“Nicko! Don’t play with the food! When I was your age, we didn’t have food!” – Maria Portokalos, My Big Fat Greek Wedding
It looks as though the proverbial fan may soon be hit with excrement. Riots in Greece have picked up. It looks as though the PM may not be able to pass another round of “austerity measures” (i.e. start to think about balancing the budget) in order to get more IMF/EU bailout cash. The credit-swap markets are apparently calling it an 80% chance of default.
The Greeks have a budget deficit (who doesn’t?). The government spends more than it takes in, and has to borrow the rest (about 56% more than it collects in revenue, if the numbers I found at Reuters are to be believed). Do that year-after-year and you’ll find that you have a massive debt whose interest payments may well eat up your entire revenue stream (or more – Greek sovereign debt apparently stands around $430 billion euros with revenues perhaps in the $120 billion euro range and sinking fast [these are rough numbers and may not be the most current]).
I was going to lead in with some meandering commentary about Greek history, the invasion of Xerxes, the Delian league (as a precursor to Greek banking interests), and the current crisis. I then found an article by Victor Davis Hansen and figured “I’m good – Hansen will cover all of that.” The article is a good read, but sadly he did not launch into historical backdrop as he usually would. At that point I figured, “man, if Victor Davis Hansen can’t weave the battle of Thermopylae into this story, then I surely can’t” – so I moved on.
It’s interesting to see how the players line up on this, and what the best outcomes may well be.
First there are the Greeks. They have spent way too much money for way too long, giving away massive government benefits to an entitled public sector class that dominates the country. The Emperor has been exposed as a naked man though, and the game just can’t continue. Whether the IMF/EU demands austerity or not, cuts must happen. There’s nothing wrong with that, I suppose. People get away with living beyond their means (either as individuals or a society) for a while and then have to adjust back to reality. And adjust they will, though perhaps not without major pain and contortions along the way.
Then there are the banks. As usual, some idiots somewhere loaned money to the Greek government (and Greek interests) not considering the ramifications of system collapse. They stand to lose their shirt when the Greeks default. (And here, I’m supposing it could be a rather hard, disorderly default – not something like missing an interest payment by a week or so.) European and American bankers are very interested in seeing another bailout – because it’s really a bailout for them. They don’t want to have to write down the bad debt and take the hit.
Then there is the rest of us. Why do we matter in all of this? Well, who do you think will do the bailing out? Who bailed out the Wall Street banks when the credit crisis hit back in 2008? That’s right, it was us. (Funny how that works. The government took money out of my checking account, via taxes, to give to the banks, so that the banks would be well capitalized enough to loan the money back to me. Ummm, I think I’d rather just have kept the money.)
So what do these interests want? Well, we want a default – no bailouts, not one red cent of my tax dollars to bail out a corrupt government half way around the world. NOT ONE RED CENT!
The banks want a bailout. The wealthy have tons of money, but they always seem to want the rest too. Perhaps its greed, or just plain pride (they don’t want to look foolish). They clearly want taxpayer dollars to cover their losses – where have I heard that before?
And what of the Greeks? They actually want to bury their heads in the sand here. They want to continue running massive deficits and not pay for them. They want to continue to consume far more than they produce, and never face the truth. Since this won’t be coming through, I suppose a default is probably the best thing. It will force an immediate balancing of the budget – they wouldn’t be able to borrow a penny more on the international markets. But it also gets the 430 billion euro albatross off their necks and lets them go about solving the problems in their own way, not the EU’s or IMF’s.
In the coming days I suspect we will be warned again and again, perhaps by our own president or his Treasury Secretary and Fed Chairman, that the dangers of a Greek default are too grave, and the US taxpayers must foot the bill. I hope we won’t, but I bet we’ll get the rhetoric.
As for we simple, common folk, well, we’ll be watching. We’ll pray for the Greeks – surely there are some Christian folk over there who are about to go through a major upheaval in their financial systems … I suppose it’s possible we’ll get there someday too.
We hate to see them go through this pain, but it would be immoral to take money from those who have budgeted and lived within their means and give it to those who consume way beyond what they produce but are somehow “entitled” to live well. (Again, where have I heard that before?)
I suspect there will be more interesting developments over the next few days …
Quick update (17 June 2011). First, I caught an article from Martin Hutchinson in which he explains the Greek dilemma:
“You see Greece has basically been living “high on the hog” of European subsidies since 1981 when it joined the EU. As a result, its people have ended up with a gross domestic product (GDP) per capita of about $30,000 a year; in other words, very close to the median of EU GDP per capita.
That’s a problem because their productivity doesn’t get anywhere near reflecting this. For one thing, they all seem to retire at 52.
So, therefore, what needs to happen is the Greek living standards need to decline about 30% or 40% in order for them to produce enough to support them, assuming the EU isn’t going to just pour money into the place ad infinitum. And you’ve therefore got a problem because an EU rescue merely perpetuates the subsidies and is a huge extra tax on the better countries of the EU like Britain, Germany, and France, whose taxpayers are expected to support all these deadbeats.”
Thought: If the standard of living needs to decline 30% or 40% just to put the Greeks in a situation where they produce as much as they consume, how much must it decline in order to have them produce what they consume and service the interest on outstanding debt? How much more would it have to decline for them not just to service the debt, but start paying it back?
The numbers? Debt is about 150% of GDP, and they’ll be paying massive interest rates. For simplicity, let’s put it at a 10% rate – which means 15% of GDP goes to servicing debt. If living standard has to drop 30% or 40% to get them even with their production, it would have to drop 40% or 50% to service the debt too (at our generous rate guess). Maybe 45% or 55% to start paying it back.
Given that much of Greece is employed by the government, and can therefore vote on their package, one must recognize the lack of political will to accept a 30% to 40% cut in living standards (entitlements always work this way). Is there any political will to cut 40% to 50%? or 45% to 55%? NO! There will be a default.
Funny thing, the default will actually force the austerity – the budget will be balanced because nobody will loan the government anything.