Global Post-Crisis Economic Outlook
Henry C.K. Liu

Part I:     Crisis of Wealth Destruction   
Part II:    Two Different Banking Crises - 1929 and 2007
Part III:   The Fed’s No-Exit Strategy
Part IV:   The Fed’s Extraordinary Section 13(3) Programs
Part V:     Public Debt, Fiscal Deficit and Sovereign Insolvency
Part VI:    Public Debt and Other Issues
Part VII:
  Global Sovereign Debt Crisis

Part VIII: Greek Tragedy

This article appeared in AToL on May 20, 2010


Following misguided neoliberal market fundamentalist advice, Greece abandoned its national currency, the drachma, in favor of the euro in 2002. This critically consequential move enabled the Greek government to benefit from the strength of the euro, albeit not derived exclusively from the strength of the Greek economy, but from the strength of the economies of the stronger Eurozone member states, to borrow at lower interest rates collateralized by Greek assets denominated in euros. With newly available credit, Greece then went on a debt-funded spending spree, including high-profile projects such as the 2004 Athens Olympics that left the Greek nation with high sovereign debts not denominated in its national currency. Further, this borrowing by government in boom times amounted to a brazen distortion of Keynesian economics of deficit financing to deal with cyclical recessions backed by surpluses accumulated in boom cycles. Instead, Greece accumulated massive debt during its debt-driven economic bubble.
The Euro Trap
By adopting the euro, a currency managed by the monetary policy of the super-national European Central Bank (ECB), Greece voluntarily surrendered its sovereign powers over national monetary policy, and rested in the false comfort that a super-national monetary policy designed for the stronger economies of the Eurozone would also work for a debt-infested Greece. As a Eurozone member state, Greece can earn and borrow euros without exchange rate implications, but it cannot print euros even at the risk of inflation. The inability to print euros exposes Greece to the risk of sovereign debt default in the event of a protracted fiscal deficit and leaves Greece without the option of an independent national monetary solution, such as devaluation of its national currency. 
Notwithstanding a lot of expansive talk of the euro emerging as an alternative reserve currency to the dollar, the euro is in reality just another derivative currency of the dollar. Despite the larger GDP of European Union (EU) as compared to that of the US, the dollar continues to dominate financial markets around the world as a bench mark currency due to dollar hegemony which requires all basic commodities to be denominated in dollars. Oil can be bought by paying euros, but at prices subject to the exchange value of the euro to the dollar. The EU simply does not command the global geopolitical power that the US has possessed since the end of WWII.
The EMU Vision
In 1998, EU member states that met the convergence criteria of the Economic and Monetary Union (EMU) formed a Eurozone of 11 member states, with the official launch of a common currency known as the euro on January 1, 1999. Greece qualified in 2000 and was admitted on January 1, 2001.
The Eurozone is an Economic and Monetary Union (EMU) of 16 member states, out of the 27-member European Union (EU), that have adopted the euro as their sole common legal tender. The Eurozone currently consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Eight (not including Sweden, which has a de facto opt out by domestic popular vote) other states are obliged to join the zone once they fulfill the strict entry criteria.
Stability and Growth Pact
The euro convergence criteria as spelled out in the Stability and Growth Pact (SGP) are:
1. Inflation rates:
No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU.
2. Government finance:
Annual government fiscal deficit:
The ratio of the annual government fiscal deficit to GDP must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.
Government debt:
The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.
3. Exchange rate:
Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devaluated its currency during the period.
4. Long-term interest rates:
The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.
Price Stability vs Employment
The euro convergence criteria of the EMU aim to “maintain price stability” within the Eurozone as new member states are admitted. In economics, “maintaining price stability” is essentially a euphemism for maintaining structural unemployment which is generally accepted as 6%. Such numerical criteria have been criticized by Keynesian economists as being insufficiently flexible to meet fluctuations in business cycles. Further, criteria need to be applied over the length of the entire economic cycle rather than in any one year. These institutionalist critics fear that by limiting governments' abilities to employ Keynesian measures of government deficit spending during economic slumps, long-term growth will be stalled by unnecessary recessions.
From the opposite side, monetarists criticized these numerical criteria as being too flexible as to become ineffective because “creative accounting” gimmickry can be used and have been used by many member states to meet the required deficit to GDP ratio of 3%, and by the immediate abandonment of fiscal prudence by some member states as soon as they are admitted to the euro club. As it happened, “creative accounting” through the use of collateralized debt obligations (CDOs) via special purpose vehicles (SPV) rendered SGP criteria meaningless and ineffective in preventing financial crises all over the world.
German and French Efforts to Water Down SGP
Ironically, the watering down of the Stability and Growth Pact (SGP) had been at the request of Germany and France, two of the strongest of the 16 member states which had been imitating the rush to phantom wealth creation through synthetic structured finance and debt securitization invented by fearless young traders in New York and London working with money provided by central banks led the Federal Reserve. In March 2005, the EU’s Economic and Financial Affairs Council (ECOFIN), under the pressure of France and Germany, relaxed the rules to respond to criticisms of insufficient flexibility and to make the pact more enforceable. Permissiveness infested the theoretical regulatory framework.
ECOFIN is one of the oldest configurations of the Council of the European Union and is composed of the Economics and Finance Ministers of the 27 European Union member states, as well as Budget Ministers when budgetary issues are discussed.
The EU Council covers a number of EU policy areas, such as economic policy coordination, economic surveillance, monitoring of member state budgetary policies and public finances, the shape of the euro (legal, practical and international aspects), financial markets and capital movements and economic relations with third countries. It also prepares and adopts every year, together with the European Parliament, the budget of the European Union which is about €100 billion.
The Council meets once a month and makes decisions mainly by qualified majority, in consultation or co-decision with the European Parliament, with the exception of fiscal matters which are decided by unanimity. When the ECOFIN examines dossiers related to the euro and EMU, the representatives of the member states whose currency is not the euro do not take part in the vote of the Council.
At the urging of Germany and France, the ECONFIN agreed on a reform of the SGP. The ceilings of 3% for budget deficit and 60% for public debt were maintained, but the decision to declare a country in excessive deficit can now rely on certain parameters: the behavior of the cyclically adjusted budget, the level of debt, the duration of the slow growth period and the possibility that the deficit is related to productivity-enhancing procedures. The pact is part of a set of Council Regulations, decided upon the European Council Summit 22-23 March 2005.
Monetary policy of the zone is the responsibility of the European Central Bank, though there is no common representation, governance or fiscal policy for the currency union. Some cooperation does however take place through the euro group, which makes political decisions regarding the legal tender and the euro. Eurozone 2008 nominal GDP was €9.21 trillion with a population of 321.5 million.
Dollar Hegemony and the Washington Consensus
Economic growth under the dollar hegemony regime requires market-participating nations to follow the rules of the Washington Consensus, a term coined in 1990 by John Williamson of the Institute for International Economics to summarize the synchronized ideology of Washington-based establishment economists, reverberated around the world for a quarter of a century as the true gospel of economic reform indispensable for achieving growth in a globalized market economy. It is an ideology that has landed much of the world in recurring financial crises.

Initially applied to Latin America and eventually to all developing economies, the Washington Consensus has come to be synonymous with the doctrine of globalized neo-liberalism or market fundamentalism to describe universal policy prescriptions based on free-market principles and monetary discipline within narrow ideological limits. It promotes for all economies macroeconomic control, trade openness, pro-market microeconomic measures, privatization and deregulation in support of a dogmatic ideological faith in the market’s ability to solve all socio-economic problems more efficiently, and to assert a blanket denial of an obvious contradiction between market efficiency and poverty eradication or income and wealth disparity.

Return on Capital vs Wages

Financial capital growth is to be served at the expense of human capital growth. Sound money, undiluted by inflation, is to be achieved by keeping wages low through structural unemployment. Pockets of poverty in the periphery are deemed as the necessary price for the prosperous center. Such dogmas grant unemployment and poverty, conditions of economic disaster, undeserved conceptual respectability. State intervention has come to focus mainly on reducing the market power of labor in favor of capital in a blatantly predatory market mechanism.

The set of policy reforms prescribed by the Washington Consensus is composed of 10 propositions: 1) Fiscal discipline; 2) redirection of public-expenditure priorities toward fields offering high economic returns; 3) tax reform to lower marginal rates and broaden the tax base; 4) interest-rate liberalization; 5) competitive exchange rates; 6) trade liberalization; 7) liberalization of foreign direct investment (FDI) inflows; 8) privatization; 9) deregulation and 10) secure private-property rights.

Abdication of Government Responsibilities

These propositions add up to a wholesale reduction of the central role of government in the economy and its primary obligation to protect the weak from the strong, both foreign and domestic. Unemployment and poverty then are viewed as temporary, transitional fallouts from wholesome natural market selection, as unavoidable effects of economic evolution that in the long run will make the economy stronger.
Neo-liberal economists argue that unemployment and poverty, deadly economic plagues in the short term, can lead to macroeconomic benefits in the long term, just as some historians perversely argue that even the Black Death (1348) had long-range beneficial economic effects on European society.

The resultant labor shortage in the short term pushed up wages in the mid-14th century, and the sudden rise in mortality led to an oversupply of goods, causing prices to drop. These two trends caused the standard of living to rise for those still living. Yet the short-term shortage of labor caused by the Black Death forced landlords to stop freeing their serfs, and to extract more forced labor from them. In reaction, peasants in many areas used their increased market power to demand fairer treatment or lighter burdens. Frustrated, guilds revolted in the cities and peasants rebelled in the countryside. The Jacquerie in 1358, the Peasants' Revolt in England in 1381, the Catalonian Rebellion in 1395, and many revolts in Germany, all served to show how seriously the mortality had disrupted traditional economic and social relations.

Neo-liberalism in the past quarter-century created conditions that manifested themselves in violent political protests all over the globe, the extremist form being terrorism. But at least the bubonic plaque was released by nature and not by human ideological fixation. And neo-liberalism keeps workers unemployed but alive with subsistence unemployment aid, maintaining an ever-ready pool of surplus labor to prevent wages from rising from any labor shortage, eliminating even the cruelly derived long-term benefits of the Black Death.

Bashing of the State

The Washington Consensus has since been characterized as a “bashing of the state” (Annual Report of the United Nations, 1998) and a “new imperialism” (M Shahid Alam, “Does Sovereignty Matter for Economic Growth?”, 1999). But the real harm of the Washington Consensus has yet to be properly recognized: that it is a prescription for generating failed states around the world among developing economies that participate in globalized financial markets. Even in the developed economies, neo-liberalism generates a dangerous but generally unacknowledged failed-state syndrome. (Please see my February 3, 2005 10-part series: World Order, Failed States and Terrorism – Part I: The Failed State Cancer)
Greece Seduced
Greece both benefited from and was victimized by macro policies based on the Washington Consensus. To continue the high growth rate of the Greek Economic Miracle years between 1950 to mid 1973, Greece after joining the EMU in 2002 adopted, with international investment banks, US structured finance innovations to mask its true financial liabilities to present a rosier picture of its financial reality.
As the world economy imploded from the last of a two-decade long serial debt bubble that began in the US two decades earlier in 1987 and finally burst in the US in July 2007, the Greek economy faced sharp contraction along with most other economies around the world. To keep social peace, the Greek government had to incur fiscal deficits to maintain the heavily socialist economic structure that it managed to keep afloat when it adopted deregulated market fundamentalism introduced two decades earlier under better times.
As the global financial crisis deepened, international lenders and the IMF began expressing doubt on the reliability of official Greek economic data which they conveniently overlooked while the debt bubble was building. This sudden doubt from creditors who had earlier extended credit with no question asked, led to drastically higher risk premium on Greek sovereign debt denominated in euros at a time when government revenue shrank from general economic slowdown. A long tradition of widespread tax avoidance and evasion by the Greek financial elite added to the problem of declining fiscal revenue. As the IMF and fellow EU member states pressed the Greek government to accept hash “conditionalities” for emergency loans needed to avoid a default on Greek sovereign debt, violent demonstrations broke out in Athens against the government’s austerity measures to secure new loans to service its €300 billion ($397 billion) debt, such as cuts to public sector pay and benefits and pension commitments. In April, 2010, the Greek government announced that it needed immediate access to the €30 billion ($39.7 billion) in emergency loans offered by other EU countries.
 It was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.

Greece's economic problems meant lenders started charging higher interest rates to lend it money and widespread tax evasion also hit the government's coffers.

There have been demonstrations against the government's austerity measures to deal with its 300bn euro (£267bn) debt, such as cuts to public sector pay.

Now the government has announced that it needs to access the 30bn euros (£26bn) in emergency loans it has been offered by other EU countries.

Structured Finance - Escape Hatch from EMU Rules

Greece fell into the euro debt trap by yielding to the temptation of structured finance, the instruments of which were first developed in the US and adopted by US transnational financial institutions such as Goldman Sachs, Citibank, JPMorgan Chase and Bank of America to generate phenomenal profit for them in deregulated global markets fueled by floods of dollar-denominated liquidity release by the Federal Reserve, the US central bank, through the virtual transaction of synthetic derivatives known as synthetic collateralized debt obligations (CDO). This new game of phantom wealth creation was soon joined by copycats in Europe such as Barclay, Société Générale, Deutsche Bank and ING. Such synthetic instruments were designed to, among other things, help banks hide their liabilities by pushing them off their balance sheets and thus lowering their capital requirement to increase profit from expanded loan-making to yield higher return on capital.
(Please see my May 9, 2007 AToL article: Liquidity Boom and Looming Crisis, written and published two months before the credit crisis first imploded in July 2007.) 

Later, expanding from the private sector, such schemes were sold to EMU member governments to help them mask their true public debt levels to skirt strict EMU rules, in order to engage in permanent monetary easing. Across the eurozone, in obscure and opaque over-the-counter (OTC) derivative deals that traded directly between counterparties off exchanges between “special purpose vehicles” (SPV), and designed to help governments legally skirt EMU criteria, transnational banks provided Eurozone governments with cash upfront in return for future payments by government. Such payments would reduce government fiscal revenue since the revenue from collateral assets has been pledged to investors of CDOs. The liabilities were taken off their national balance sheets to present a healthy picture of national finance, until the government is forced to make up the revenue shortfall in a recession.
Special Purpose Vehicles (SPV)
In an article: BIS vs. National Banks, published in Asia Times on Line on May 14, 2002, five year before the financial crisis that began in July 2007, I warned against the danger of SPV:
Set for 2004 by the Bank of International Settlement (BIS), implementation of the new Basel Capital Accord II is meant to respond to such regulatory erosion by LCBOs (large, complex banking organizations). “Synthetic securitization” refers to structured transactions in which banks use credit derivatives to transfer the credit risk of a specified pool of assets to third parties, such as insurance companies, other banks, and unregulated entities, known as Special Purpose Vehicles (SPV), used widely by the likes of Enron and GE. The transfer may be either funded, for example, by issuing credit-linked securities in tranches with various seniorities (collateralized loan obligations or CLOs) or unfunded, for example, using credit default swaps (CDS). Synthetic securitization can replicate the economic risk transfer characteristics of securitization without removing assets from the originating bank’s balance sheet or recorded banking book exposures. Synthetic securitization may also be used more flexibly than traditional securitization. For example, to transfer the junior (first and second loss) element of credit risk and retain a senior tranche; to embed extra features such as leverage or foreign currency payouts; and to package for sale the credit risk of a portfolio (or reference portfolio) not originated by the bank. Banks may also exchange the credit risk on parts of their portfolios bilaterally without any issuance of rated notes to the market.
Such structured finance deals implemented through SPVs, because they were technically recorded as sales through SPVs rather than collateralized loans to the government, misled investors and regulators about the actual depth of a country’s liabilities, thus allowing it to sell more sovereign bonds. Greece, for example, traded away the rights to collect airport fees, expressway tolls and lottery proceeds for decades to come, with little concern for potential default in the event of a sharp reduction in these revenues should the economy falls into recession from a burst of the global debt bubble.
Greek Myths of Public Finance
Some of the Greek SPV derivative deals were named after figures in Greek mythology. One of them was called Aeolos (Αἴολος in Greek), after the god of the winds in Greek myth, ironically appropriate for Greek national fortune having gone with the wind.
The financial wizardry went even further. In what amounted to a frenzy promotion on a national scale in an E-Bay type auction of exotic financial instruments, the Greek government essentially mortgaged the country’s infrastructure revenue to raise much-needed up-front money not to finance productive development, but to finance runaway consumption unsupported by economic fundamentals, socialist or capitalist.
Aeolos, a legal SPV created in 2001, helped the Greek government move some of its debt off its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar SPV created in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans that needed to be paid back out of government revenue, despite doubts by many critics.
Ariadne (Αριάδνη), in Greek mythology, was daughter of King Minos of Crete. Minos attacked Athens after his son was killed there. The Athenians sued for peace, terms of which included an annual sacrifice of seven young men and seven maidens to the Minotaur, a creature with a man’s body and a bull’s head who lived in a labyrinth. Ariadne fell in love at first sight of the young Thesus who volunteered to come and kill the Minotaur, and helped him by giving him a sword and a ball of red fleece thread that she was spinning, so that he could find his way out of the Minotaur’s labyrinth after victory. Alas, in 2010, the Ariadne structured finance deal was unable to lead Greece out of it debt labyrinth. 
EU Governments Divided on SPVs, but Greenspan Opposed Full Disclosure
These kinds of SPV deals have had their critics within EU government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should require full disclosure. The answer, supported by positions taken in the US by then Fed Chairman Alan Greenspan, was that full disclosure was not needed and would unnecessarily hamper innovation. However, in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales. But since the liabilities resided in special purpose vehicle with secured cash flow, the issuing government was considered insulated from risk.
The Enabling Role of Goldman Sachs
In 2005, Goldman Sachs sold interest rate swaps it created to the National Bank of Greece, the country’s largest bank. In 2008, Goldman Sachs helped National put the swap denominated in euros into a legal special purpose vehicle (SPV) called Titlos. But National retained the bonds that Titlos issued for use as collateral to borrow even more euros from the European Central Bank (ECB) and in turn from international banks. The swap will be costly and unprofitable for the Greek government through its long contract term. Appropriately, in Greek manuscripts, the titlo was often used to mark the place where a scribe accidentally skipped the letter, if there was no space to draw the missed letter above. SPV Titlos performed the special purpose of skipping the liability Greece had assumed in order to get more loans from the ECB and international banks than was permitted. Such SPV deals were not made public even though Titlos obligations are among the weak links in Greek public finance in 2010. Information on them finally trickled out only through government investigations and media investigative reporting.
Der Spiegel reported in early January 2010 that Goldman Sachs two years earlier had helped the government of Greece cover up part of its huge deficit via a currency swap deal name Titlos, which used artificially high exchange rates. A report commissioned by the Greek Finance Ministry released on February 1, 2010, revealed that Greece had used swaps to defer interest repayments by several years.
On February 15, 2010, Bloomberg reported a Greek government inquiry uncovered a series of swaps agreements with securities firms that allowed it to mask its growing debts. The document did not identify the securities firms Greece used. But the former head of Greece’s Public Debt Management Agency told Bloomberg that the government turned to Goldman Sachs in 2002 to obtain $1 billion through a swap agreement.
“While swaps should be strictly limited to those that lead to a permanent reduction in interest spending, some of these agreements have been made to move interest payment from the present year to the future, with long-term damage to the Greek state,” the Finance Ministry report said. The 106-page dossier is now being re-examined by Greek lawmakers most of whom had not been fully informed of the opaque transactions.
A currency swap is a foreign-exchange agreement between two parties to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency. Currency swaps are motivated by comparative advantage. A currency swap between private parties should be distinguished from a currency swap between central banks to increase liquidity in one of the swap currencies, such as the currency swap agreements between the Federal Reserve and the European Central Bank.
OTC Currency Swaps
Currency swaps are OTC (over-the-counter: not traded on exchanges) derivatives, and are closely related to interest rate swaps. However, unlike interest rate swaps, currency swaps can involve the exchange of the principal.
The Goldman Sachs transaction consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen that was swapped into euros using a historical exchange rate, which produced a reduction in debt that added some $1 billion of funding to the EU’s Luxembourg-based statistics office for that year. Importantly, Bloomberg claimed that rating companies were aware of the deal but did not change their credit ratings on Greece, on account that the risk profile for Greece had not changed since the additional unit risk was made invisible through dispersion into systemic risk of the Eurozone and through it into global systemic risk.
Similar to damage done to other credit markets involving high tech dot com debt and subprime home mortgages, toxic structured finance instruments, the category term for complex debt securitization and derivative based synthetic financial products, are now showing their ugly faces as systemic crises in sovereign debt markets all over the world.
The sovereign debt crisis in the PIIGS (Portugal, Ireland, Italy, Greece, Spain) economies, visible first in Greece, poses the most significant systemic challenge to Europe’s common currency, the euro, since its creation on January 2, 1999, and through it to Europe’s goal of full unification. Technically, Greece is not “too big to fail”. It has a population of 11 million out of the total EU population of 830 million and a GDP of $357 billion in 2008 out of a total EU GDP of €11,805.66 billion ($16,447.26 billion in 2009).
Greece Not Too Big to Fail, but the Euro Is
On the surface, Greece owes its foreign creditors €300 billion, an amount of little impact in the scale of global government finance. What is at stake is the undisclosed counterparty risk in euro-based OTC derivative instruments held by major international banks in the event of a sovereign debt default within Eurozone and its adverse impact on the exchange value of the euro. Suddenly, highly rated mark-to-model instruments are reduced to underwater status when mark-to-market. A chain reaction of counterparty defaults can amount to trillions. This lack of transparency caused banks to limit their risk exposure by refusing to lend to other banks, thus causing a liquidity crisis not much different except possibly at larger scale than the meltdown of the credit market brought on by the Lehman collapse in 2008.
Almost two year after the breakout of the credit crisis in July 2007, resistance to efforts to reform the loose regulatory regime of the $605 trillion OTC derivative market continues to hold. Counterparty defaults of these impaired derivative contracts, detonated by little Greece, similar to that created by the Lehman collapse, would reverberate around global financial markets to cause a meltdown. Greece is not too big to fail, but its derivative obligations are too widely spread to fail without serious global consequences.
Recent History of Greek Politics
George Papandreou (junior), who became socialist prime minister on October 6, 2009, is a scion of a prominent Greek political family, whose father, Andrea, was a highly respected Harvard-educated economist and professor and department chairman at the University of California at Berkley before returning to Greece in 1959 to participate in Greek politics and eventually became Greece’s first socialist prime minister in 1981. As a student, Andreas was arrested for Trotskyite activism by the Fascist Metaxas dictatorship in 1938 and deported to the US in 1941 and enrolled in Harvard in 1942. George’s grandfather, also named George, served three times as prime minister.
When the Greek Junta led by Colonel Georgios Papadopoulos seized power in April 1967, Andreas Papandreou was incarcerated while his father George Papandreou (senior) was put under house arrest and died in 1968. The grandson, George Papandreou, became prime minister on October 6, 2009 when he led the Pan-Hellenic Socialist Movement (PASOK) to electoral victory over the conservative center-right New Democracy Party on a campaign that promised to lead Greece out of the recession caused by the global financial crisis that began in the US in 2007.
A Toxic Inauguration Gift for the new Greek Socialist Government
Upon inauguration, George Papandreou’s new socialist government discovered that the condition of public finance was far worse than had been previously disclosed by the conservative New Democracy Party, with a budget deficit of 12.7% of GDP, more than quadrupling the EMU limit of 3%, and a public debt of $410 billion, at 115% of GDP, almost doubling EMU limit of 60%.  Not only there was no money available to execute deficit financing to jump start the Greek economy from recession, the government was faced within a serious sovereign debt crisis that it could not solve without outside help.
On April 23, 2010, the Greek government under Papandreou requested that the EU/IMF bailout package that had been discussed for months be immediately activated to prevent sovereign default. The IMF responded that it was “prepared to move expeditiously on this request”, not with IMF guarantees or funds, but with technical restructuring advice IMF style which means hash “conditionalities” to force Greek fiscal surpluses over future years to pay back debts owed to foreign banks. The size of the emergency bailout from the EU to allow Greece to avoid a default was expected to be €45 billion ($61 billion) and it was expected to take three weeks to negotiate, with a payout within weeks of the €8.5 billion of Greek bonds becoming due for repayment.
Four days later, on April 27 2010, Greek sovereign debt rating was lowered to BB+ (a ‘junk’ status) by Standard & Poor’s amidst fears of default by the Greek government in the event the bailout package failed. Greece had to offer investors interest at 15.3% on two-year government bonds while two-year US Treasuries were yielding 0.71%. Standard & Poor’s estimated that in the event of default on Greek government bonds, investors would lose 30–50% of their principal. Stock markets worldwide and the exchange rate of the Euro declined sharply in response to the announcement of impaired confidence.
Eurozone Finance Ministers Fiddled While Athens Burned
While the sovereign debt problem had been known for years in EMU government circles, Eurozone officials were debating on the seriousness of the situation while the debt bubble was still expanding. As the global financial crisis erupted in mid 2007, EMU officials were slow to recognize the fatal contagion effect. Suddenly, Eurozone’s 16 finance ministers, found themselves in an emergency meeting on Sunday, May 2, 2010, that lasted until the early hours of Monday, and emerged with a quickly assembeled €110 billion ($146 billion) package of emergency loans aimed at averting a sovereign default by Greece and preventing a confidence crisis contagion spreading to other Eurozone countries such as Spain and Portugal.
The loans to Greece from the 15 other eurozone countries and the International Monetary Fund were described by IMF officials as “big and unprecedented”. The details of the package were thrashed out at a meeting of eurozone finance ministers in a late night meeting. Eurozone countries are to contribute €80 billion of the total.
The emergency loan was conditioned on Greece’s agreement to severe austerity fiscal measures, including a sharp reduction of Greece’s budget deficit from 13.6% of GDP to below 3% within three years, by 2014, and to stabilize the public debt at about 140% of GDP, even though it is expected to peak at almost 150% of national income. The package included tough measures to drastically reduce the size of Greece’s public sector built up by earlier socialist policy that had been rendered inoperative by neoliberal economic policies of recent years under the previous conservative New Democracy government, cuts in public sector salaries and pensions, a rise in value-added tax and an increase in taxes on fuel, alcohol and tobacco.
Even though such hash austerity measures would hit the already severely impaired Greek economy hard, the Greek Finance Ministry had no choice but to accept them, as it revised down its economic forecasts and projected that the economy would contract 4% in 2010 and 2.6% 2011.
Official Celebration on an Explosive Rescue Package
Yet, in Brussels, José Manuel Barroso, the European Commission president, described the agreed set of measures as a “solid and credible package”. US President Barack Obama told Greek Prime Minister George Papandreou that he welcomed Greece’s “ambitious’’ reform program as well as the “significant support’’ provided to the country by the IMF and other Eurozone members.
The European Central Bank’s governing council welcomed the rescue deal with the following statement: “The program is comprehensive and supported by strong conditionality.” But the ECB statement added: “The governing council also considers essential that the Greek public authorities stand ready to take any further measures that may become appropriate to achieve the objectives of the program.” In other word, Greece was expected to go through tough austerity measures for more than three year, perhaps even a decade.
The Greek People Bolted
While the financial establishment was profusely supportive of the hash “conditionalities”, the Greek public was less enthusiastic. Three days after the rescue deal was announced, on Wednesday, May 5, 2010, thousands in Athens, Greece’s capital, took to the streets to protest deep spending cuts aimed at saving the country from default on its sovereign debt and from falling into insolvency. Clashing with the police, the demonstration turned deadly. Three bank employees died in the chaotic demonstration, trapped in a blaze started by a petrol bomb thrown as the city erupted into violence during a march by tens of thousands of striking workers angry at the government’s deep spending cuts. The clashes erupted after the government announced further cuts in bonuses and allowances for about 600,000 public sector workers and an increase in value-added tax. The strike grounded flights in and out of Athens international airport and shut public transport.
Still, Prime Minister George Papandreou vowed to push through draconian economic measures demanded as part of the €110 billion rescue package for his debt-burdened country despite the mass demonstrations. Papandreou characterized the deaths as caused by “a murderous act”. He said he would not be deterred from pushing through unpopular public spending cuts and tax increases demanded by the IMF as part of the €110 billion rescue package agreed with the other Eurozone members and the IMF.
The deaths were the tragic outcome in five months of daily street protests against the government’s austerity program. But the full socioeconomic tragedy will take decades to play out. A spokesman for ADEDY, one of the unions organizing the march to parliament, said he regretted the deaths but that the protests would continue. Television news showed Greek police firing teargas and stun grenades at demonstrators who tried to force their way into parliament ahead of a debate on the three-year program. Angry protestors outside the parliament building raised clenched fists and shouted “Thieves, thieves” - an accusatory expression for corrupt politicians and bankers. Confidence in a government that is prepared to sacrifice its working population to restore market confidence is shown by the people to be in sharp decline.
May 17, 2010