Tuesday, February 14, 2012

Greasy deals, greasy palms, Greecey World

Athens was in flames the other night. Stores were looted and property was destroyed, there was violence against government agents and against private citizens. And why? Because the Greek government is choking down the demands of the EU, the so-called austerity measures that include tax hikes, spending cuts, wage and salary cuts, layoffs, etc.

And why must the Greeks accept these austerity measures? Because without them, the EU will not engage in another bailout of the Greek government which, incidentally, is pretty much flat broke.

And why does that matter, since most governments just borrow money when they run out (or print some more)? Because the bondholders--the people Greece has already borrowed money from--are not willing to lend the Greek government any more money. Already, these bondholders are looking at significant losses. And this is an important issue to fully understand.

The bondholders are like a credit card company, in a way, that is trying to collect from a delinquent customer, one that doesn't have any other assets to go after, but could possibly get back on their feet if they had some money (and really needs some money to eat, as well). But the reality is that the credit card company knows it will be lucky to see any money, whatsoever. Thus, it is willing to engage in negotiations to hopefully cut its losses. The alternative is to watch the customer go bankrupt and never see a dime of what it is owed.

So, the Greek government has negotiated with its bondholders (some of them, at any rate) to make huge cuts on what it owes them, thus allowing for the possibility that it can pay some portion of what it originally owed. By the way, the bondholders unwilling to cut the debt will be dragged kicking and screaming into the deal, but that's neither here nor there.

With the lowered debt on the books, Greece will then be able to borrow more money from the EU, in order to keep the government running, keep making all the payments it needs to make on a daily basis, keep its economy from collapsing completely.

But as Andrew Lilico of The Telegraph points out, there's a bit of a problem here. A number of EU nations are very clearly opposed to giving Greece any more money, whatsoever. They'd just as soon see it burn:
When the second bail-out was originally agreed, part of the deal was that Greece would sell off 50 billion euros of state assets. It isn’t even 10 per cent of the way through; the current proposal is to reduce the programme to just 19 billion euros. Since the 50 billion was supposed to be integral to Greece supporting itself, that implies that Athens hopes to get billions more from the rest of Europe later on. If I were a Finnish or Slovak diplomat, I’d turn up to the next summit with a copy of the original agreement, and ask how the privatisation is going. 
The truth is that Europe doesn’t want to pay – so despite all the drama in Athens, the Greeks will probably default outright in March anyway.
If things play out this way--and they very well might--it means that all of the bailout drama was for naught; the billions spent will have been wasted and the bondholders for the Greek debt will see maybe one more interest payment, then eat the principal.

It's easy to see the bondholders and the EU as villains in all of this. After all, their demands are essentially destroying Greece and will leave it in rubble, with or without the riots. And to be fair, many of the bondholders have made tidy sums loaning money to Greece and many other nations. Eating the losses here won't break them, at all (most of them). Looking at it through the credit card analogy once again, these bondholders kept extending Greece credit, in return for interest payments (maybe a loanshark is a better analogy). But they should have known--and probably did know--that the end-game was bankruptcy/default.

But what of the Greek government's culpability? On what basis did it think it could keep borrowing money? Olive oil futures? It's tourism industry? No, the Greek government was certainly aware that it was living on borrowed time. And that begs the question, where did all of the money go?

Greece has enjoyed a very high standard of living, as compared to much of the rest of the world. The UN ranks Greece 29th on its 2011 Human Development Index (the UK is 28, the US is 4). At the same time, it's government is perceived to be exceedingly corrupt, ranking number 80 on that index (the UK is 16, the US is 24, higher is better here). On The Heritage Foundation's benchmark Index of Economic Freedom, Greece ranks 119th (the UK ranks 14, the US ranks 10).

The last metric--Labor Freedom--is particularly telling. What it measures:
The labor freedom component is a quantitative measure that looks into various aspects of the legal and regulatory framework of a country’s labor market. It provides cross-country data on regulations concerning minimum wages; laws inhibiting layoffs; severance requirements; and measurable regulatory burdens on hiring, hours, and so on.
Given that Greece has the largest debt-to-GDP ratio in the EU, it's not particularly difficult to understand why Greece is in the situation it is in: its government has largely funded the high standard of living the citizenry has enjoyed. That standard of living was not a product of hard work and industry, but of simple government expenditures: high public sector salaries and benefits, mandated employment rights and high minimum wages in the private sector, and entitlements like healthcare for all.

And now--surprise, surprise--the Greek citizenry is furious that the high standard of living they had enjoyed may be gone, the standard of living that was largely unearned and unwarranted. Really it's a tragic situation, for the average citizen of Greece was promised things by the government that were beyond the power of the government to actually deliver, unbeknownst to that citizen. Who wouldn't be furious? I know I would be. Yet at some point, introspection becomes necessary, for the only way to save Greece is to undo what it has become, to eliminate the unrealistic expectations that have been created by the reckless borrow-and-spend mentality of the government, coupled with its unworkable regulations on employment and business.

And of course, the Greek lesson calls out for other Governments to recognize their own failings in this regard, to avoid following the same path as Greece.

Cheers, all.

A factual error was corrected in this article on February 14th at 6:32 pm


  1. So we can consign the "slippery slope" argument to non-governmental actions where it belongs, and adopt the "greecy slope" argument that states anything government attempts to do it will eventually overdo to excess and to the detriment of the individual. I like it.

  2. Doesn't Japan have the largest debt/gdp ratio? Above 200%

  3. This raises an interesting question. How does Japan survive at the moment with its mountain of debt and rapidly aging population?

  4. Well, it has things Greece doesn't have, like cars and electronics, that are in demand on the world market. Then there are its fishing fleets and other things. And it's used protectionism to insulate its economy. That said, it's not exactly in a great position.

    Interestingly enough, it started the severe upward trend in that ratio during the 90's. And according to people like Krugman, it should have spent even more in those years...