The economic viability of the Eurozone continues to slowly leech away. The latest iteration of the crisis originated again in Athens. Last week, voters there chose parties on the left and right that agreed on one thing: No more austerity, including measures already agreed to in exchange for another bailout this summer from the European Union (EU) and the International Monetary Fund (IMF). The popular revolt against austerity could not have been a surprise. Greece has seen its GDP shrink 20 percent, its unemployment rate reach 22 percent, its state pensions and government salaries slashed by 30 percent, and the real hourly wages of Greek workers decline 15 percent. Yet more austerity, designed to assure global investors that Greece will not default on its debts, could mean another 15 percent decline in wages and another 10 to 15 percent drop in GDP. The Eurozone plan, in short, asks the Greek people to accept an extended depression and sharply lower incomes in order to reassure European bankers.
To be sure, most governments have to reassure global investors that their bonds are sound and their private sectors produce healthy returns. What is unique here is that until the financial crisis blew Greece's cover, it had deliberately misled the EU and global markets about its deficits and debt. Using a scheme concocted by its Goldman Sachs advisers, the Greek government moved a significant part of its deficits and outstanding debt off its balance sheets. And Goldman's scheme was so complex and exotic that nobody grasped the deception. Without hard guarantees from the Eurozone, foreign investors are unlikely to trust Greece for a long time.
This Eurozone crisis has other singular features. Most important, the basic arrangements of the Eurozone hobble Greece's efforts to recover. In good times, the euro gave Greece greater access to capital markets than it could ever manage on its own. But in the bad times that have followed, Greece has found itself carrying crippling debt and unable to devalue its way to competitiveness. So, Greece is forced to depend on EU bailouts and the willingness of the European Central Bank (ECB) to accept Greek bonds as collateral for new loans to European banks. The price for these concessions has been drastic austerity. Imposing more austerity on an economy already in a deep downturn was a formula for economic depression and political upheaval -- and Greece now has both.
What does this mean for the U.S. economy? The crisis could reach a climax in matter of weeks, dealing another nasty shock to the recovery. Both sides, however, have good reasons to delay the day of reckoning at least one more time. That means that it is just as likely that the next president will have to deal with this shock. So, if not next month then early next year, it seems likely that the Greek government will formally reject more austerity. With their credibility on the line, the EU and IMF will almost certainly suspend future bailout payments, and the ECB will dial down its indirect supports for Greek bonds. Without those measures, Greece will default on its sovereign debt in a matter of days.
Even if the result is inevitable, a delay of several months will let everyone prepare for a Greek default and exit from the Eurozone. The Eurozone has no rules or provision for kicking out a member. But without the Eurozone's continued support, Greece will have to quit: Only by leaving can Greece reissue the drachma and let it devalue sharply. Everything Greek will be available at fire sale prices, which will attract foreign investors and make Greek exports price competitive. Greece and its people will be left a lot poorer, but that's also now inevitable.
For everyone else, the main danger is contagion. Once the Eurozone lets Greece go, global investors may decide it is time to get out of all risky, European sovereign debt. That would include the huge markets for Italian and Spanish sovereign debt -- and if that happens, the crisis would quickly go global. Every bank in Spain and Italy carries large portfolios of its own governments' bonds. That's why many big depositors at those banks are already shifting their funds to German banks. Already weakened, the Italian and Spanish banks would be bankrupted by a sharp drop in the value of their government bond holdings. The Eurozone's emergency bailout facility can spend up to 500 billion euros buying up falling government bonds and providing capital to faltering banks. But if Italy or Spain teeters on default, that won't be nearly enough to rescue them.
That would bring the world, including the United States, back to 2008. French and German banks also have huge holdings in Spanish and Italian government debt. Our banks do not. But once again, nobody knows how many credit default swaps our institutions have issued for European sovereign debt and the Eurozone banks that hold them. If U.S. financial institutions issued those swaps in large numbers, or simply have large transactions going with European banks caught up in the contagion, the meltdown could lead to a new American financial crisis. After this week's revelations about the reckless bets taken out and lost by J.P. Morgan Chase, there should be little doubt that our financial system would be very exposed to a full-blown Eurozone crisis.
The Eurozone could have resolved all of this some 18 months ago, and at relatively modest cost. That would have required that German Chancellor Angela Merkel accept the basic rule of every monetary union, that the full faith and credit of the whole stands behind the full faith and credit of its parts. And the instrument for doing so would have been the ECB. But that posed short-term term political costs for Merkel.
Last week, the President of the Federal Reserve Bank of Kansas City, Esther George, noted in The Globalist that, "the current [Eurozone] crisis is following much the same pattern of previous financial crisis -- an inability or unwillingness to see the warning signs and take preventive action, followed by massive damage..." So, we have been have been here before, substituting the ideological blinders of Henry Paulson and his colleagues in Bush administration for those of Merkel and her confederates. We all know how that worked out last time.
The reasons for this canard are obvious. The banks "didn't know that Greece was lying." The EU statisticians fell down on the job. Therefore, all banks should be repaid for their losses. And people buy the propaganda and continue peddling the canards, much to the detriment of the taxpayer.
This propaganda is effective and insidious. It covers over a vendor-financing scam. With Too-Big-To-Fail, for instance, a CEO from a corporation in the military industrial complex sits on the board of a big bank, and asks that bank to lend money so that the receiver of the loan can complete a contract with the CEO's company. Sometimes bribes are rolled into the price of the contract. The bank goes along with it knowing that any losses will be picked up by taxpayers. If you see how this plays out, the real sympathy should go to taxpayers outside of France and Germany, the two countries that benefited most from these vendor financing scams. In other words, the money was rerouted to French and German companies, but the losses suffered by French and German banks were partly defrayed by taxpayers outside Germany and France. No sympathy for France, Germany or Greece (home of the corrupt gov't ministers who approved those contracts).
Then there's this. Was Greece above the limit?
http://insidegreece.wordpress.com/2011/12/08/umbrella-union-10-myths-about-greece-and-the-crisis/
"This issue is totally removed from that of forged statistics. It has become a throwaway line for commentators and journalists to write that Greece fibbed its way into the euro. This misconception is largely driven by the decision of the New Democracy government that came to power in March 2004 to conduct an audit of public finances that led to Greece’s budget deficit figure being revised upward, above the 3 percent of gross domestic product limit for euro-area members. However, the deficit increase was largely down to the conservative administration changing the way military expenditure was recorded. Rather than record the spending when the procurements were delivered, it attributed them to the date when the orders were made. This exposed a weakness in the way that the eurozone treated statistics. By failing to agree on a uniform system for all, it allowed statistics to be open to political manipulation in several member states, not just Greece. It is an issue that the European Commission has only addressed over the last few months. As Dimitris Kontogiannis revealed in Kathimerini English Edition recently, the EU now uses the delivery method to record procurements, which means Greece’s deficit when it joined the EMU in 1999 met the 3 percent target."
Also consider the Maastricht requirements were lifted in 2004 so Greece would have joined regardless.
As always, the name of the game in Europe is collateral damage. Portugal is hardwired into the European core in a way that Greece never was. Portugal's debt is owned by Spanish banks, so this kind of budget manipulation to hide debt is accepted and acceptable in certain quarters.
In fact, the EU is still playing these same games today.
Read this: http://www.economonitor.com/edwardhugh/2012/03/11/portugal-gradually-shuffles-its-way-up-towards-the-front-of-the-debt-queue/
"With interest rates on 10 year bonds up around 14% it certainly won’t be. According to the Troika calculations Portugal had sovereign debt of 102.7% of GDP in 2011, and a budget deficit of 5.9% broadly in line with the target laid down in its bailout package. Yet, despite the fact that the Portuguese reform programme was recently described by the WSJ (following the lead of the IMF) as being on track, the deficit numbers were, in fact, only saved by a last minute scramble which involved transferring funds (5.6 billion Euros or 1.9% of GDP) from the banking-sector pension system to the government social security one, in order to achieve what the IMF consider a short term accounting benefit. There were also questions raised as to whether this was not “short term gain for long term pain” in another sense, since the government has also to assume future liabilities for bank pensions, and several experts have queried whether these liabilities were transferred on a “fair value” basis, or whether indeed some sort of disguised longer term (in the short term the bank balance sheets take a hit) subsidy to the banking system was not in fact indirectly provided."
Perhaps the powers that be are relying on journalistic amnesia. After all, the very person who wrote the original 2003 article, Nick Dunbar, recently wrote a piece about the deal in which he seemed to aver that the deal was first uncovered in 2010. Either Dunbar has much editorial oversight in his work or else he has a severe amnesia about the things he himself has previously written about.
Did people know? Well, if you're following the budget deficit reports of the countries in the Eurogroup's sights, you already know that statistical manipulation is still occurring. Not to mention that Germany did the same currency swaps deal with investment banks but the German deal was 50x larger than the Greek deal. Many European countries did this at the time.
It appears to me that the laws of the eurozone were not subverted. They were tailored deliberately in that fashion. At the very heart and root of the entire euro project, there are regulations which do not help the people--they are there for banks and privateers. For instance, the ECB is banned from purchasing even distressed sovereign debt in the secondary markets, but it is allowed to purchase private or corporate debt in those same markets. I think my links made clear that the EU deliberately allowed Goldman to operate legally in such a fashion especially since most countries were doing the same deals.
"The statisticians wanted derivatives-related cashflows to be treated as financial transactions, with no effect on deficit or interest costs, and with the derivatives' current market value stated as an asset or liability. The debt managers opposed this, insisting on having the freedom to use derivatives to adjust deficit ratios. The published version of ESA95 reflects the victory of the debt managers in this argument with a series of last-minute amendments."
Goldman of course claimed that Eurostat was consulted:
http://www.risk.net/risk-magazine/news/1593054/corrigan-goldman-sachs-consulted-eurostat-greece-currency-swaps
Eurostat then claimed ignorance:
http://www.risk.net/risk-magazine/news/2070897/eurostat-continues-deny-knowledge-greece-goldman-swaps
Eurostat is apparently like many of us. The past is the past. There is no history there. But of course, Eurostat is then also claiming incompetence by claiming ignorance since the publishing trail for the deal is widely known. Only Eurostat seems unaware.
It is just not true what the author is claiming about deception.
First, the Goldman deal. Was it a dastardly plan kept a secret from other investors to hide debt or... were there articles such as this one published many years ago?
http://www.risk.net/risk-magazine/feature/1498135/revealed-goldman-sachs-mega-deal-greece
This was published a long time ago. In the trades. Everyone knew about it:
"Equally murky is the exact effect of Goldman Sachs' transactions on Greece's publicly reported national accounts. Since the deficit was a comfortable 1.2% of GDP in 2002, it is more likely that the cashflows were either used to help lower the debt/GDP ratio from 107% in 2001, to 104.9% in 2002 (by funding buybacks) or to lower interest payments from 7.4% in 2001 to 6.4% in 2002. But why did the large negative market value of the swaps not appear on the liability side of Greece's balance sheet?
"The answer can be found in ESA95, a 243-page manual on government deficit and debt accounting, published by the European Commission and Eurostat in 2002. As revealed by Piga, the drafting of ESA95's section on derivatives was the subject of fierce arguments between the government statisticians and debt managers of certain eurozone countries."