Friday, July 10, 2015

Grecian Formula

  “If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.” J. Paul Getty

  Europe is awash with controversy over whether to loan Greece more money than the 300+ BILLION EUROS it currently owes its creditors. This may not seem like a lot in America where our government is 18 TRILLION DOLLARS in debt and racking up another 300 BILLION DOLLARS (one Euro is worth 1.12 US. Dollars) is just a bad couple of months or a good eight months of borrowing but for Greece this is more than the annual Gross Domestic Product of the country for a year. Greece may not be thought of as a large nation but it has the 45th or so biggest economy in the world and is in the middle of the pack of European Union economies.

  When Greece entered the European Union and switched its currency from the Drachma to the Euro in 2002 it gained easy access to credit from the rest of Europe. 7 Billion Euros went to the 2004 Olympics and that doesn’t count the new airport and rail system put in place for the games. Public sector wages doubled and when citizens retire they receive up to 92% of their working salary as a 'pension' which is much like our Social Security.

  Greek’s debt was manageable until the great recession of 2008 hit and their unemployment rate skyrocketed from 7% in 2008 to 15% in 2010 to 20% in 2011 to its current 25%. At a time when the United States and the European Union are racking up huge deficits to stimulate their economies Greece is being asked to cut spending in order to get the money from the International Money Fund and the European Central Bank and the European countries that will be used to pay their International Money Fund, European Central Bank, and European creditors. Since pensions and state wages make up 80% of the government spending, any Greek government that attempts to cut spending has to cut pensions (by 40%) and wages (15% cut for state workers and a 22% cut in the minimum wage) and will soon lead to a new government. This has led to protests and the rise of a new parliament headed by Alexis Tsipras who ran on a platform of restructuring the debt and reducing the austerity measures. Tspiras gained a four month extension of the country’s loans in February and paid Russia’s Vladimir Putin a state visit but did not return with any coins for the country’s coffers.

  Tspiras wants a restructuring of Greece’s debt that will allow Greece to be forgiven a large portion of their debt while Greece’s creditors want to loan Greece enough money to allow it to keep making its payments if it adheres to its strict austerity measures. After the latest in a series of debt repayment deadlines was missed last week, Greece closed their banks and stock markets, only allowing account holders to withdraw 60 Euros a day from their ATM machines.

  When Tspiras could not successfully renegotiate the a new loan or a reduced debt, he called for a referendum to let the people of his country decide whether to accept further austerity measures in return for new loans. Predictably the vote was overwhelmingly against further pension cuts and taxes. Now a new deadline of July 20th has made the front page of the papers. That is the date Greece is due to repay 3.5 BILLION Euros to the European Central Bank which they have no way of repaying without a new loan. Think about that - Greece can't pay back ONE PERCENT of it's loan! If Greece doesn’t make the payment they risk being kicked out of the Eurozone group of countries that use the Euro currency.

  I can understand Greece’s creditors not wanting to write off portions of the money owed them even though as part of one of the many repayment loans Greece was allowed to write off some of their debt to private creditors. And I understand Greece has no reason to pay these loans back. Their unemployment rate is 25% (50% for youth), the country is mired in a recession or depression (choose your buzzword), and estimates show they will be paying back their debt until 2057. The latest proposal by Tspiras to secure new lending makes it appear that he has lost since the proposal agrees to the wage and pension cuts that the referendum overwhelmingly rejected.

  This looks like the world’s biggest game of chicken so far in the 21st century. The European Union seems willing to gamble that Greece will knuckle under and Tspiras will agree to continue the austerity cuts in order to get the loan. Tspiras has submitted a request for a new three year loan which supposedly includes concrete austerity steps. I cannot imagine Tspiras actually going through with the political suicide enacting his reforms will bring. I see this more as a way for everyone to cool off for a couple of years and hope the world economy rebounds so repayment becomes easier but Greece still has no way to balance their budget and therefore no way to repay this latest loan that will be spent on the next three years of loan payments. Three years from now Greece will owe even more money and still have no way to pay it back. The more they can borrow the more they will be able to borrow by threatening not to repay the loans. If Tspiras’s austerity steps are found to be lacking, will his creditors really pull the plug on what remains of the Greece economy by denying further credit? How will these creditors explain to their stockholders that they let a third of a TRILLION EUROS or more go into default with the Greece economy.

  It is easy to knock the people of Greece for giving raises to the public sector and pensions on the rest of Europe’s borrowed money, but the knockers probably won't be anyone that receives benefits from a country like the USA that is 18 TRILLION DOLLARS in debt which (like Greece) is more than the country’s gross domestic product. Personally I reserve my scorn for whoever kept on feeding Greece loan after loan after loan – wouldn’t it have become apparent before the repayment terms stretched to 2057 that the loans were not going to be repaid?

  No one thinks this can happen in the USA and right now it probably can’t because unlike Greece, the USA can print money through round after round of ‘Qualitative Easing’ and as long as people and countries buy our debt all is well and we can subsidize people's food, social security, medical coverage, etc…, etc… , etc… as well as corporate subsidies for farmers, the sugar industry, the oil industry, etc… , etc… , etc… I’m not saying these subsidies aren't worthwhile. I'm saying they aren't worthwhile at the expense of borrowing 18 TRILLION DOLLARS to provide them. If J. Paul Getty was alive today he would probably have to amend this quote to be ‘If you owe a third of a TRILLION EUROs you have a problem but if you owe 18 TRILLION DOLLARS whoever loaned it to you has a problem!’


Tim Carson said...

Hi Hank,

Good article. Does your bird bark yet?

Tim Carson said...

May a good person still say the Pledge of Allegiance? By saying the Pledge of Allegiance does one voice support for the sodomite states of America or does one pledge support for the former republic for which the flag once stood? If one supports the republic surely one must support resistance to this present Judicial Dictatorship. I have decided to skip the pledge because the Bible says I will be cast into the lake of fire if I support a nation which supports homosexual marriage. May God soon judge the rainbow house. Tim

Hank Anzis said...

Hi Tim,
I don't know whether Harry the cockatiel is barking yet but the question is really whether he thinks he self-identifies his noise as barking. As far as the Pledge of Allegiance I think it is OK as long as the words 'Under God' are still in it. Those words were the last ones added to the pledge in 1954 (see it here) and will likely be the first ones taken out. If you were willing to take the pledge last year I see no difference this year since many of the same rules put in place by the 'Supreme' court a couple of weeks ago were in place in many of the states.

Thanks for leaving a comment! Hope to see you soon.