Sunday, July 05, 2015

Greece and Debt

According to the Bible,

The borrower is slave to the lender (Prov 22:7).
Two corollaries of this verse are being lived out in Greece.
  • The government that borrows excessively turns its people into slaves.
    The Greek people are experiencing this at the current time.

  • When the borrower owes the lender €300 billion, the lender is also the slave of the borrower. The governments of Europe are discovering this in Greece.

Greek Government Foolishness

1. Betrayed by Politicians
The Greek people have been betrayed by successive governments that have taken on excessive debt in order to buy votes.

2. Greek Oligarchy
Bad government protects the rich and powerful. The Greek banks are vehicles through which the Oligarchs controlled the economy. They serve the economic elite, while smaller businesses are starved of funding.

3. Banks Broke
The Greek banks are broke. The three largest banks—–Alpha Bank, National Bank of Greece and Eurobank Ergasias—–have upwards of €60 billion of non-performing loans, which represent nearly one-third of their total book of €180 billion. In addition, they also have €50 billion of bonds and other investments—much of which was issued or guaranteed by the Greek state. Against the massive imbedded losses, the three banks have only €9 billion of tangible book equity. In short, neither the stock or the long-term debt of these banks have any recoverable value at all (David Stockman)

European Control

1. NATO Outpost
During the cold war, Greece was an outpost of NATO on the edge of the Eastern Bloc. The US encouraged Greek military spending and supported the military junta that ruled Greece, because they feared a socialist government would link the nation with the Soviet Union. Being orthodox Christians, the Greeks have a natural affinity with the Russian orthodox people.

2. Entry to the Euro
When Greece entered the Euro, Goldman Sachs helped the government fudge the books to make it look better than it was. Greece used to be on the boundary between of the Eastern Bloc during the cold war, so European leaders were keen to get it into the Euro. They turned a blind eye the accounting fudges to get Greece locked into Western Europe.

3. Bank Stupidity
After Greece joined the Euro, European banks made huge loans to the Greece government at low interest rates. Their governments encouraged them. Minimal due diligence would have shown that these loan could never be repaid. Without government rescues these banks would have collapsed in 2011 and 2012. The European government took responsibility for these debts. Not a wise move.

4. Bank of Last Resort
The Greek banks are insolvent, but all banks everywhere are technically insolvent. In the modern system, the central bank acts as the bank of last resort, to prevent bank runs. The bank of last resort for Greece is the European Central Bank (ECB). By cutting off emergency funding to Greek banks, it has precipitated a run on the banks. This is a bizarre action for a central bank to take: the opposite of what it is mandated to do. The ECB action has really disrupted economic activity in Greece, a pointless punishment of the Greek people.

5. Euro Debt
The EU got involved in Greece in 2011, because European banks had mass bad debts in Greece. French, German, Dutch and Italian banks and other private lenders had outstanding loans to the Greek government of €100 billion in 2009. Because they considered their banks were too big to fail, the European central banks took over most of the debt. The debts held by the private banks have been reduced to about €15 billion. Now €250 billion or nearly 80% of Greece’s €320 billion of fiscal debt is directly owed to the EU central banks and the IMF; and upwards of half of the balance is indirectly owed to European taxpayers because €45 billion of Greece’s T-bills and bonds are either owned or funded by the ECB.

6. European Share of Debt
The Germans are liable for €92 billion of Greek debt. The French share is €70 billion, although its own debt is approaching 100 percent of GDP. The Italians who already have a 130% debt-to-GDP ratio have a €60 billion exposure to Greece. Struggling Spain is responsible for 42 billion of Greek debt. The political leaders would face a hostile reaction from voters if they had to write off these debts. This is why they are so strident against the Greek government.

7. ECB Capital
A Greek default could wipe out the capital of the European Central Bank. The Greeks owe the ECB about €90 billion and it guarantees another €100 billion owed to other European central banks. ECB equity and reserves are about €95 billion. Writing of Greek debt would wipe out this capital. It would have to be recapitalised by member banks at a time when debt is already a major problem for members of the EU.

8. EU Bullying
The leaders of the EU claim to believe in democracy, but that want to control the nation of Greece. Martin Shulz, the President of the European Parliament says that the Greek government should resign and let a technocratic government take work out a deal acceptable to the Europeans. Like all the European leaders, he does not respect the right of the Greek people to vote on their destiny.

9. Austerity
European leaders have imposed austerity on the Greek economy. Doing this during an economic crisis is stupid, as it just makes the situation worse. The time for reducing debt is during good times. Cutting expenditure during bad times weakens the economy. It increases unemployment and social welfare benefits and reduces taxation, so the deficit gets worse, which increases debt levels. The austerity measures imposed on Greece have weakened the economy, and increased its debts. The time for encouraging austerity was before the GFC, but no one worried about debt back then.

10. Privatisation
European leaders have imposed a privatisation program on Greece. Even if privatisation is good in principle, it is a foolish thing to do during an economic crisis, because valuable assets get sold at fire-sale prices to wealthy oligarchs. The economic elite obtains cheap assets, and the government loses income. The privatisation of Greek assets has produced very little revenue so far. The banks that are scheduled for sale are now worthless, so there is little to be gained from further privatisation.

11. Gunboats and Debt
European domination of Greece has a long history. In 1850, the British sent gunboats to Greece size ships and their cargoes to cover unpaid debts. This time the governments of Europe hold no security covering their Greek debts. If the Greek government defaults there are no assets to claim, so their money will be lost.

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