On Monday, June 29 2015, the leading indicators on the American stock market took a sharp dive; the DOW dropped 350.33 points and the NASDAQ went down 122.04 points.
All this because Greece was at the point of near bankruptcy, with a massive payment that was due Tuesday June 30, which the government couldn’t and didn’t meet. Negotiations for a new loan broke down the Friday before, when the Greek negotiating team walked out of the meeting. The Greek Prime Minister, Alexis Tsipras and the leftist Syriza party who were elected to end austerity, called for a referendum to be held a week later, letting the people decide what to do. The next day, Tuesday June 30th 2015, Greece defaulted on its debt. On Wednesday, July 1, the Greek government attempted to come to an agreement with the European Central Bank. When the referendum was held a week later the majority of Greek citizens voted against paying back the debt.
The Greeks through nefarious practices for the last decade or so were able to hide the fact that the government was spending far more than it was taking in in taxes. They continually kept spending far more than the GDP (Gross Domestic Product), the amount of wealth the country produced. In addition Greece apparently has a lot more tax cheaters than any of the other European nations, consequently they estimate that about 20 million euros worth of taxes and their earnings were/are going into numbered Swiss bank accounts. The American firm, Goldman Sacks, had earlier engendered creative economics for multi-million dollar fees and allowed the government and people of Greece and other countries, some of which were part of the 19 nations of the Eurozone, to engage in picturesque bookkeeping and spend far more than they should have.
At the beginning of 2010 it was discovered that Greece had paid Goldman Sacks and other banks millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. The most notable is a major currency swap that hid billions worth of Greek debts and loans which were factiously converted into yen and dollars, thus hiding the true extent of the debt. The purpose of this and similar actions was that these various Greek governments could continue spending. An interesting short term solution to an ever growing long term problem that would eventually explode.
The process of paying back its debt, currently set at 270 billion dollars, began toward the end of 2008 with a massive economic collapse. The financial crash that occurred at this time in the United States and beyond, diversely effected Greece, Portugal, Spain, and Italy of the Eurozone Nations. These countries had been working since that time to get themselves out of debt. They have not succeeded, actually Greece has significantly increased her level of debt.
Greece has now essentially defaulted on a repayment instalment of 1.7 billion dollars that was due on June 30, 2015. She could only meet this payment if she borrowed all of the funds from the European Central Bank plus an addition 50 to 60 billion dollars to keep herself functioning. It’s a movement of figures in different columns of the banks bookkeeping that seems to go on forever with the debt never disappearing but continually growing.
On the first Saturday in July the people of Greece voted on a referendum determining whether or not they should pay back their debt to the nations of the Eurozone. I understand that the referendum was fairly complex and that a lot of people had a problem determining exactly what it meant. Also the government recommended a no vote. They came out with a strong no vote. Consequently the Greeks defaulted upon their debt but may still un-default it.
Currently Greece’s unemployment level is over 25%. For the last six years the government has been paying back this debt without really diminishing the principle because she has to borrow to do so. And the country has undergone ever increasing levels of privation in order to do this and accomplished nothing. The banks were closed in Greece by government order and the amount of cash that could be taken out of ATM machines was very limited. The country essentially limped along close to total bankruptcy. Much more money was needed than the country had in order to make the installment payments that Greece seemed to have or could reasonable get. A real solution to this matter seemed highly problematic.
One of the major basic questions dealing with Greece and the Eurozone is what is really National Wealth? Is it money or the goods and services produced within a given amount of time, usually a fiscal year, stated in terms of money value?
Money, for about the last fifty years has had nothing behind it but the word of the government issuing it. Its domestic value is determined by what people will sell or take for it and internationally by what other countries will trade for it. Basically, today, it is a tool, which allows the exchange of goods and services within the particular nation and throughout the world. In essence it is the grease that allows the economies to function. Without an acceptable form of currency a nation faces complete economic disaster.
The problem with printing more money, which is a power the Greek Government does not have as a member of the Eurozone, is that too much money in circulation tends to force up the price of goods and services as people compete for these items. It will eventually bring about a depression. On the other hand too little money in circulation tends to reduce the amount of goods and services needed, as people are limited in what they can afford. This can also bring about a recession leading to a depression. The trick is to have enough in circulation so that maximum productivity can be reached and maintained. This also has to be gradually increased as the population of the nation increases. In Greece today there is not enough funds left to service either the needs of the country or the debt.
People are taking their funds out of the country leaving the banks with a shortage of cash. The banks were closed several weeks ago to end a run on them with long lines waiting to withdraw their cash. The country was either days or hours away from total bankruptcy when the banks were closed. Currently Greece is trapped in an ever increasing cycle of growing debt in order to just maintain its existence.
The Eurozone today is in a situation fraught with contradictions. When the Eurozone were first formed in 1999 the 19 nations agreed to function as a single economic unit with a single currency working through a central bank. Meanwhile, with the exception of currency control, each of the 19 independent states gave up none of their sovereignty and still continued to act as an independent entity. Some of these 19 nations were far more economically secure than others. Greece was one of the poorer nations that acted like the wealthier states and continually spent more money than it could realistically afford.
Up until the end of 2008 the U.S. and other industrial nations were a-flow with money. Then, starting with the United States, the Housing Bubble burst and property values in that country went down the toilet. Internationally the flow of money tightened. Suddenly Greece and these other countries were heavily in debt. In order to meet these debt payments the governments had to divert a good percentage of their taxes. An ever larger percentage of the GDP left these countries and there was not enough left to perform the regular services which the governments ordinarily provided. This in turn forced the governments to lay off large numbers of government employees which, in turn, exacerbated unemployment and decreased the GDP. In order to meet these payments Greece had to borrow more funds from the European Central Bank, actually increasing its debt. With a shrinking economy the government had to further economize in an attempt to meet its payments. This caused more and more economic shrinkage in the country.
What currently exists in Greece is a lose, lose situation with no hope in sight and well over 50% of the population in the referendum have voted for permanent default. But if the Central Bank in the Eurozone grants this then Portugal, Italy, Spain and Ireland may demand the same treatment. In fact it could become a pattern with some of its members. Yet if it doesn’t grant relief they also face an impossible situation. Greece is currently just days ahead of its banks running out of money and going into bankruptcy. It’s quite a dilemma.
In the United States toward the end of 2008 a similar situation existed. This was caused by the explosion of the Real Estate Bubble brought about by the large banks in the country over a thirty year period. The banks had divided each of the many home mortgages into hundreds of pieces and the different pieces were combined and sold in a multitude of different Hedge Funds. Actually no one owned the mortgages, just fractional pieces of them. The large banks financed or refinanced the mortgage paper, then sold the pieces, administered everything and charged fees for everything they did. Once the mortgages were sold the money was lent out again. It was an endless process with the banks collecting multimillions in fees. In this way a million dollars could fund one hundred million or more in mortgages. The banks were in such a hurry to continue the process that they devised an unbelievable sloppy system of record keeping that was fraught with error. This meant there was no accurate record keeping of the multitude of transactions.
When the Real Estate Bubble burst in late 2008 the large banks began foreclosing on properties that they did not own. It took a while for the courts to realize the fraud and all the large banking houses were fined heavily for these and other illegal actions. What the country faced was a possible twenty years or more of insane confusion in the housing industry and a depression greater than that of 1929. With the addition factor that most of the large banking houses in the U.S. could go under and the movement of money throughout the country would become a trickle.
The first actions were taken by President George W. Bush during his last few months in office when the Federal Government began the process of bailing out most of the banks. This was followed by President Barak Obama who successfully continued bailing out most of the large banking houses and also the auto industry and avoided a deep depression.
The housing crisis was largely solved by the Federal Reserve under the sterling leadership of Ben Bernanke, who for a period of over two years bought 45 billion dollars’ worth of mortgage paper every month, spending well over a trillion dollars. The mortgages came from all 50 states and were all fractional shares of an endless number of properties. In essence what the FED did was to contribute well over a trillion dollars to this enterprise with no way of collecting any of it back. In fact it contributed this amount of money to the general welfare and growth of the economy. And the process brought back a level of prosperity and solved the mortgage dilemma in a period of just a few years.
The difference between this solution and the current problem in the Eurozone is that no one in the United States has ever mentioned what was being done. All that the FED announced was that they were buying back mortgage paper. There was never any discussion about the morality of the issue or the fact that they would never be able to cash these mortgages. To my knowledge no one questioned the meaning of this statement. If the country and Congress had been aware of what was happening we might still be in the middle of the mortgage crisis that the banks in their greed caused. People do not like someone else to get something for free even if it indirectly benefits them.
Over the July 4th Weekend the majority of the Greek population voted to reject the current austerity negotiations with the other Eurozone nations. As a result the European, American, and other stock markets dropped on the following Monday.
Basically the issue is with what is the Central European Bank dealing? Is the issue the Greek default on an impossible debt? Or is it a problem the Eurozone is facing regarding one or some of her members? If it’s the former then default is inevitable sooner or later with the lack of stability that would follow this action. If, on the other hand, the issue is the latter then it becomes a problem of the entire Eurozone and its solution is one involving all the states of the Eurozone. The result of this could be a new stability for all the states within the Eurozone.
We’ve seen that dealing with this issue totally as a Greek problem is insolvable from any aspect. If other members of the Eurozone want to punish Greece for excess spending over a decade that ended 6 or 7 years ago they are not only hurting Greece but also themselves and their own futures. But if this issue is dealt with as a Eurozone problem then there are possible solutions from which all of the Eurozone states can benefit.
What is required is a consortium of all the Eurozone states to handle not just Greece’s economic problem but also that of Spain, Portugal, and Italy. They are also in debt to the European Central Bank. If it is everyone’s problem they all need to participate in its solution.
Basically what these states have to deal with is the setting up of a central legislative body representing all of the states that can determine what is best for all of the states. They need to bring about a United States of Europe that has the authority to function for the benefit of all the states within the Eurozone. And all the states need to give up some of their sovereign rights for the good of the union. This, incidentally, was their original goal
Numerous problems will have to be faced and resolved, particularly in terms of the extent of representation each state will have in this new union. With a union each state would be stronger than it currently is and the euro would be back on a solid footing as one of the world’s safest forms of money. The European Central Bank would be the European version of the American Federal Reserve and the world’s stock markets would again be more stable.
Is this possible? That’s a good question. There are innumerable problems that have to be solved before this can come about. But if the answer is, yes, then there would be more stability not only in the Eurozone but also throughout all the industrial nations.
It would seem that the interests of Germany, France, and some of the other members are against Greece defaulting and exiting from the Eurozone. Rather than fall out of the Eurozone on Thursday, July 9, 2015 the Greek government capitulated by delivering a new package of economic reforms to the ECB, raising taxes and the retirement age. Faced with the collapse of the country’s banking system and total economic catastrophe the government yielded on the issues that led to the previous collapse on a new rescue plan. The retirement age is being pushed to 67 and government pensions are being cut by 15% for government workers who retired at age 62 after 40 year of employment. The government will also withhold more taxes from state salaries and pensions and deduct a 6% healthcare premium from retirees’ checks. The reforms are projected to generate at least 13.2 billion dollars in revenue over the next two years.
Currently the Greek debt is over 175% of its GDP. It needs to be reduced or rescheduled over a longer period of time with the interest rates kept low to prevent the debt from growing. The Greek people need to take a more realistic attitude about repayment.
On Monday, July 13, 2015, after long hours of deliberation, with some states of the Eurozone arguing that the Greek prime minister’s word could not be trusted, the other states agreed to bail out Greece with a loan of about 50 billion euros. Presumably Greece will pass further economizing measures and the loan will be implemented gradually. There is a payment due on the debt in about two years and Greece will be able to reduce her debt somewhat at that time if she adheres to her agreement.
The problems that the Greek government has to meet at this time is to economize enough to at least make a payment on her debt and also to restore the confidence of her own population in her banking system. The probability is that as soon as the banks are reopened within the country there will be at least a light run on them. Presently the Greek Government’s solution is to reopen the banks and only allow very limited withdrawals. Many people with large enough incomes may deposit the salaries in other countries, fearing that the bank closure could happen again. It will take time for domestic confidence to be restored. And a payment must be met in about two years.
Another problem which effects the entire Eurozone is one dealing with the declining value of the euro. The euro when it first appeared was worth about 1.5 dollars. Last year with the infusion of a large amount of euros by the European Central Bank into the national flow of the Eurozone it dropped to about 100.3 percent of the dollar. On Monday July 13 with the current solution to the Greek Crisis the euro was worth 90.51 cents to the dollar. On Tuesday, July 14, the euro had risen to 1.1034 to the dollar. What will happen to its value in the future? I suppose that is dependent on how well the Eurozone continues to function.
Greece will have a payment due in about two years. If she is able to make a payment and not have to borrow more money then, the Eurozone will function properly and the value of the euro will have risen. If, on the other hand, Greece has to borrow money again to just stay alive then there is no telling what the disaster will be for the Eurozone.
On Monday, July 20, 2015 the banks in Greece reopened; but the amount that could be withdrawn from any account was severely limited. What does this portend for the immediate future? We’ll have to wait and see.
(Footnote: To my readers: you must forgive me for not responding to your enquiries. I get innumerable requests daily. If I answered all of them I wouldn’t have time left to write the blog. Virtually all your enquiries are answered in The Weiner Component #122 – Responding To Your Enquiries.)