Thursday, February 26, 2015

The Memory Hole Devouring Greece

A suffocating debt load, unable to raise money in the market and an economy in a death spiral on the verge of collapse. Sure, an apt description of the situation in Greece but one that would also apply to West Germany in 1953. February 27th of that year saw the signing of the London Agreement on German External Debts which forgave half of the German foreign debt and stretched the repayment of the remaining IOUs over 30 years. What's more, the agreement gave creditor nations an incentive to import German goods by stipulating that repayments were only due while West Germany ran a trade surplus and were limited to 3% of export earnings.

Fast forward almost 62 years and we found the new Syriza government led by Alexis Tsipras, elected on an anti-austerity platform by the Greek people January 15th, going hat in hand seeking a similar reprieve from her creditors. After five years of Troika (the ECB, IMF and European Commission) mandated austerity imposed in exchange for bailouts, the Greek economy is in ruins. Dictated spending cuts have led a plummeting economy, skyrocketing unemployment, services being cut and have ultimately cost lives. GDP has contracted 25% and unemployment is currently over 25% with youth unemployment above 50%. Experts have opined that is no coincidence that the cuts to health care, emergency services and benefits have accompanied a 200% increase in HIV infection rates, a 60% suicide rise and a plethora of other social ills.

Rarely mentioned in the press, much of Greece's pre-crisis debt was fraudulently obtained in order to qualify the country for the euro. Adding insult to injury, despite it being clear that the country was bankrupt in 2010, it was forced to add to the outstanding debt by accepting bailout money. Worse, this money didn't go to the people; instead it went directly to private Swiss, French and German banks thus effectively transferring the credit risk onto the public shoulders of the ECB and IMF. Many argue against debt forgiveness as it increases moral hazard, when risk is undertaken knowing that others will incur the costs, forgetting that private lenders undertook the original risk of lending without paying any price.

So the table was set for a showdown between unelected technocrats and the democratic will of the people. The new government had about a month to figure out how to avoid insolvency which would have occurred the day after the aforementioned 62nd anniversary while renegotiating a deal its people had repudiated. It was apropos that the protagonists in this confrontation were character yanked from the stage of a morality play as the two sides in the negotiations both attempted to claim the moral high ground; the debtor pleading for mercy and the lender stressing the dangers of moral hazard. Yanis Varoufakis, the new Greek finance minister, the leather clad Marxist economist arriving astride his motorbike versus Wolfgang Schäuble, the German finance minister, a conservative member of a conservative party whose sartorial selection was surely less S&M and more M&S.

Just as the doctor's whites convince the patient to trust him, the suits have

persuaded us that if the patient only took its austerity medicine they would be sure to recover. Yet, a quick glance tells us that no European country has done more to 'reform' its economy than Greece. It is in fact the medicine that is killing the patient. The quackery of men such as Schäuble would be more apparent if we were told of their past misdeeds. See, despite his adamant denials at the time, Schäuble, as second in command to Helmut Kohl in the 90's illegally accepted millions of marks of illegal contributions from arms dealers. As public prosecutors in Germany are not independent, but take orders from the government, of course all charges against Schäuble were dropped.

Public perception you see is far more important than the particulars. Never mind that the Greeks themselves never saw a penny of the debt they are now paying off as every cent went to pay back the banks who originally took on too much risk; the media's role is to perpetuate the myth of thrifty Germans supporting reckless Greeks. The public, already inured to the devious methods used to hoist private debt onto public shoulders, from government guarantees of bank debt in Ireland to the outright bank bailouts in the US and elsewhere, were primed to perceive the Greeks as undeserving. Instead of placing the blame on the very institutions responsible for the mess, thanks to lazy media coverage most point the finger at the shiftless Greek people. It would do us good to realize that according to the OECD, the average employed Greek works more hours than anywhere else in Europe, a measure which places Germans second from the bottom.

One couldn't help but be constantly reminded of who the Greeks owe in the past month's coverage. An example from the BBC:

Graphic showing how much Greece owes to whom

Strangely, um, not, no one seems to mention that little 1% number next to foreign banks as the reason it is so small (and those Eurozone, IMF and ECB) numbers are so big has gone down the memory hole. Of the €226.7 billion disbursed to Greece, only 27 billion has made its way into Greece with the rest going into the pockets of the banks, mostly French, Swiss and German. In this way, a bank problem was transformed into a public problem making the Greeks an easy target for demagoguery.

Ah, but still, you say, where did all this debt come from? Those lazy ouzo drinking, early retiring slackers were able to high on the hog thanks to the original loans. Oh contraire, oh contraire. Not that the public sector has ever been particularly thrifty, but much of the fault can, as usual be laid at the feet of the banks who helped swap, sweep and mortgage Greece into the euro in the first place.

Once in the club, the Greeks behaved like any other country but forgot they no longer controlled the levers of monetary policy having forfeited them to Brussels and Frankfurt helping make the Germans the unquestioned winners of the eurozone. Don't just take my word for the benefits Germany reaped being able to sell Mercedes Benzes on cheap credit from Lisbon to Athens, take a look at this. The reason Germany has become number two only to China in trade surplus is the straightjacket called the euro. While its record €217 billion surplus is perceived as growth driver, it is in fact an anchor, dragging down the rest of Europe.

One needn't be David Ricardo to figure out that comparative not absolute advantage is the basis for optimal trade policies and the running of a surplus entails financing someone else's deficit, just ask China and the US. German savings needed to go somewhere and they chose to invest in paper IOUs that might never be repaid. Monetary policy would normally correct the imbalance, but the euro has taken away this tool from national central banks in the eurozone. Instead, austerity led to a collapse in domestic (European) demand, necessitating devaluing the currency (for example through printing money, last months quantitative easing) which in turn forces the world to borrow more in an endless cycle.

It may seem facile, but it's hard not to compare the situation to the 3 1/2 year German occupation of Greece in WWII. Not only did the host have the bear the cost of occupation but the Third Reich forced the Greek National Bank to lend Hitler's Germany 476 million reichsmarks interest-free. All told, it's estimated that German occupation cost the Greeks €162 billion. While the hindsight afforded by the repercussions of forcing Germany to pay war debt following WWI makes it difficult to argue that it wasn't a good idea to forgive its debt following WWII, it's equally difficult to be blind to the hypocrisy of the German position today.

Adding insult to injury, the Germans smugly point to their success of having achieved their first balanced budget last year since 1969 while not only ignoring the direct contribution of Greeks buying BMWs but the indirect help as well. One need look no further than the cost of defence. Again, it's hard to argue in favor of, um, you know, Germany increasing military spending, but the fact is they have been able to get away with only spending 1.4% of their budget on defence (versus NATO's suggested 2%) in part because of the safety provided by Greece picking up the slack by spending 4.3% to protect the southern flank of the continent. Oh, and one should also keep in mind that though they may not buy many tanks, as evidenced by their woeful state of military preparedness, the Germans certainly do benefit by producing them; Germany is the third largest military exporter in the world. Early in the austerity shell game, Greece had to cut public spending, but they were not allowed to cancel tank deliveries from Germany.

The only way to find any kind of silver lining to last week's Greek capitulation to the Troika is to imagine that at least a portion of the public has woken up to the contradiction that is the European Union. Ostensibly a vehicle to promote cohesion, democracy and peace, it has morphed into an untenable union which ignores democratic values thus enabling warfare of a modern variety. The two key pieces of the platform that got Syriza elected, debt renegotiation and remaining in the eurozone, proved mutually exclusive. Sadly, the more likely outcome of the Greek concessions will be the empowerment of parties on the other end of the spectrum from Syriza, from the Golden Dawn in Greece to Marine Le Pen's National Front in France.


Steve Hayes said...

The biblical parable of the unforgiving debtor comes to mind

Shane said...

Interesting, I hadn't ever read Matthew 18:21-35 before now. I am familiar with the Biblical concept of debt forgiveness through Jubilee though and feel that it's just to hit the reset button now and then.

Steve Hayes said...

The notion of Jubilee is partly about debt forgiveness, but also aimed at preventing greedy landlords grabbing everything, eg Isaiah 5:8.

Shane said...

Another good quote. Reminds me of the Blackstone Group buying up so much post crash property, especially in the US and Spain.