long history because it threatens the very viability of the entire European grand experiment we know as the European Union. The reader may recall that in the Spring of 2010, the eurozone countries with the help of the European Union, the European Central Bank, and the International Monetary Fund (the Troika) provided a rescue package worth about $145 billion (110bn in Euros and 91bn in British pounds). As part of the bailout deal, Greece’s Prime Minister, George Papandreou announces a round of even more stringent austerity measures.

Trade unions, of course, immediately called a general strike in protest. That’s because the life preserver the Troika tossed to Greece had strings attached (they always do). Greece had to clean house, tighten its belt, privatize many of the inefficient bloated public services (which had guaranteed workers jobs for life), seriously collect taxes from the chronic tax cheats, reduce spending, and do something about corruption that everyone knew was rampant. Greece agreed. Her creditors at the time had their debt rescheduled, which is a euphemism for accepting cents on the Euro as payment. Greece drastically reduced spending and curtailed public payrolls and began privatizing. This was the bitter medicine called austerity.

As might be expected, the people began to suffer, really suffer, because of the past profligacy of their leaders. As should have been anticipated, unemployment spiked, businesses closed and the economy severely contracted. Immense unrest began to roil the country, and just last week a far-left Party, Syriza, was elected promising to end the austerity upon which the bailout had been predicated in the first place. This is, indeed, the stuff of Greek tragedy of mythological proportions.

The so-called Troika is, of course, caught between the proverbial rock and a hard place. Portugal, Spain, Italy, and who knows who else, are all watching and waiting to see whether more liberal bailout terms are offered to Greece, because they all have their own problems.

Germany and Finland and the other more responsible, productive and credit worthy countries are also watching. They know they will ultimately bear the burden of any further defaults regardless of how the risk is spread on paper. Their taxpayers are not going to sit still for paying with their taxes what the Greeks and, perhaps, other southern countries have not paid for with their taxes. And besides, Greece’s debt structure is in good shape compared to some of the other bailout countries. Greece enjoys the longest debt maturities and actually has a lower cost of interest relative to its gross domestic product compared to most of the Eurozone countries, and the citizens of those countries vote too.

You would think everyone with so much skin in the game would be treading very carefully right now. But that isn’t what is happening. Instead lines are being drawn from which it will become increasing more difficult for anyone to retreat. The new Greek government is demanding from the rooftops to have its debt rescheduled (further haircuts for the creditors), the time for repayment extended (initial payments are due later this month) and an end to austerity. The moment of decision is at hand. The EU’s bailout deal, now valued at about 240 billion Euro’s, runs out at the end of this month. Under the deal Greece has to put further reform measures in place and start paying off billions of Euros in bond redemptions in order to receive the final 7.2 billion Euros it has (or had) coming under the bailout agreement. Right now, it doesn’t look like that is going to happen. Any deviation from the bailout plan Greece had agreed to is apt to cause a furor in Germany and a number of other EU countries.

Greece’s new Finance Minister, Yanis Varoufakis has announced that he won’t even meet with representatives of the Troika to discuss the crisis. Meanwhile, officials of the EU and the European Central Bank are drawing their own lines in the sand. Germany’s Finance Minister, Wolfgang Schaeuble, wasn’t having any of it. “Rules need to be kept,” he has insisted.

To add suspense to this unfolding drama, Spain has general elections coming up this year and the anti-austerity party known as Podemos has been mightily energized by Syriza’s success in Greece. Podemos, which means “yes we can” is surging in the polls and its leader Pablo Iglesias has promised that 2015 will be a year of change for Spain. Spain’s public debt has, in the past few years, soared to over a trillion Euros, about 100% of its GDP.

Until the housing crisis erupted in 2008 Spain had managed its economy reasonably well. The bitter pill of austerity has not gone down well in Spain and the people are fed up. Spain, like Greece, has had it with austerity fatigue and a class-warfare mentality seems to have taken hold. “We are Greece” has become a popular slogan on the Iberian Peninsula ever since the anti-austerity Syzira party catapulted to power in Athens last week. Spain’s economy is stronger than Greece’s, but the country is still shouldering 24 percent unemployment and the people are restive.

The currencies of the strong exporting countries such as America as well as Germany, Switzerland, Finland and other Northern European countries have spiked up dramatically making their goods more expensive, and harder to sell. We seem to have a perfect (but very ugly) storm in the making.

Not long ago, Greece leaving (or being banished from) the EU was unthinkable. Greece and those who provided the bailout funds are facing off against one another. Everyone is waiting to see who blinks first. Homer would have a field day finishing this story.

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3 responses to “Greek Debt Dustup: The Stuff of Greek Mythology.”

  1. Bill Bryant says:

    Hal & Steve:
    This is the most insightful article I have ever read on the Greeks and their spending habits, Great information, and I learned a lot. Thank you and Sylvan for sharing. I am a long time fan Of Thee I Sing. The big question is wheres does all of this lead? There may be hell to pay….
    Regards, Bill Bryant

  2. George Dounias says:

    As a Greek American, I follow the events in Greece daily.
    I am compelled to debank the assertion that the country has reneged on its loans, etc.

    First bancrapsy happend in the 1880s when prime minister was Harilaos Tricoupis. The second occures in the mid 1930s in the dead of the great depression when most countries had the same fate. This debt was paid in ful by Konstandinos Mitsotakis as soon as he won the elections 1998.
    In my experience, there was no reneging on loans. Nothing my age covers more than 3 generations.
    A word on semantics: The word polemos means war. In English the corresponding is polemic adjective and derived from the noun “Polemos”.
    Another coment on the subject of corruption as recent as the last administration before “Siriza” (which means erradication), in the middle of Greece’s depression under the pretext that the parlamentarians were travelling to their districts to get in touch with their voters, were issued a car. They couls choose either Lexus or BMW. Even worse, the leader of Pasoc V. Venezelos was issued an armored limousine.
    In contrast, Alexis Chipras the prime minister and Glanis Farousfakis finance minister, both arrive in the parliament on motorcyle. The first act of siriza was to take away every car as well as one of the 3 airplanes.

  3. George Dounias says:

    As a Greek American, I follow the events in Greece daily.
    I am compelled to debank the assertion that the country has reneged on its loans, etc.
    “…During much of the 186-year history of the modern Greek state, the country seems to have reneged on its loans in just about every generation. …”
    First bancrapsy happend in the 1880s when prime minister was Harilaos Tricoupis. The second occures in the mid 1930s in the dead of the great depression when most countries had the same fate. This debt was paid in ful by Konstandinos Mitsotakis as soon as he won the elections 1998.
    In my experience, there was no reneging on loans. Nothing my age covers more than 3 generations.
    A word on semantics: The word polemos means war. In English the corresponding is polemic adjective and derived from the noun “Polemos”.
    Another coment on the subject of corruption as recent as the last administration before “Siriza” (which means erradication), in the middle of Greece’s depression under the pretext that the parlamentarians were travelling to their districts to get in touch with their voters, were issued a car. They couls choose either Lexus or BMW. Even worse, the leader of Pasoc V. Venezelos was issued an armored limousine.
    In contrast, Alexis Chipras the prime minister and Glanis Farousfakis finance minister, both arrive in the parliament on motorcyle. The first act of siriza was to take away every car as well as one of the 3 airplanes.

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