When Greece joined the EU back in 2001 it was economically speaking the weak sister of the regional organization, and life didn’t get better for the Greeks after the Recession of 2007-08 – it got significantly worse.
“Greece has a capitalist economy with a public sector accounting for about 40% of GDP and with per capita GDP about two-thirds that of the leading euro-zone economies. Tourism provides 18% of GDP. Immigrants make up nearly one-fifth of the work force, mainly in agricultural and unskilled jobs. Greece is a major beneficiary of EU aid, equal to about 3.3% of annual GDP. The Greek economy averaged growth of about 4% per year between 2003 and 2007, but the economy went into recession in 2009 as a result of the world financial crisis, tightening credit conditions, and Athens’ failure to address a growing budget deficit” [theo]
Here we go again – back to the perpetual phrase in DB’s assessment of things financial — “one man’s debt is another man’s asset.” And, Greece has plenty of debt. By way of contrast, the United States’ public sector accounts for only about 23.1% of our GDP. [World Bank] Several factors made the Greek level of indebtedness problematic:
- Greek levels of public employment appear to have been artificially high. In a stronger economy this might not have been a serious difficulty, for example the UK’s public sector is about 42.1% of its GDP, but Greece did not have a “strong economy.”
- The extent of Greek indebtedness was masked by dealing with Goldman Sachs, which created a “financial instrument” allowing the Greek government to push its health care costs far into the distant future, roughly analogous to a family taking out a second mortgage to pay off credit card debt. [NYT]
- Previous private investment assistance included disguising loans as “currency trades” which further obfuscated actual levels of indebtedness. [NYT]
- The solution to the financial anxiety of 2010 was alleviated by having the European Central Bank, IMF, et. al. consolidate Greek debt. This, it appears, got the private investment firms off the hook but shifted the problem to the international banking institutions.
What gives Wall Street the jitters is exposure, otherwise known as risk, especially when that risk threatens to go into default. Investors, private and sovereign, have gone to elaborate lengths to reduce their risk (exposure) to defaults. Ever more esoteric financial instruments (paper products) have been created – and continue to be created – to spread the risk as far and wide as possible. When the risk is widespread so is the “exposure.”
(1) While interest rates are low investors can borrow to invest in these risk-spreading products, betting that their investment returns will cover their costs. (2) Or, while interest rates are low the higher yielding Greek paper looks very attractive for short term investors. When terms like “default” get tossed around the bankers get anxious, and when they get anxious we’re told they are fearful of global “exposure” to Greek default. Translated down to an oversimplification: Bankers are afraid that they won’t get the return on the investments they made in Greek paper. Lower returns = lower revenue; lower revenues = lower profits.
There is no such thing as zero risk. That’s why bonds pay interest. The higher the yield, the greater the risk – assuming that higher rates of interest are the price of getting someone’s investment, anyone or any thing’s investment. Until and unless bankers find it more profitable to be honest with themselves and others about the levels of risk, we’ll keep seeing these manufactured crises in financial institutions. However, as the creative products for hedging their bets become ever more elaborate and opaque, the banks are essentially papering over their “exposure.
Meanwhile, the Greeks have asked for a last minute “2 year” agreement to restructure debt, extend terms, and make policy changes.
“There are big questions over whether the eurozone would consider Greece’s request. While European officials have said that a new aid program would be possible, it would require Mr. Tsipras to accept the policy overhauls and budget cuts he has so far rejected. Many officials also don’t trust Mr. Tsipras and his government to implement these measures.” [NakedCap]
And all of this to avoid “haircuts.”
“A haircut, in the financial industry, is a percentage discount that’s applied informally to the market value of a stock or the face value of a bond in an attempt to account for the risk of loss that the investment poses.” [FinDict]
If the players in the Greek debt game willing to take a “hair cut,” we could get these headlines into the archives in short order. Obviously, they are not.
The problem may be that the Greek debt is simply not recoverable in the foreseeable future? Now, we circle back to “exposure.”
“The merest hint of bank collapses sends fear through financial markets. Then there is the prospect of contagion, that other European nations could follow Greece and fall foul of repayment commitments.” [abcnetAus]
In a world connected by hazy, mistrusting, and expensive financial deals, the fear of contagion is very real for the investment bankers. Who’s next? The Portuguese? The Spanish? The Italians?
The impasse over Athens is taking on the appearance of an argument over how everyone can win and nobody loses. The Greeks, billionaires included, need to pay their taxes, and probably more taxes than they’ve been wont to pay previously. Some government services may need to be scaled back, but unrestrained austerity would only serve to further reduce their GNP. For their part, the bankers may need a quick to the barbershop.