Tuesday 1 November 2011

The Cradle of Democracy: Greek Debt and the Referendum

Kathimerini

Athens News

BBC Report

BBC Report 2

Reuters

Robert Peston (closer to the mark)

Gavin Hewitt

New York Times on the IMF Reports

An Australian friend sent me this extract from a fairly hostile article in The Australian:

http://www.theaustralian.com.au/news/features/making-a-killing/story-e6frg8h6-1226176176402
Register online to read it all.
The tsunami of cheap credit that rolled across the planet between 2002 
and 2007 wasn't just money; it was temptation. It offered entire 
societies the chance to reveal aspects of their characters they could 
not normally afford to indulge. Entire countries were told: "The lights 
are out, you can do whatever you want to do and no one will ever know." 
What they wanted to do with money in the dark varied. Americans wanted 
to own homes far larger than they could afford. Icelanders wanted to 
stop fishing and become investment bankers. The Germans wanted to be 
even more German; the Irish wanted to stop being Irish. No response was 
as peculiar as the Greeks', however.

For most of the 1980s and 1990s, Greek interest rates ran 10 per cent 
higher than Germany's, as Greeks were regarded as far less likely to 
repay a loan. There was no consumer credit in Greece: Greeks didn't have 
credit cards. They didn't usually have mortgages, either.

Of course, they wanted to be treated by the financial markets like a 
properly functioning northern European country. In the late 1990s they 
saw their chance: get rid of their currency and adopt the euro. To do 
that, they needed to prove they were capable of good European 
citizenship - that they would not, in the end, run up debts that other 
countries in the euro area would be forced to repay. In particular they 
needed to show budget deficits under 3 per cent of their gross domestic 
product (GDP) and inflation running at roughly German levels. To hit the 
targets, the government moved all sorts of expenses (pensions, defence) 
off the books, froze prices for electricity, water and other state 
utilities and cut excise taxes on petrol, alcohol and tobacco.

In 2001, Greece entered the European Monetary Union, swapped the drachma 
for the euro and acquired for its debt an implicit European (read: 
German) guarantee. Greeks could now borrow funds long-term at roughly 
the same rate as Germans. To remain in the eurozone, they were meant, in 
theory, to maintain budget deficits below 3 per cent of GDP; in 
practice, all they had to do was cook the books.

Here entered Goldman Sachs, which engaged in a series of apparently 
legal but nonetheless repellent deals designed to hide the Greek 
government's true level of indebtedness. For these trades Goldman Sachs 
- which, in effect, handed Greece a $1 billion loan - carved out a 
reported $300 million in fees.

The machine that enabled Greece to borrow and spend at will was 
analogous to the machine created to launder the credit of the American 
sub-prime borrower - and the role of US investment bankers in the 
machine was the same. The investment bankers also taught Greek officials 
how to securitise future receipts from the national lottery, highway 
tolls, airport landing fees and even funds from the EU. Any future 
stream of income that could be identified was sold for cash and spent.

As anyone with a brain must have known, the Greeks would be able to 
disguise their true financial state for only as long as (a) lenders 
assumed that a loan to Greece was as good as guaranteed by the EU (read: 
Germany) and (b) no one outside Greece paid much attention. Inside 
Greece there was no whistleblowing, as basically everyone was in on the 
racket.

As it turned out, what the Greeks wanted to do, once the lights went out 
and they were alone in the dark with a pile of borrowed money, was turn 
their government into a piñata stuffed with fantastic sums and give as 
many citizens as possible a whack at it.

In the past 12 years the Greek public sector wage bill has doubled in 
real terms - and that doesn't take into account the bribes collected by 
public officials. The average government job pays almost three times the 
average private-sector job. The national railway has annual revenues of 
$137 million but an annual wage bill of $550 million and $400 million in 
other costs.

On October 4, 2009, the Greek government fell. The new government found 
so much less money in the coffers than it had expected that it decided 
there was no choice but to come clean. The new prime minister, George 
Papandreou, announced that Greece's budget deficits had been badly 
understated - and that it was going to take some time to nail down the 
numbers.

Pension funds and global bond funds and other sorts who buy Greek bonds, 
having seen several big American and British banks go belly-up, and 
knowing the fragile state of a lot of European banks, panicked. In came 
the International Monetary Fund to examine the Greek books more closely; 
out went whatever tiny shred of credibility the Greeks had left. "How in 
hell is it possible for a member of the euro area to say the deficit was 
3 per cent of GDP when it was really 15 per cent?" a senior IMF official 
asks.

That's more or less what I asked when I went to see the new Greek 
minister of finance, George Papaconstantinou, whose job it was to sort 
out this fantastic mess. Papaconstantinou attended New York University 
and the London School of Economics in the 1980s and then spent 10 years 
working in Paris for the OECD. Like many people at the top of the new 
Greek government, he came across less as Greek than as Anglo - indeed, 
almost American.

"The second day on the job I had to call a meeting to look at the 
budget," he said. "I gathered everyone from the general accounting 
office, and we started, like, this discovery process." Each day they 
discovered some incredible omission. A pension debt of a billion dollars 
every year somehow remained off the government's books. Everyone 
pretended it did not exist, even though the government paid it. The hole 
in the pension plan for the self-employed was not the $400 million they 
had assumed but $1.5 billion; and so on.

"At the end of each day I would say, 'OK, guys, is this all?' And they 
would say, 'Yeah.' The next morning there would be this little hand 
rising in the back of the room: 'Actually, minister, there's this other 
100 million to 200 million euro [$137m-$274m] gap.'"

By the final day of discovery, after the last little hand had gone up, a 
previously projected deficit of roughly $9.6 billion was actually more 
than $40 billion. The IMF's question - how is this possible? - is easily 
answered: until then, no one had bothered to add it all up. As he 
finished his story, he stressed that this wasn't a simple matter of the 
government lying. "This wasn't all due to misreporting. In 2009, tax 
collection disintegrated, because it was an election year."

"What?"

He smiled. "The first thing a government does in an election year is 
pull the tax collectors off the streets."

"You're kidding."

Now he was laughing at me. I'm clearly naive.

The evening after I met the minister of finance, I went for coffee with 
a tax collector. He took it for granted I knew that the only Greeks who 
paid their taxes were those who could not avoid doing so: salaried 
employees of corporations, who had their taxes withheld from their pay. 
The vast army of self-employed workers - the biggest in Europe, from 
doctors to the guys who ran the newspaper kiosks - cheated. "It's become 
a cultural trait," he said. "The Greek people never learnt to pay their 
taxes. And they never did because no one is punished."

Greece's tax-collecting system, it turned out, mimicked that of an 
advanced economy - and employed a huge number of tax collectors - but it 
was rigged to enable an entire society to cheat on its taxes. The Greek 
state was not just corrupt but also corrupting. Once you saw how it 
worked you could understand a phenomenon that otherwise made no sense at 
all: the difficulty Greek people have in saying a kind word about one 
another. Everyone is pretty sure everyone is cheating on his taxes, or 
bribing politicians, or taking bribes, or lying about the value of his 
property to avoid taxes. And this total absence of faith in one another 
is self-reinforcing. The epidemic of lying and cheating and stealing 
makes civic life impossible; and the collapse of civic life only 
encourages more lying, cheating and stealing.

The structure of the Greek economy is collectivist, but the country, in 
spirit, is the opposite of a collective. Its real structure is: every 
man for himself. Into this system investors poured hundreds of billions 
of dollars. And the credit boom pushed the country over the edge into 
total moral collapse.

Just now the global financial system is consumed by the question of 
whether the Greeks will default on their debts. At times it seems as if 
it is the only question that matters, for if Greece walks away from $400 
billion in debt, then the European banks that lent the money will go 
down, and other countries flirting with bankruptcy might easily follow.

But there's a second, more interesting, question: even if it is 
technically possible for these people to repay their debts, live within 
their means and return to good standing inside the EU, do they have the 
inner resource to do it? Or have they so lost their ability to feel 
connected to anything outside their small worlds that they would rather 
just shed the obligations?

On the face of it, defaulting on their debts and walking away would seem 
a mad act: all Greek banks would instantly go bankrupt, the country 
would be unable to pay for the many necessities it imports (oil, for 
instance) and the government would be punished for many years with much 
higher interest rates, if and when it was allowed to borrow again.

But, as I said, the place does not behave as a collective; it behaves as 
a collection of isolated particles, each of which has grown accustomed 
to pursuing its own interest at the expense of the common good. There's 
no question that the government is resolved at least to try to recreate 
Greek civic life. The only question is: can such a thing, once lost, 
ever be recreated?

This northern summer, when I returned to Dallas to see Kyle Bass, Greek 
credit default swaps were up from the 11 basis points he had paid to 
2300. Ireland and Portugal had required massive bailouts; and Spain and 
Italy had gone from being viewed as essentially riskless to nations on 
the brink of financial collapse. On top of it all, the Japanese ministry 
of finance was about to send a delegation to America to seek someone, 
anyone, willing to buy half a trillion dollars' worth of 10-year 
Japanese government bonds.

"This is a scenario in which no one alive has ever invested before," 
Bass said. "Our biggest positions now are Japan and France. If and when 
the dominoes fall, the worst, by far, is France. I just hope the US 
doesn't collapse first. All my money is bet that it won't. That's my 
biggest fear - that I'm wrong about the chronology of events. But I'm 
convinced what the ultimate outcome is."

No comments:

Post a Comment