A Guide to the EU Economic Crisis, Part 1: Greece
First installment in a primer for the perplexed about all the players in the European economic crisis.
The FTSE is considering downgrading Greece from "developed market" to "advanced emerging market status." Why? Because years of unrestrained spending have left Greece with a debt much bigger than its entire economy. Last year other European nations and the IMF agreed to lend Greece $150 billion to bail it out.
This money was contingent on Athens coming up with -- and following -- a plan to close its budget deficit. Greece is supposed to reduce its deficit to 7.5 percent of gross domestic product this year, and below 3 percent by 2014, according to the International Monetary Fund. As things now stand the government is not on target with the plan. This is why the loaners -- the IMF, European Commission and European Central Bank, a/k/a the Troika -- are threatening to withhold the next $11 billion payment from the bailout. This is what the current crisis is about.
The Troika wants a crackdown on tax evasion and steep cuts in the size of Greece's government. Greek Prime Minister George Papandreou has said he will do this. But in the words of H.L. Mencken, "It is hard to believe that a man is telling the truth when you know that you would lie if you were in his place."
Blood from a turnip
So far the government has merely tried imposing new taxes. Whatever method Greece uses to bring in more money is unlikely to work. That's because the nation's economy is expected to contract by about 5.5 percent this year -- more than the 3.5 percent earlier assumed -- and a further 2.5 percent in 2012. Higher tax rates on a shrinking economy doesn't get you more tax revenue.
How long Papandreou stays in office is anyone's guess. The Greeks rioted over earlier cuts and haven't gotten less argumentative since. Greek finance chief Evangelos Venizelos has likened the international pressure on the nation to "blackmail and humiliation." That's more like pouring ouzo on troubled waters instead of oil.
Without the $8 billion the government will be unable to pay its bills on Oct. 17 - which is a pretty neat trick given that they are already broke. Greece will likely get the money. Governments and bankers are too terrified of the alternative. (Selling on the market jump following the announcement of the funding going through would not be a bad idea.)
The second bailout package
A second aid package this summer aimed to help Greece avoid having further government-bond sales to raise money. No one wants to see this happen because investors think Plato's homeland is about as credit worthy as your crazy Uncle Al who has three ex-wives, two mortgages and would have a hard time getting a job delivering pizza. (In the last week Greek 1-year bond returns have staggered from 144 percent to 115 percent and are currently around 128 percent.)
Unfortunately, this second bailout plan needs approval from 17 European legislatures, and that won't happen any time soon. Some have put off the matter until the end of the year. Still others, like Finland, want collateral before approving the loan. Some leaders of non-broke EU nations -- like Germany's Chancellor Angela Merkel -- have pledged to support the deal but the voters are very unhappy about this. Merkel's coalition government has been losing local elections at an alarming rate.
The second bailout faces the same problem the first one did: Greece is totally broke. Loaning it money makes it possible for the nation to pay its bills but adds to the debt total. There is no plausible scenario in which Greece can earn enough money to repay its current debt, let alone any new ones. If it were a person or a company it would already have declared bankruptcy and tried to start over. Everyone knows this, but they're hoping a genie will jump out of an amphora and make everything better.
Because Greece is one of the 17 nations which use the euro as its currency this would have a big impact on all those other nations. So another debate is going on about Greece leaving the EU voluntarily or otherwise. The Greek government says that under no circumstances would it put membership up for a popular vote. If true, then it will be pushed. No one has ever left the EU before, and what happens to the organization and the euro is uncertain.
Why it matters to you
Greece poses a threat to the European and world economies because of the money it owes to other banks and nations. (There's a good list here of the banks and nations with the most exposure to Greece.) Although direct U.S. exposure to Greek debt is limited, direct exposure to institutions holding Greek debt is not.
Go here for A Guide to What Happens When Greece Defaults.
Next up on our hit list is Italy.
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