Recapping the Greek Crisis

by Greek Reporter

It all started a bit before 2000, when the EU countries were preparing for the Euro. Now, it was not that easy joining in since members had to show specific fiscal performance to meet specific criteria. It is no secret today that several of them cooked their books –common knowledge among the ranks of the EU mechanism ever since- but Greece went too far and couldn’t keep it to itself, attracting unneeded attention by the speculators. Later Greek governments followed this same path.

At the same time an intra-EU loan industry was set. The ECB (European Central Bank) would lend to members’ banks at a minimal rate (around 1%), then these banks would buy EU state bonds paying a considerably higher rate, while using these same bonds as a collateral to the ECB for yet more loans. If this is not a bubble waiting to burst I do not know what it is!

The masks shielding the bad state of the Greek economy flew off in 2009 in the aftermath of early Greek elections. With the advent of a new party in power two things became evident: 1) The Greek economics were in a much worst shape the common man could imagine (courtesy of the cooked books), and 2) Greece had gone so far down the easy (loaned) money route that it would be unsustainable.

These very facts sent vibrations on the whole of the EU artifact exposing more countries fiscal weaknesses. But concerning Greece, the markets acted in their own sensible way by depreciating the value of the Greek bonds. At the same time rates for new loans skyrocketed. Greek CDS values (premiums on default insurance) peaked too. Greece was unable to refinance itself and pay off existing bonds with new loans. Practically speaking, Greece defaulted.

The new government was not up to the task of coping with the situation to say the least. It took long, long time to react and also did it in the unique modern Greek political way. They were searching for a political solution to a fiscal problem.

Leaving the technocrats, diplomats, economists, and market specialists out of the loop, the new government just succumbed to their EU counterparts demands when a deal for immediate economic/fiscal support was negotiated. EU officials were also interested in the viability of their own banks that held the big sum of the Greek bonds. As a result, Greece got an unfavorable deal. The specifics of the deal are not to be discussed at the moment because to do so would take us away from the the effects on average Greek citizens. Suffice it to say, the new loans to Greece were given not by the banks, but by the EC member’s themselves. Along with them came strict conditions –as to be expected- regarding Greek economics mending, especially on indexes like the budget deficit and the loan/GDP ratio.

Now a government, especially one that is in a hard currency system that excludes the possibility of a currency depreciation to achieve the new goals, can 1) cut back on State expenses, 2) collect more money from outstanding payments, 3) revive the economy and have proceeds from the expected growth, or 4) downright impose more taxes.

The current Greek government has received much criticism on its inability to perform these tasks after 2 years of effort The outstanding exception is the last option - More Taxes.

I have lost count how many times new taxes were imposed and the old were raised in these past years and we have more road to go. The effect is easy to predict. Taxing a growing economy usually works. But taxing an economy that is already downsizing is a recipe for one thing - A Recessive Spiral.

The effects of which are stories to soon be told.

Greek Reporter - 14 August, 2011