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Greece: the drama continues

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Robin Lustig | 11:33 UK time, Friday, 4 November 2011

I've been putting it off for as long as I can - but I can put it off no longer. I know it is my duty to write something about Greece, and the euro, and the global economic crisis which some normally sober commentators have now started describing as an impending catastrophe.

But first a word of warning: I am not an economist, and I have an inbuilt tendency to distrust economists who claim to be able to analyse with any degree of accuracy the mysterious workings of international financial markets.

I mean, seriously, how can we trust people who talk about "negative growth", "taking a hair-cut", and "quantitative easing"? As far as I'm concerned, the best definition of an economist is "someone who will explain to you tomorrow why what they predicted yesterday didn't happen today."

So, to Greece. Let's make it simple: they borrowed too much money, they can't pay it back, and unless they can get their hands on more, they'll be bankrupt.

If that's what happens, a lot of banks who lent them billions of euros will have to kiss those loans goodbye. And that remains the case whether or not the high-stakes gambler George Papandreou is still prime minister.

You probably remember what happened the last time the banks found they'd lent rather a lot of cash to people who couldn't pay it back. We ended up bailing them out, on the grounds that it's not a good idea for banks to be allowed to crash.

That's one reason (not the only one, I know) why the UK government has decided it has to cut back pretty sharply on its spending - because as for everyone else, in the current climate, spending money you don't have is not regarded as the thing to do.

It's worth remembering, though, that not everyone is sliding toward the abyss. According to figures from the International Monetary Fund, 20 countries last year registered economic growth rates above 8 per cent. (One of them is Ethiopia, from where Charlotte Ashton reported for us on Wednesday's programme.)

Of the 20 highest achievers, 10 are in Asia (China and India obviously, but also Sri Lanka, Uzbekistan, and yes, even Afghanistan); four are in South America (Paraguay, Argentina, Peru and Uruguay); five are in Africa (Democratic Republic of Congo, Zimbabwe, Botswana, Nigeria and Ethiopia). Just one - Turkey - is in Europe (sort of).

Yes, I know, these are, mainly, relatively small economies. With the exception of China and India, most of the main global economies - the US, Japan and Europe - are in the doldrums. And that's why we're all in so much trouble.

But according to a report presented to the G20 summiteers this week by Tidjane Thiam, chief executive of Britain's largest insurer, Prudential, Western investors are sitting on trillions of dollars which could go into financing major infrastructure projects in some of the world's poorest, but rapidly growing, economies.

The theory goes like this: invest in, say, road-building. More roads mean more trade, which means more business, which means more wealth. More wealth means more people with money to spend, which means bigger markets for clothes, and televisions, and fridges, and cars.

Result: growth. But of course, even if theory turns into practice, it all takes time. And with Greece on the brink, and Italy, Spain and Lord knows who else waiting nearby, time is in short supply.

Comments

  • Comment number 1.

    Being given an ultimatum by a German chancellor is probably less than helpful.

    http://www.dailymail.co.uk/news/article-2056400/Greece-debt-crisis-Greeks-believe-Germans-owe-60bn.html

    If the Greeks are taking it personally, who can blame them?

  • Comment number 2.

    The problems in Greece have many facets --it is not only a divided society (the civil war) --but also there is a lack of social responsibility -- massive tax evasion and corruption.

    -- It is naive to believe the society will change --rather than continue on the same path.

    http://en.wikipedia.org/wiki/Refugees_of_the_Greek_Civil_War

    http://www.nytimes.com/2010/05/02/world/europe/02evasion.html?pagewanted=all

    http://www.guardian.co.uk/world/blog/2011/oct/20/europe-breadline-corrution-pervades-corner

  • Comment number 3.

    It could be impending catastrophe, but I've been asking myself: why weren't all countries subjected to a full Audit Commission before they entered the Eurozone in order to segregate regular debt (repayable) from odious debt (subject to write off)? It would have been fair; it would have foreseen where the biggest problem lay i.e. with the banks which were carrying too much toxicity, too many worthless derivatives.
    Why wasn't a full Audit Commission undertaken? I believe because the banks would have been forced to write-off so many debts, several banks would have fallen.
    It's not economists who talk about "negative growth", "taking a hair-cut", & "quantitative easing"; it is Governments; it's politics, and it's far too often a means of protecting the banks too big to fail.
    Greece borrowed too much money based on the advice/guidance of one huge investment bank too big to fail; Greece was guided to place debts into the future; also, Greece carries a huge amount of odious debt, subject to write-off. In March of this year, Greece was begging for an full Audit Commission. What happened to that? Why did the Eurozone not undertake the audit?

  • Comment number 4.

    I can't feel sorry for those banks who lent Greece (and other PIIGS) billions of euros; these loans may not have been necessary depending on the findings of a Full Audit Commission. It's not too late for such a Commission. I wonder what the level of odious debt is in Greece, Spain, Portugal, Ireland...even Britain.
    I remember last time the banks found they'd lent rather a lot of cash to people who couldn't pay it back; it was called sub-prime lending; it was called worthless derivatives. It should have been called time for bank bankruptcy - not bail-out.
    Austerity is not the answer to nefarious financial products; it cleans up nothing. It places suffering onto the taxpayers vs bankruptcy onto the banks. Before Britain goes down the austerity road, it ought to carry out a full Audit Commission, but then again London is one hub of large investment banks too big to fail; so, it's not going to happen. Ask the Government WHY it's not going to happen?

    Not everyone is sliding toward the abyss. According to figures from IMF, 20 countries last year registered economic growth rates above 8%. Highest achievers, 10 in Asia (China, India, Sri Lanka, Uzbekistan, & yikes - even Afghanistan); 4 are in South America (Paraguay, Argentina, Peru & Uruguay); 5 are in Africa (Democratic Republic of Congo, Zimbabwe, Botswana, Nigeria & Ethiopia).
    I repeat your listing because it should scream at you: something is wrong with western banks too big to fail - something ODIOUS has happened, something that needs cleaning up, something that needs exposure through a full Audit Commission. Heads need to roll, or at least sit in prison.
    You will never get growth from austerity programs. You will never get growth while western governments continue to protect the nefarious financial products of the western banks, th sub-prime loans, the odious debt...You may continue to get bank bonuses.
    Time is short. Get on with full Audit Commissions & let the guilty fall where they belong.

  • Comment number 5.

    The fault line is in economics itself. Economists forgot that it is vital to manage the price of money and the volume of credit lest you create a bubble and than a crash. Economists used to know this hard earned fact of economic life, but they forgot!

    What then happens is that there is an unseemly bartering of the price on money down and the volume of debt up. This creates the inevitable condition that the dynamics of the market wants to increase credit but interest rates have reduced to near zero so the amount of credit has to be increased exponentially so as to maintain the income of the money creating lender. This is what happened in both the private and the sovereign debt sectors. If you look at things this way then the problem is highlighted and unfortunately so is the solution. Debt has to be reduced so that interest rates can rise and normal economics/capitalism can resume - if this does not happen, or rather until this happens, the western world's economies will remain in stagnation or depression.

    What this means is that the real problem is still inside than banks and financial institutions - they have destroyed themselves. We have to recognise this reality before we can cure anything. In the case of sovereign debt haircuts will be the norm for many years - there is no alternative short of total global collapse. The later will see huge economic disruption and those who will suffer most will be the poor.

    What I find difficult to understand is how economics convinced itself that this several thousand year old fact of economic life could be ignored. Economists have to be the chief culprits along with regulators who abrogated their responsibilities.

    Greece and every debtor needs to reduce the capital sum of its debts so that they can afford to pay say 6% interest to finance their debt then capitalism can start to resume. It the private sector (and mortgages) this means house prices need to fall to no more than 3 times a single income so the regualtors need to regulate with this in mind. For states all then heed to do is to declare haircuts and all should do so along the line of the same criteria.

  • Comment number 6.

    The banks and financial institutions that caused it all extort money form the nations to satisfy their continued greed. The people in most nations want the banks to be held accountable and that is something the governments refuse to do. This has been handled in the wrong manner from day one and they continue to satisfy the bankers with continued debt that only makes the problem worse. When the banks contribute to the the solution for a problem they caused things may head in the right direction. Protecting the wealth of the wealthy is not going to help the economies. It is the political and financial corruption and their collusion in the collapse that has prevented solutions that will be in the best interest of the people and not just the bankers and wealthy stockholders. The governments failed to protect the investments and pensions of the people. The governments failed in their fundamental responsibilities. Don't blame a particular party..they were all involved.

  • Comment number 7.

    6. ghostofsichuan wrote: "Don't blame a particular party..they were all involved."

    More particularly the regulators who work for us all (and both parties) are actually responsible - yet these have not been sacked!

    Let me provide a model of why every lowering interest rates cause the gigantic increase in credit which is at the root of our ongoing problems.

    Example: Let us say we start by lending 100 at 10% so we get 10 profit. Now rates drop to 1% so to make the same 10 profit we need to lend 1000 and given there was/is no cap on the volume of lending that is exactly what the banks do to maintain their profits. This was/is a recipe for disaster and we are living through the disaster now and will be doing so for a generation.

    This stupid regulatory disaster was entirely mathematically predictable and it has happened. There is no need to invoke any idea that what has happened is somehow new or unique it was well understood even before Adam Smith and probably back to the Phenetians. Yet our highly paid regulators on both sides of the Atlantic forgot the basics! They caused the disaster by completely mishandling and mis-regulating the price of money.

    We have to get back to properly priced money before we can have a recovery.

  • Comment number 8.

    At least the topic of British ´Sovereignty´is now redundant, as are the calls for a British referendum on EU membership.

    With the possibility looming of a two-tier EU and Britain being in the third -- discussing ´Sovereignty´ alone-- appears pointless.

  • Comment number 9.

    Although I have followed the Greek "drama" and accompanying Euro crisis assiduously with daily readings in the Financial Times and more recently the NY Times far be it from me to indulge in the hubris that I have any solutions of my own to the Eurozones desperate struggle to hold itself together. Rather I want to recommend the works of two intellectual giants in our own times who each in their own way have illuminated some important trends that shed light on the proliferation of unexpected crises that mankind faces in the still young 21st century. Naseem Nicholas Taleb is a professor of risk and investments at NY University whose book, The Black Swan, became an overnight sensation because of its connection to the financial meltdown of 2008. He is regularly featured on the regular CNBC shows such as squawk box and is an invited speaker at recent Davos WEF events. Many of his appearances are available on the YouTube internet network. Naseem has been a prominent advisor to British PM David Cameron. As Naseem tells it he is appalled at the reckless attitudes to the overuse of risky financial instruments called derivatives by institutions on Wall Street and other financial centers. He also criticizes the policies of the Federal Reserve under chairman Ben Bernanke but I find his reasons for this criticism to be less clear than his other views. His principal concern is based on the view that the 2008 meltdown and the attempts at bailing out the money center banks on Wall Street and in the City of London have left the interconnected global financial system in a more fragile state than before. He believes that this complexity and fragility will inevitably lead to more meltdowns. His theory of the black swan is based on the notion that there has been a dangerous trend in the modern world to ignore and even downplay the damage that low probability events can create for mankind and this element of risk extends to natural phenomena such as the recent 9.0 magnitude earthquake-tsunami in northern Japan and the resulting nuclear meltdown at the Fukushima Daiichi power plant. This trend causes mankind to build nuclear plants in seismically risky places like Japan as well as invent and invest in derivatives that they do not understand very well such as Collateral Debt Obligations and poorly underwritten and underregulated mortgage instruments which were behind the financial meltdown of 2008. Naomi Klein is an award winning young journalist who wrote an astoundingly insightful book, the Shock Doctrine, about how economists at the University of Chicago, persuaded powerful men in Chile and the US government to use crisis management to their economic advantage to bring about revolutionary changes in the way in societies around the world such as Iraq are organized. She has gone on to visit and apply her insights into the way energy companies like BP have tried to minimize public perception of the enormous damage that the Gulf oil spill did to the environment of that biologically critical oceanic basin. Her recent talk to an appreciative audience in the Gulf state of Florida can be accessed at www.naomiklein.org/2010/11/shock-doctrine-push-gut-social.

  • Comment number 10.

    Just listened to a fascinating documentary on World Service BBC... i am a british person living in Argentina, and sure, the Argentine economy has come out of the crisis.. but as a business owner www.foto-ruta.com here you always feel the sense that it's about to fall off the edge of a cliff at any moment

 

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