Two of the better recent chickflicks of the past several years – Sisterhood of the Traveling Pants and Mamma Mia – occur in Greece. After viewing the former with her girlfriends one evening several years ago, Eldest came into the kitchen and announced that she would love to go to Greece. My wife, loving travel herself and envisioning the Holy Grail of family vacations, mentally went Boo-Yah! and plans were laid. The trip coincided with the summer of Eldest’s upcoming senior year; after college started, all bets would be off as to future availability for a trip with the entire family. After more than two years of saving, we hit the road to Greece and Italy.
The trip was instructive in a real world sense, as well. Along with the Acropolis and other historic sites, the kids got to experience (peaceful) political protests, riot-damaged buildings and the presence of riot police, armed with automatic weapons; it wasn’t what I envisioned originally, but hey, it’s educational nonetheless. Consequently, what happens in Greece has a more-than-intellectual interest to our family. As we’ve talked about it periodically, including today’s conversation about the impact of any potential return to the Drachma, it’s been important to keep the players and events straight. So where do we stand at the moment?
As of today, the Greek government is having to decide whether to accept the demands of the "Troika" for continued and additional austerity measures, including the abolition a paid national holiday and reduction in pensions to the tune of about 35%. If they don’t, then the Troika – the European Central Bank, the International Monetary Fund and the European Commission (the governing body of the European Union) – will refuse to release the 130 Billion Euros to the Greek government that it needs to survive. And what happens if they don’t get the money, among other things? At stake is the next installment of 14.5 billion Euros that the Greeks owe on their outstanding debt; they don’t pay it – and without that money, they can’t – and they’re officially in default. Let’s have some perspective here since we’re used to dealing in dollars. As of 2010, the Greek GDP was about $304 Billion; at the June 2010 exchange rate of .819 Euros to the Dollar, this means that the Greek GDP was about 249 Billion Euros. This 130 Billion Euro payment that the Greeks need to survive amounts to 52% of their 2010 GDP and if this were occurring here in the US, a proportional amount that we’d need would be in the order of $7.3 Trillion (yes, that’s trillion).
Why are the Greeks balking? First, their government is chronically incapable of collecting taxes since tax evasion is as big a national sport as soccer with a resulting chronic shortfall in revenue. Second, the Greeks are unwilling to part with their social welfare/retirement benefits, which are amongst the most generous in the world. This particularly galls the thrifty Germans, who have a retirement age about a decade later than the average Greek and who see their best and brightest go into Manufacturing, while the best and brightest of the Greeks become tax accountants. Third, some Greeks believe that something is owed to them by the Germans, who’ve never actually apologized – ummm, yeah, about that 1940 invasion and famine…sorry, ok? Now pay up, you sheepherding deadbeats – let alone reimbursed them for all of the damage caused during the Second World War. Fourth – and probably the most important point – is that there’s an amount of gamesmanship occurring. The old saying is that if you owe the bank $100 and can’t pay, you have a problem but if you owe them $1 Million and can’t pay, then the bank has a problem and that’s the issue here. Greek bonds are held by European banks to a large extent and any default or significant "haircut" of the bond values will leave them insolvent and these banks are already suffering from too little capital. Greeks believe that if they stall long enough, they can drive a hard enough bargain to minimize the damage that they know is going to occur.
The final reason that the balk has become almost concrete is that the Germans – who as one of the few financially AAA rated countries in Europe – are the real backstop behind the European bailout. They’ve seen this continue for more than a year and are at the point that some of their Ministers are demanding that if the Greeks really want the money, then they’d have to give up control of their public budget and spending functions to non-Greek Europeans; the Greeks would essentially be giving up their sovereignty. Consider the backlash here if we were so in hock that the Chinese demanded control of our fiscal autonomy in return for funds.
The situation is simply so impossible that if it were presented to Solomon, he’d sit down with a fifth of Jack Daniels and call it a night.
So if things are that screwed up, why are they worried about Greece? Again, it comes down to the banks. The European banks are badly undercapitalized and any truly significant hit on their Greek bonds could be devastating to them, let alone to their ability to continue making sufficient loans to actually healthy businesses that need money. These banks are tied up amongst one another in a web effect and the great fear is of a financial lock-up that would make the 2008 Lehman collapse look like a cakewalk. The web effect even carries over to domestic American banks and there’s fear of difficulty here, even if not to the extent of Europe. And once Greece goes, next up is Portugal with its own issues and then Spain and finally, Italy.
The final point is that after actually being there, and talking to the merchants and history guides, the fishing captains and average folks – and yeah, even the riot police were pleasant – this is not simply an intellectual exercise. It’s a devastating occurrence with real-world consequences that are tragic and instructive if you’re willing to pay attention.
So, which do you choose? Painful austerity and loss of sovereignty, or economic collapse and your nation?