The Greek Debt Crisis for Economic Morans
If you work in the financial services industry, or teach economics, or even if your familiarity with the "dismal science" is limited to a course you took in college 35 years ago, this article is not for you. I suggest you click on by and read Roger Simon. Just be sure to let him know I sent you.
When PJM's managing editor called and asked me to do a piece on the Greek debt crisis that even dummies could understand, I was mystified.
"Why me?" I asked. "I don't know the first thing about the Greek debt crisis."
"You're perfect for this assignment," he said. "It's precisely because you don't know anything about the Greek debt crisis that I want you to do it. Besides, you're something of a dummy yourself. People will relate to you."
He had me there. So that's the story of how I, a true Moran when it comes to matters pertaining to numbers and such, got roped into doing a story about how Europe is on the brink of a string of sovereign defaults whose impact on the world's economy might be catastrophic. Or it might not. Or it might be a little catastrophic but not as bad as some people think. Or it might not be catastrophic at all and some analysts are scaremongering.
Get the point? It's a matter of perception. Uncertainty is killing Greece. Can -- and more importantly, will -- Greece pay what it owes to its creditors? And if it doesn't, what does that mean for other countries also teetering on the brink of default?
How much does Greece owe? Good question; glad you asked. It doesn't matter. The whiz kids in the financial press talk in terms of percentages of gross domestic product. For Greece, the forecast is that this year, the country will owe 120% relative to GDP. If you think that sounds like a lot, you're right. It is colossal. Don't worry, though. Here in the U.S. we're doing our best to catch up as quickly as Ben Bernanke can print the money. Our GDP is $14.4 trillion. The debt is now 83% of GDP, up from 51% in 1988.
No doubt the idea that tiny Greece can outdo America in anything -- even in piling on debt -- is driving the Obama administration and the Democrats to greater exertions in running up our national bar tab. This is the kind of "exceptionalism" our president can really get behind.
When a country's debt achieves such stratospheric heights, perceptions begin to change and fear and panic begin to affect the markets. Even Communism begins to look pretty good to some people. That's because no one expects Communists to pay anybody back, but at least the markets would be certain of that. Removing doubt allows creditors to plan for their losses.
Protesters from the Greek Communist Party have taken advantage of the country's miseries by pouring into the streets and calling for the government to reject any notion of cutting spending. Considering the fact that many analysts point to the government coddling public employee unions as a contributing factor to the crisis, one wonders from which planet the Communists fell to earth. It is no longer a question of if the government should cut spending but by how much. The recent bailout package of about $150 billion put together by Germany, France, and the International Monetary Fund calls for Greece to cut spending massively.
The Greek government and the European Union leadership, prodded by the International Monetary Fund, are finally becoming realistic about the dire economic situation in Greece. They have abandoned previous rounds of optimistic forecasts and have now admitted to a profoundly worse situation. This new program calls for “fiscal adjustments” — cuts to the fiscal deficit, mostly through spending cuts — totaling 11 percent of gross domestic product in 2010, 4.3 percent in 2011, and 2 percent in 2012 and 2013. The total debt-to-G.D.P. ratio peaks at 149 percent in 2012-13 before starting a gentle glide path back down to sanity.
Imagine if the U.S. government cut spending by nearly $1.6 trillion in one year. I daresay we'd have riots in the streets too. What policymakers, bureaucrats, and ordinary people in Europe are beginning to realize is that there are limits to the welfare state. After being told for 60 years that government was a spigot from which flowed unending goodies, reluctantly, and with great resistance, Europeans are beginning to understand the concept of limits. There comes a tipping point where taxing producers and giving to non-producers is no longer a viable governing strategy. And because Greece hid their real deficits for years (with the help of Goldman Sachs and other big banks), when the tipping point was reached, it came as a total shock not only to the Greek people, but to creditors around the world.
This "contagion" of doubt is a disease that afflicts much of Europe at this point, as explained by Neil Irwin at the Washington Post:
Contagion is a function of vicious cycles in which confidence in a country's ability to repay its debts falls. If investors lose piles of money on the debt of one country, they assume that owning the debts of other countries with similar finances might cause them to lose even more. So they sell their investment in the second country, which in turn must pay higher and higher interest rates to get any loans, which adds to its debt and creates a fiscal death spiral that can well move on to the next country.
The Greek bailout package is supposed to tide the government over while they deal with the fiscal insanity left over from previous governments. But some very smart people are saying even the $150 billion isn't near enough, that it is only postponing judgment day.
This becomes of interest to American taxpayers because about 40% of all that IMF money comes out of our pockets. And with the prospect that other weak sisters like Spain, Portugal, and Ireland may follow Greece in taking a long walk off a short pier, we Americans would be faced with the prospect of bailing out the IMF:
Greece's bailout alone is likely to cost 120 billion euros ($159 billion) over three years, German Green Party lawmaker Juergen Trittin told Bloomberg News Wednesday, after being briefed by IMF Managing Director Dominique Stauss-Kahn. The IMF can handle bailing out Greece, as well as a potential stabilization plan for Portugal (budget deficit 9.4% of GDP), if the debt contagion moves West. The actual bailout tab could, of course, turn out to be a lot more.
The IMF wouldn't have enough funds on hand, say, to stabilize Spain (budget deficit 11.2% of GDP), which has an economy four times larger than that of Greece, if Spain determined that it required help at the same time as Ireland needed funds.
With the entire euro zone tapped out from bailing out Greece, the problem will fall right into Uncle Sam's lap. At that point, it will become necessary to decide whether to allow Europe to collapse into a muddled heap or assist the IMF in saving what's left. The fact that such a catastrophe would almost certainly impact our own economy negatively might give the impetus to politicians for bailing out the IMF.
Still with me? The numbers being tossed around are dizzying - especially for us Morans. All we need to know at this point is that Greece is getting gobs of money, including 22 billion euros from Germany alone, and that there doesn't seem to be much spine in the Greek government to make the admittedly tough decisions on cutting spending that would start them on the road back.
In other words, these guys are so addicted to spending and so terrified of offending voters that they might prefer paying off 25 cents on the dollar to their creditors and being kicked out of the European Monetary Union instead of biting the bullet and doing what's right for the long-term health of their economy. In their efforts to quiet social unrest, they may open an even bigger can of worms when the dominoes start to fall and the Greek economy collapses, triggering a "contagion" that would affect several other states.
When experts a helluva lot smarter than me and you start talking in such apocalyptic terms -- and in researching this piece, I found that so many of them are -- the natural tendency to accept "authoritative" analyses becomes almost overwhelming. In truth, I would like to believe those other experts who are confidently predicting that the Greek bailout package will do the trick, and that other nations like Spain, Portugal, Italy, Ireland, and Great Britain can muddle through without causing a massive problem.
But many of these optimists had a hand in creating this debacle in the first place. EU governments, central bankers, finance ministers -- they all ignored the problems until the fire began to consume them. And now we're supposed to accept their confident forecasts of recovery?
What do they take us for? A bunch of Morans?
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