The EU will go to any lengths to give the impression that Greece is a viable entity and keep it locked in a game of financial smoke and mirrors, simply because the EU is working for the banks, especially the German ones. Greece bankrupted itself years ago because it was was able to borrow by issuing bonds in a debt market propped up by the European Central Bank (ECB). While this site has been following Japan’s economic demise with considerable interest, as a cornerstone of the impending implosion of the world financial markets, Greece is extraordinary because of the fact of such a small economy keeping the whole EU in thrall and threatening its very survival.
In 2001 Greece’s public debt was about $150 billion (100% of its nominal GDP). Because of the ECB’s artificial propping up of the European bond markets, by 2010, Greece’s public debt had soared to $380 billion, thus growing at a compound annual rate of 10% for the decade. This occurred despite the fact that Greece’s notoriously corrupt, inefficient, and special interest dominated economy was never reformed. In fact, the ECB’s quantitative easing (QE) in the European bond markets rewarded the Greek government with a dramatic drop in the 10-year bond yield between 2001-2008, such that even by the time the crisis hit in early 2010 it was only 5.5%, a yield that would normally be impossible for a basket case like Greece to obtain.
The ECB had thrown money to the winds in that same 11-year period ending in 2010, its balance sheet soaring threefold, growing at an 11% annualized growth rate. So the QE printing presses in the Frankfurt European Central Bank so falsified euro bond prices, that even with yields on Greek bonds being above all other European yields to account for extra risk, the Greek state was able to borrow itself into bankruptcy.
Between 2001 and the 2009 peak, the Greek economy appeared to surge—-with nominal GDP expanding from $150 billion to $340 billion or by 10% annually, in a debt fuelled bubble of public and private construction investment and new household consumption on the part of Greece’s public employees and social beneficiaries. This boom in GDP based on a fake bond market, was thus a fake boom, giving the false appearance that the ratio of debt/GDP had only reached 115% by 2008—- when in fact the true underlying ratio was soaring. In this Alice in Wonderland world, Greek politicians drastically increased pensions and other social welfare programs.
Thus the debate between Alexis Tsipas and Yanis Varoufakis of Syriza and the troika apparatchiks about the “austerity” package is really, like everything else here, a fake one. Where Greece, in the graph below, has actually reduced nominal outlays for its pension and old age programs by 6 billion euro or 16% since the peak in 2009, in the prior 3 years alone it had increased these outlays by 35% (and by upwards of 60% since first joining the eurozone). The recent rollbacks and pension cuts, therefore, amount to some recoupment of unaffordable previous rises based on a debt-fuelled bubble economy.
So simple arithmetic tells us that the “austerity” to which Greece has been subjected is not the result of Troika (EU, ECB, IMF) policies, but the result of its shrinking GDP: Greece’s sustainable GDP in 2008 was never the $340 billion it actually posted. The drop toward $200 billion is simply the liquidation of a bubble economy that was dependent on massive unrealistic new injections of debt. To pretend that this mirage can be restored by the elimination of the fiscal constraints being imposed by Greece’s lenders is a commentary on today’s general financial madness.
Nevertheless the Troika bailouts and conditionalities have no merit whatsoever, saddling Greece with illegitimate, onerous, predatory debt that it should be ejected in a process of default, since Greece is in fact bankrupt. The $380 billion of gross public debt that existed in 2010 should have been shrunk to a fraction of that amount in what should have been a proper process of bankruptcy.
As it happened, most of that debt was simply transferred from the banks and bond managers of Europe to the taxpayers of the eurozone. The elected politicians of Greece did not want this bailout in the first place; it was forced on them by French, German and Italian authorities in order to bailout their own financial institutions.
So at present Greece’s current public debt ratio is 180% of GDP, and simply cannot be serviced over the long run. Given that interest rates must eventually normalize, since permanent QE is not possible, the potential rise of 3-5% on Greece’s debt service cost would have unconscionable results. Given that reality, the idea that Greece can work itself out from under its massive debt burden by running 1-5% of GDP primary surpluses in its budget is absolute rubbish, so the whole current exercise is a matter of kicking the can down the road.
Had the ECB’s Draghi not announced he would massively monetize euro sovereign debt in July 2012 through QE, Greece would have been bankrupt long ago, and the peripheral borrowers like Italy, Spain and Portugal would have had their day of fiscal reckoning, too. The eurozone would have blown sky high, and the ECB would be no more. Likewise, were not the ECB now supplying $125 billion of funding to the Greek banking system—or actually more than its current level of fast vanishing deposits—-the latter would also have crashed and burned months ago, thereby triggering a crisis which would have eventually destroyed the euro.
When Greece’s prime minister, Alexis Tsipras, despite everything, says that “We have no right to bury the European democracy in the land where it was born”, he is right in political terms, and, in that respect, if Greece’s democracy is to survive, it must be cut loose from the destructive regime of superstate dictation from Brussels and monetary falsification from Frankfurt. Then, going back to the Drachma would put Greece’s politicians right were they were before they were betrayed by the false monetary regime of eurozone central banking. They would be forced to run a primary surplus because they would not be able to borrow on world markets after a massive default on the debt forced upon them by the Troika.
The necessary mix then of taxing the rich, cutting the pensioners, catching the tax cheats, selling state assets, shrinking the bureaucracy and squeezing the crony capitalist companies which feed on the Greek state, would be up to Greek politicians, not the apparatchiks of the IMF and the European superstate, which is the way it should always have been. Furthermore, faced with an honest bond market, the Greek state would rediscover the requisites of sustainable fiscal governance. But Tsipras is now confronted with this kind of hard choice facing the Troika. If he sells out Greece one more time to the paymasters of his country’s crushing debt, it will be only a matter of time before another Greek prime minister will be forced to walk the same plank on which he now balances.
By doing what’s right for Greek democracy, by contrast, he would prove to be an angel of mercy. There is no way that the euro and ECB could survive a Grexit, nor could worldwide profligate central banking survive the blow that would emanate from this demise.
No wonder the assembled powers of the world will move heaven and earth in the days ahead to keep Greece locked in the debtor’s prison that has replaced honest free markets in sovereign debt. To this end, they may yet turn Tsipras into a faithless “trusty” of the wards, but to do so they will have to again make pigs fly——at least for a little while longer.
-with thanks to David Stockman for the substance of this post