Greek Crisis

 
 
There are macro reasons, which are simple and easy: too much corruption etc.

But that doesn’t explain why exactly the Greek economy chose to implode in 2008.

The short answer is the following:

The Greek Economy starting approximately in 1984 started a massive expansion of the amount of money the government spent within the economy. This expansion continued throughout the next 20 years.

The problem with the expansion is that it was not fueled by taxes but through debt.

There were two sources of debt income. The first was the EU which gave the Greek economy a lot of money to improve the country. The second was inflation. What most non-Greeks and most Greeks under the age of 30 don’t remember, is that in the period around 1981->1992 we experienced rapid devaluation of our currency and our savings. In fact sometime in the 1988->1992 period — I can’t remember the exact timing inflation was on a hyper-inflationary trajectory … Stores were offering discounts if you paid in cash now, and prices were changing very rapidly.

Before monetary union access to EU debt was harder than it became after the union.

So up until EU monetary union the situation was unstable and heading to a fall but the rate of accumulation of debt was low.

However, the evil cocktail was brewed and drunk. The cocktail was the following: many Greeks derived some income from the state. This was either indirect – working for a firm that had contracts or directly for the state. The only way to increase income was to get the state to give you more. The only way the state could get more was to borrow. In the past when the amount giving out exceeded the amount coming we would have inflation.

Then monetary union happened and all of a sudden the government could borrow at will at low rates, and give out more money and not pay for it in terms of inflation. And so the government did.

This was a classic ponzi scheme. So the question is: how the hell did the government get the money?

There were three approaches.

1. The first was direct loans, which were not that interesting and limited in scope. Government to government lending is never fun or easy.

2.The second was forcing pension funds under government control to only buy Greek bonds. In fact much of the pension crisis in Greece can be traced to that fact when you couple it with the hair-cut that was imposed on the bonds.

3. The third was far more venal and poorly understood. Basically the Greek government installed it’s own leaders in the public banks and told them to get German loans at ridiculous rates to buy Greek debt. It was a perfect scam: the Germans loaned to Greek banks and the Banks loaned to Greek Government, the Greek Government then spent the money and the German tax payer was going to bail everyone out.

The reason this third scheme was so brilliant is that it made the Greek banks look stable: after all they were borrowing from Germans to lend to the Greek government. And the Greek government looked stable because it was growing — although the growth was fueled by debt.

So what happened? In 2008 as we all know the debt fueled intoxication of the growth period between ~1980 and 2008 came to a crashing end. It came to an end because of the mortgage backed security crisis that put a lot of pressure on the German banks which all of a sudden were unwilling or unable to lend to the Greek government. With the sudden cut-off of the debt fueled air-supply the Greek government started to see it’s growth slow and all of a sudden the debt to GDP ratio went from scary to terrifying to nightmare on elm street scary.

With the Greek government looking insolvent, the Greek banks became insolvent, and then the money stopped flowing in Greece. And if you remember the pension note I made earlier, because the Greek government was on the hook for those liabilities as well it just got worse and worse and worse.

The current set of solutions are not working because most governments are unable to fathom that the real, not-debt-fueled economy, is much smaller.

Let me explain.

In the 1980’s Greece was a poor country. If you weren’t working in some industry that directly extracted money from foreigners or sold to foreigners or dealt with with foreign industry you lived poorly. As the government shared more debt money with people through higher salaries etc, the broader economy took off. As a classic example in the 1980’s Greeks did not travel around Greece because they were broke. In the 1990’s Greek tourism was dominated by Greeks because they had money. That growth in income was fueled in large part by the debt taken on by the Greek government.

So what’s going on now is that people whose business are operating with the rules of the 1980’s are doing fine. If you’re a boutique hotel in Santorin where 90% of your clients are foreigners you’re doing fine. If you’re a hotel in Anafi dependent on Greeks you’re going broke.

Until everyone admits that the country is poorer than the loans assumed the country will continue to free fall. At some point in time either the Greeks will say enough or the debtors will take action. I hope it’s the latter. The former may create other bigger problems for Greece.

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