9 Years Later... Greece Is Still In A Debt Crisis!

Authored by Simon Black via SovereignMan.com,

Sometimes you have to marvel at the absurdity of the financial universe in which we live.

On one side of the Atlantic, we have the United States of America, which triggered yet another debt ceiling disaster last Thursday when the US government’s maximum allowable debt reset to just over $20 trillion.

Of course, the US national debt is pretty much already at $20 trillion.

(That’s roughly $166,000 per taxpayer in the Land of the Free.)

This means that Uncle Sam is legally prohibited from ‘officially’ borrowing any more money.

But far be it from the US government to start living within its means. Sacrilege!

These guys have zero chance of making ends meet without going into debt.

Just last year, according to the government’s own financial report, their annual net loss totaled $1 TRILLION, and the national debt increased by $1.4 trillion.

And that was in a relatively stable year. There was no major war or financial crisis to fight. It was just business as usual.

This year isn’t going to be any different.

So, cut off from their normal debt supply (the bond market), the Treasury Department is resorting to what they call “extraordinary measures.”

They’re basically pillaging government employee retirement funds, and will continue to do so until Congress raises the debt ceiling.

It’s a repeat of what happened in 2015. And 2013. And 2011.

Pretty amazing to consider that the “richest” country in the world has to plunder retirement funds in order to keep the lights on.

Former US Treasury Secretary Larry Summers said it perfectly when he quipped “How long can the world’s biggest borrower remain the world’s biggest power?”

Then, of course, on the other side of the Atlantic, we have Greece, which is now in its NINTH YEAR of a major debt crisis.

Incredible.

Greece has had nine different governments since 2009. At least thirteen austerity measures. Multiple bailouts. Severe capital controls. And a full-out debt restructuring in which creditors accepted a 50% loss.

Yet despite all these measures GREECE IS STILL IN A DEBT CRISIS.

Right now, in fact, Greece is careening towards another major chapter in its never-ending debt drama.

Just like the United States, the Greek government is set to run out of money (yet again) in a few months and is in need of a fresh bailout from the IMF and EU.

(The EU is code for “Germany”…)

Without another bailout, Greece will go bust in July– this is basic arithmetic, not some wild theory.

And this matters.

If Greece defaults, everyone dumb enough to have loaned them money will take a BIG hit.

This includes a multitude of banks across Germany, Austria, France, and the rest of Europe.

Many of those banks already have extremely low levels of capital and simply cannot afford a major loss.

(Last year, for example, the IMF specifically singled out Germany’s Deutsche Bank as being the top contributor to systemic risk in the global financial system.)

So a Greek default poses as major risk to a number of those banks.

More importantly, due to the interconnectedness of the financial system, a Greek default poses a major risk to anyone with exposure to those banks.

Think about it like this: if Greece defaults and Bank A goes down, then Bank A will no longer be able to meet its obligations to Bank B. Bank B will suffer a loss as well.

A single event can set off a chain reaction, what’s called ‘contagion’ in finance.

And it’s possible that Greece could be that event.

This is what European officials have been so desperate to prevent for the last nine years, and why they’ve always come to the rescue with a bailout.

It has nothing to do with community or generosity. They’re hopelessly trying to prevent another 2008-style meltdown of the financial system.

But their measures have limits.

How much longer do Greek citizens accept being vassals of Germany, suffering through debilitating capital controls and austerity measures?

How much longer do German taxpayers continue forking over their hard-earned wages to bail out Greek retirees?

After all, they’ve spent nine years trying to ‘fix’ Greece, and the situation has only become worse.

For a continent that has been at war with itself for 10 centuries and only managed to play nice for the last 30 or so years, it’s foolish to expect these bailouts to last forever.

And whether it’s this July or some date in the future, Greece could end up being the catalyst which sets off a chain reaction on both sides of the Atlantic.

Do you have a Plan B?

Greece versus its creditors: Who will blink first?

The Greek debt crisis has been around for a long time, probably raising its head just around the time that the U.S housing and loan crisis unfolded in 2009; when the country acknowledged that it piled up debt to the tune of 113% of its GDP. 

Since then, through endless turmoil and stress, the country has been battling with its creditors to “give it a break” and write-off a large chunk of its owing. That story still continues till this day!

A RAY OF HOPE?

A review of Greece’s financial performance in mid February, by the European Commission (EC), shone a ray of hope on the battered nation’s economy. The Commission had earlier predicted that the country’s GDP would see a decline of 0.3% in 2016. That forecast was revised upward – noting a growth (instead of a decrease) of 0.3%.

The review also concluded that there was hope of a continued recovery through 2017 with a 2.7% increase, and a 3.1% GDP rise in 2018. However, this was predicated with a very important proviso: That the soon to be held review (planned for February 20th) of Greece’s dept relief package concludes quickly; and that Greece may need to embrace additional austerity measures as a result.

And that sent dark clouds to cover the tiny ray of hope!

Greek prime minister’s leftist coalition government was quick to dismiss any suggestions of yet more austerity measures. Hardliners within the coalition believe that the Hellenic nation is being asked to tighten its belt more than what was previously agreed – without anything substantial to show in return.

Digital Policy Minister Nikos Pappas minced no words in telling his supporters what he thought of the ECs comments: In Pappas’ words, there would be “…no more austerity measures” accepted by the Greek government. Period. 

The dark clouds overshadowing the ray of hope just got even darker!

THE RACE IS ON

With the next installment (of €86B) of bailout funds hanging in the balance, Greece is desperate to find a resolution to its predicament – as are its creditors. In July this year, the Greeks have to make €7B in debt repayments to the European Central Bank (ECB). As a result of the latest crisis, there’s renewed talk of a Greek default, which has sent interest rates for Greek debt rising, while badly hitting the country’s already struggling stock market.

Meanwhile, in an effort to resolve the deadlock, EU Finance Commissioner Pierre Moscovici met with Mr. Tsipras in Athens on February 15th.  The urgent session really had just one agenda item: To try and convince the Greeks that further austerity measures would be the only way that the next tranche of bailout funds, amounting to around €86B, would be released.

THE REAL “STORY”?

Despite all the wrangling and raucous flurry of activity – both behind and on the scenes – Greece-watchers might be wondering what the “real story” here is. A central party to the Greek bailout talks, the International Monetary Fund (IMF), seems to be sending out mixed signals. 

At a recent press event, its Managing Director, Christine Lagarde, said that the IMF “…cannot cut a sweet deal for a particular country”; meaning Greece should not expect “special treatment” from the world’s lender. Simultaneously though, she indicated that Greece’s creditors should brace themselves for a “haircut” as a means to resolve the latest standoff.

So, what’s the real story here? And who will blink first? Will it be the lenders throwing in the towel, or will Greece have to bow to international pressure – again! – and swallow yet another bitter pill of unpopular economic belt-tightening? Time will tell!

Is Greece Really On The Verge Of Another Financial Crisis?

Submitted by Milton Ezrati via The Strategic Culture Foundation,

Just about every adult on earth has seen this show before. Greece faces a debt repayment that it cannot meet: for this performance, €86 billion due in July. It needs fresh bailout funds from the European Union and/or the International Monetary Fund because borrowing directly on global capital markets comes at too high a cost—10 percent to replace the maturing bonds. Germany, leading the EU, states that before Greece receives a single euro it must first commit to more severe budget policies. The IMF points out that Greece cannot possibly live up to Germany’s demands, and even if it did, the country would not be able to repay its outstanding debt burden, which at last count stood at 181 percent of Greece’s gross domestic product. The IMF goes on to hint that Greece may have to leave the eurozone. Throughout this familiar point and counterpoint, few focus on Greece’s need for the fundamental economic reforms that offer the country its only hope of using its own resources to meet its obligations.

Pretty much the same actors are playing the same roles as a couple of years ago, when Europe last staged this farce. Greek prime minister Alexis Tsipras has assumed his same initial tough stance toward Greece’s creditors, just as he did last time, before he caved into EU demands. German finance minister Wolfgang Schäuble insists that the EU will give no help until Greece broadens its income tax and cuts public pensions enough to create a budget surplus excluding debt service costs—known as a primary surplus—that is equal to 3.5 percent of GDP and maintain that surplus for ten years. Greece has countered by saying that it might commit to three years. The head of the IMF’s Europe department, Poul Thomsen, has argued that such goals are impossible. He has pointed out that next year Greece expects a primary budget surplus of only 1.5 percent—even after two years of severe budget constraints. He has also gone on to stress that such fiscal severity is counterproductive given Greece’s depressed economy and fragile politics.

The IMF has a point. Past budget stringency has failed to relieve Greece’s predicament. To be sure, Greece has never really lived up to its commitments in this regard, but even previous watered-down tax hikes and spending cuts have so depressed growth that progress on public finances has remained problematic. Since this crisis first emerged in 2010 and Greece first began to comply with EU budget demands, the real economy has shrunk 4.2 percent a year through 2015 (the last full year for which data is available). Unemployment has climbed to 26.2 percent of the workforce, and youth unemployment stands at 49.8 percent. Such economic reverses have increased needs for government relief, even as they have reduced government revenue flows from income and value-added taxes. As a result, public finances have suffered. German demands for more severe action along these lines seem unlikely to have a different, more favorable effect going forward.

Meanwhile, everyone seems to ignore the fundamental economic reforms that might get Greece out of its untenable situation. If Greece were to liberalize its constraining labor and product laws and ease restrictions on new business formation, then its economy could grow—even in the face of stringent budget regimes. Unfortunately, since the 2010 opening night of this farce, Greek governments left and right have resisted such steps. Instead, Greece’s established business interests have managed to keep down competition with a regime of government red tape, which is extreme even by European standards. Instead, Greece maintains a set of product regulations that stymies the free flow of goods in favor of existing buyers and suppliers. Instead, unions and others in established positions have secured themselves behind labor laws that constrain the ability of businesses to either hire or fire—at the expense of job seekers.

If Athens were to unwind this crony-capitalist regulatory regime, it would generate an economic dynamism that Greece desperately needs. Organic economic momentum would overcome the constraining effects of German budget demands. The country could break the vicious cycle it is in, where budget stringency fails to improve public finances because it also impedes growth and leads to more calls for greater restraint. That cycle only redoubles the weight on the country’s economy and future budgets. By promising organic growth, fundamental reforms might even give private investors enough confidence to lend Athens money at supportable rates and obviate its need to go to Europe, hat in hand.    

But such reform is unlikely to take place any time soon. Since Athens has overseen an economic disaster without tackling the entrenched interests that benefit from the status quo, then it is a good bet that the current regulatory mess will prevail. That leaves only two potential paths for Greece and Europe. In one, Greece fails, stiffs its creditors and leaves the eurozone to return to a depreciated drachma. Greece would have trouble borrowing at supportable rates for years following such an event, and though a depreciated drachma might help Greek exports and tourism, it would further impoverish an already suffering population by reducing the global buying power of its income. Such an event would also raise additional doubts about the European experiment as it is currently structured. But what is more likely is that Greece will pretend to comply with the EU’s demands, secure funding and avert a crisis until it becomes apparent that Athens cannot make the next big payment. At that time, the same players—or their understudies—will take the stage for the next remake of this show.