The developed Western Nations have become so use to kicking the debt can down the road that few seem to understand that the road always ends and there is nowhere left for that can to be kicked. Well, such is life. The Greek saga, and no, I don’t mean the Iliad, which started back in 2008 and reached default state in 2012, is now set to be played out in the last dramatic act. Already the chorus of financial commentators is chanting their lines in the wings as the main actors are about to take center stage. But a little background before the curtain opens.
Greece was a country that never should have joined the European Monetary Union (EMU). The country has little industry and what it does or did have was small in comparison to Germany and France. Its own currency was weak in comparison to the French Franc and German Mark. Even the Spanish Peseta was stronger. But by joining the EMU it would get that one time boost to its GDP in the form of a stronger currency paid at a one to one exchange. This meant that it could import goods and services using the euro and not need to pay more in a devalued currency. Unfortunately this also meant that its exports to the other EU countries would be far less competitive since the costs in wages were paid in euros and not their formerly devalued currency. A monetary union is a two edge sword, so it seems. Finally, as the economic situation was failing due to the beginning of the great recession of 2007-08, the political situation started to worsen and civil strife appeared. The European Central Bank and the International Monetary Fund mismanaged the situation as expected by well meaning politicians. And in 2012 we had the almost Greek bond default. When the consortium of issuers of collateral debt swaps and other financial derivatives and engineered debt obligation insurance ruled no default and hence no payout, thus preventing the start of the collapse of the world financial system, all was deemed well and good.
Greece has since gone from being a not fully developed country to an underdeveloped country to being a non developed country. Geographically it would have been better had it been located on the east coast of Africa and thus attractive to Chinese financial influence. We have seen the radical left political party Syriza gain power and influence as well as members. It has been dubbed a Nazi-like political movement and is a position to take control in the general elections come the 26th of this month. One of the planks in its political platform is the default of the government bonds. Germany and France are both alarmed and understandably upset. The Germans can afford the loss of 60 odd billion euros, assuming total default, the French, already in negative GDP for last year and not expected to go positive anything soon, cannot, for their stake is around 45 billion euros. What is ironic is that Italy and Spain, both of which will have negative GDP have a sizable portion of Greek government debt. Now note that these Greek Government bonds are held by both commercial banks and individual country central banks. The IMF holds 10% while the ECB holds 8%.
What is to stop Greece from defaulting on these bonds? Will the Italians and Germans launch invasions as they once did in World War Two? If one remembers Mr. Onassis, Greece use to be the world shipping transport headquarters. At least that brought in some income. But there is little industry left in the country, there is little farm products to export, and little sea food to export. It has no natural resources to speak of and no independent power generation. And much to the dismay of clean energy enthusiasts, it needs coal fired electric power plants. One can only export so many lemons and jars of olive oil. So this little country with a 332 billion euro debt has become a world wide financial crisis and could very well start the cascade of falling dominoes.
Never fear, Mario Draghi, head of the ECB, has three plans. The first is that the ECB buy only AAA rated government bonds from approved countries within the EU. While that may inject liquidity into the EMU that is not of much help to Greece, whose bonds are not AAA rated. Okay, plan number two: buy bonds from all countries. Well yes, that helps Greece marginally, but the whole problem is one of debt maintenance or interest payments. And it does not address the maturity of the bonds, the repayment of principle. It only kicks the can further down the road and we are almost at the end of that road now. Then there is option number three: the stupidity option, require that the individual country central banks buy the bonds or everyone else. Well, that makes no sense at all. But as Ulysses Everett McGil (O Brother ) said, “It is useless to look for logic in the cockles of the human heart”.
Europe is the poster child for not putting progressive socialists and communists in charge of anything to do with money. They truly believe it grows on trees. The conservatives believe you have to mine it like coal. Yes, Dorthy, we are not in Kansas any more. The world is about to find out in the most rude way that there is no such thing as a free lunch. On the other hand I hear that a massive asteroid is due to either pass by or hit the earth on the 25th of this month, thus making the Greek problem moot. Not sure which I’d rather see.