Greece: a "new wave" of crisis?

Submitted by Matthew on 18 February, 2010 - 9:43 Author: Martin Thomas

The Greek government could run out of money to pay its bills in the next couple of months. Usually governments are guaranteed at least to be able to pay their bills inside their own countries — because, in the last resort, they can always print more of their national money — but the Greek government, in the eurozone, has no power to print more euros.

Immediately, the result is promises by Greece's social-democratic government that it will make huge cuts in public spending to free up cash to pay the international financiers to whom Greece has debts. At present Greek prime minister George Papandreou has over 60% of his electorate telling opinion polls that they support him and consider cuts necessary, but protests have already started and will expand.

Three big questions of international scope are raised by the Greek crisis.

The first is the future of the EU and the eurozone. The eurozone is an odd combination. The governments in it lack the normal power of governments to print more money or to cut or raise interest rates. All that power has been transferred to the European Central Bank.

At the same time they have more or less unlimited power to set their national budgets and to run deficits. The treaties that established the euro set limits on annual budget deficits and on accumulated government debt, but those limits have been breached many times, and by big states central to the eurozone as well as by Greece.

The EU felt obliged to promise some sort of support to the Greek government, since failure by Greece to pay its debts would push down the value of the euro in international exchanges. But it is hesitant. As the Financial Times reported, the promise is “less a bail-out plan than a vague recipe of intent... Eurozone members, led by Germany and France, will lend money [as a last resort, and on terms yet to be revealed]. The International Monetary Fund will meanwhile [oversee] Athens’ budget deficit reduction programme”.

Logically, the Greek crisis — and maybe similar eurozone crises in Ireland and Spain soon — should shift the EU off its current muddling-through position in one direction or another. Either the EU, or at least the eurozone, should become much more coordinated over public budgets as well as over interest rates and money supply. Or the weaker eurozone members will be forced to drop out.

The second alternative will be very unwelcome to countries like Greece. Being in the eurozone means that the Greek government can’t print money. But it also means that international financiers will always take whatever the Greek government can pay them as good coin, because it is euros.

The first alternative will be difficult. So the immediate outcome will probably be only modified muddling-through. But the stress-lines have been mapped out.

The second question is the extraordinary and irrational power of international financiers. In essence, Greece is in trouble because international financiers are demanding higher interest rates to lend to the Greek government, and international financiers are demanding those higher interest rates... because they see Greece as in trouble. The vicious spiral is self-accelerating, and driven by the same people whose greed-is-good gyrations brought us the financial crisis of autumn 2008.

On the face of it, when the Greek government sells a bond — a piece of paper entitling the owner to a certain percentage rate of interest each year, plus repayment of the original amount at the end of so many years — the interest rate should be just the same as German government bonds, because a thousand euros paid by the Greek government are worth exactly the same as a thousand euros paid by the German government.

In fact interest rates on Greek government bonds have been 3.6% higher than on German. International financiers are saying that they do not believe that the Greek government will pay up. And thus they set in train processes which make it harder for the Greek government to pay up.

According to the Observer on 7 February, super-rich Greeks have been moving their money out of Greece. On the face of it, it makes no sense, unless they fear (with little justification, sadly) that a desperate Greek government will start heavy taxes on the rich. A euro held in Athens is the same as a euro held in Zurich or Frankfurt.

As the Observer reported, Greece has “increasingly become divided between the very rich, who live in Hollywood-style opulence in the outer suburbs, and the poor... a fifth of the population lives beneath the poverty line”. How long will the super-rich be allowed to decide the fate of whole countries?

The third question is whether the Greek crisis could be the first of many in which governments do not have enough cash — or in the case of governments which can print their own money, enough internationally-acceptable cash — to meet their bills.

The financial crisis of 2008 was calmed essentially by governments taking the brunt of it and shielding the banks. Governments paid out vast amounts in guarantees, credit, and cash to banks to stop financial systems imploding, and ran big budget deficits to stop market demand for factory production imploding. That shifted the sharp point of the crisis so that it now targeted the governments.

Nouriel Roubini, the US economist who most accurately predicted the 2008 meltdown, is now writing about “The Coming Sovereign [i.e. government] Debt Crisis”. Another mainstream US economist, Carmen Reinhart, has told the Wall Street Journal: “Historically, following a wave of financial crises... you get a wave of [government] defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely.”

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