Tuesday, November 8, 2011

Greek Drama

The Greek Drama keeps getting stranger by the day. Greece’s prime minister, George Papandreau, after acceding to the financial troika’s (IMF, European Central Bank, European Commission) demands to impose further harsh austerity measures in exchange for the latest in a long list of bailouts decided to put the measure to a referendum. Then he changed his mind; now he wants a unity government, I expect so the people’s wrath can be spread around to all the political parties. No matter what the citizenry actually wanted, all the parties were going to back the deal anyway, so why take the blame himself for his party only?

As part of the deal private Greek bond holders are going to take a 50% haircut; that is, lose half of their investment. The part owned by the big banks will then be covered by bailing them out. That is why there is such heavy pressure and urgency in getting Greece to take on the new debt; better the Greek people pay than France, Germany, etc., having to ‘recapitalize’ their banks with their own money.

In the end result, if everything works according to the troika’s optimistic projections, Greece’s debt to GDP ratio will fall to 120% in 2020. In other words, after eight years of wrenching and painful sacrifice, they will still be hopelessly mired in debt. Part of the problem, it seems to me, is that the leadership is conflating default with leaving the Euro. The two are not necessarily mutually exclusive, because even if Greece formally, technically ‘leaves’ the Eurozone and prints its own money, most transactions there will still be in Euros unless the government specifically prohibits their use, which would be absurd. Go to any European country outside the Eurozone and you can spend Euros as easily as the local currency, at least in the touristy or big city areas.

All the money now in circulation in Greece is Euros; tourism, the country’s number one industry will continue to bring in Euros and all contracts signed since Greece joined the Euro in 2001 are in Euros. The beneficiaries of those contracts will demand payment in Euros.
What’s to stop Greece from continuing to use the Euro after they’ve ‘left’ the Eurozone? For instance, I live in Cambodia in which the US Dollar makes up 80 to 90% of all transactions even though the country also has its own currency. There are no US coins here so everything priced less than a dollar is in riel, the local currency. Also all transactions with the government are made in riels. Cambodia, as well as the several other countries who use the dollar as their own never asked America for its permission to use the dollar.

As long as the Greek people are going to deal with hardship anyway they’re better off defaulting. That way it can be cathartic and the citizenry can come together in a national forum and decide where they want their country to go rather than be forced to accept the nasty, punitive, neo-con economic prescriptions/ultimatums of the elite whose primary goal is to protect their banks and by way of inference, their investments. As I’ve stated repeatedly, there’s too much money at the top. If the 1% aren’t willing to give some of it up in increased taxes they should at minimum lose out for their poor investment choices. If the top are cut down to size, everyone else will benefit.

While Greece, the small potatoes, is in turmoil, Italy, the big cahuna, is teetering on the brink. It’s that old contagion thing: If Greece is having problems, then maybe Italy will be next, so let’s jack up the interest Italy has to pay now. The bywords of the recent international summits is: Calm the Markets; that’s the primary goal of the bailouts and rescue funds. If the financial community, which brought down the world economy with its shenanigans, is the least bit ‘jittery’ then they’ll force up interest rates to the point where countries can no longer sustain them, so that Italy last paid 6.6% on its bonds. It cannot go on very long at that rate before it can no longer meet its obligations.

Italy’s debt is very large, 120% of GDP, but its annual deficit actually isn’t, so it’s not really in the same predicament as Greece which is running very large deficits on top of its extremely high national debt ratio. Nonetheless, because the Markets rule, they decide whether a country passes or fails. Without the ‘Greek effect’ few people would be noticing Italy’s problems, or at least not think they were all that important or imperative. High debt doesn’t matter as long as the lender thinks the loan will be repaid. Witness the US which is currently paying very low interest in spite of its massive debt.

To bail out Greece to the tune of a couple of hundred billion is one thing, but to come up with the trillion or so Italy would need… well, that would be a might more of a challenge, possibly even insurmountable.

Meanwhile in make-believe-land, aka, America, there is great wrangling and hand wringing over cutting the deficit by $400 billion a year - from $1.5 trillion to $1.1 trillion. Even after shafting people who depend on benefit programs - SS, Medicare, Medicaid, as Dumbocrats have proposed - there’s still a $1 trillion plus deficit. A healthy economy would reduce the deficit by $400 billion, but that’s nowhere on the horizon, especially since both parties are intent on taking money from commoners, who spend their money in the economy, rather than taxing the wealthy who hoard it or speculate, either way with no benefit to the society as a whole.

I know Obama has taken out his populist, election-is-approaching, talking points about taxing the wealthy, but it’s nearly all lip service since he’s proposing minute amounts from the very wealthiest; nothing that would remotely get the country’s books in order. Further, Congress’ most liberal members, cowed by the neo-con paradigm, are proposing a .25% financial transaction tax to yield $100 million per year when they should be demanding at least 1%. There’s no legitimate long-term investor who’d be put off by paying 1%.

When Greece’s debt to GDP ratio (under the present optimistic scenario) is down to 120% in 2020, the US’s ratio, without drastic attitude adjustments, will be up around 160%; where Greece stands today. Some argue the deficit is not a great problem, better to borrow to create jobs than be stuck with a faltering economy. I might agree if there weren’t such massive wealth reposited in the elite. If a single one time 8% wealth tax on those with more than a million dollars can cover an entire year’s deficit there’s no reason whatever for any cuts in benefit programs, and lots of economic, as well as moral, reasons to tap into those deep pockets.

The US is experiencing a deer-in-the-headlights moment. Crash and burn is coming but Congress is incapable of responding - except by digging in its heels, and challenging the gods of reality, as it were.

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