November 09, 2011

Behind the scenes of the 'Greek crisis'

The financial news of recent weeks has been consumed with the so-called Greek debt crisis. Whenever there is news that a deal has been reached to bail out that government, stock markets rise. When the deal seems to have collapsed, the markets fall. Although the reports act as if the Greek government or people are being bailed out, it is actually international banks that are the benficiaries. What I find extraordinary is that news reporters and commentators talk as if 'calming the markets' is the most important thing in the world and thus governments must do everything they can to make stock markets go up, even if those moves have devastating effects on ordinary people. This is why we need massive protests against the financial oligarchy, to show governments that there are other important elements of society whose interests need to be considered.

While I am by no means an expert on international finance, I have tried to get a rudimentary understanding of what is going on and here is what I have learned.

How it started was that big European banks loaned the Greek government huge amounts, while partly insuring themselves against potential losses by purchasing 'collateral debt swaps', a form of insurance offered by other banks. The Greek government is finding it hard to repay the loans. One option for them is to declare bankruptcy, which would mean that the banks will have to absorb huge losses. The deal that the markets favor involves major European economies such as France and Germany essentially agreeing to find the money to loan Greece enough to pay off the debts it owes to the banks. How this is done is to buy bonds issued by the Greek government, which will then use that money to repay its loans. Because the Greek government is in danger of bankruptcy, it has to offer high interest rates in order to tempt buyers and this places a big repayment debt burden on its budget. To deal with that, the Greek government would increase even further the austerity measures it has imposed on its people and cut back on services in order to find the money to service its bonds. This is what the French and German governments are insisting that the Greeks do if they want the money.

So it is the usual story of squeezing ordinary people of their pensions and services to pay off wealthy banks that loaned money recklessly, a story that should sound drearily familiar to people in the US. Following that pattern, we can expect that once the deal is done, the banks will celebrate their salvation by giving huge bonuses to their top executives.

We are told that the banks will not get off scot free but will take a 50% 'haircut'. i.e., they will be reimbursed for only half their loans and so that they will share in the suffering. But in actual fact as Tyler Durden points out in a succinct analysis that does the math, the haircut will only be 28% but thanks to creative bookkeeping has been made to look larger than it really is. And being the cynic that I am, I suspect that once all the dust settles, we will find that it is even smaller than 28%. The big banks never lose.

The Greek case illustrates what has become all too obvious, that the world is being run for the benefit of the financial oligarchy. We often hear the phrase 'too big to fail' to describe some banks and it is thought that this is an undefined category but it turns out that there is an actual list of 29 banks that governments feel obliged to bail out if they get in trouble. Of these 17 are based in Europe, eight in the U.S., and four in Asia. Of course, knowing that they are too big to fail only encourages these banks to thumb their noses at the normal rules of the marketplace and take excessive risks with other people's money for their own benefit, which is what has caused all these problems in the first place.

We now see more clearly why the leaders of France and Germany are twisting the arms of the Greeks. Some of the banks that are most vulnerable to losing money if the Greeks default on repaying loans are Dexia, Societe Generale, Deutsche, BNP Paribas, and Commerzbank, all of which are on the list. If the Greeks don't pay them back, the French and German governments will feel obliged to do so, and their own public may revolt.

So is the US off the hook since none of those banks is based here? No. The fact is that in the worldwide casino that the financial world has become, other major banks have invested in those infamous 'credit default swaps' (CDS) which are essentially bets that have been taken on the loans. They are a form of insurance that the banks that made the loans have made against default and if the Greeks don't pay up, then the banks will ask their 'insurers' to pay. Who are these insurers and what is the extent of their potential liability? In the secretive world of CDS it is hard to know who is on the hook for how much but given their history, one can safely conclude that Goldman Sachs, JP Morgan Chase, and Bank of America are likely to be major players. This is why the issue is more than just Europe and why US banks and the US government are also so keen on Greece accepting the deal.

This article provides a sequence of the worst case fall of dominos that could be triggered by a Greek default. I am a little skeptical of these doomsday scenarios, since they are often just propaganda to rush people into signing on to a bad deal. After all, Iceland decided to default and the world did not end and they are doing quite nicely now. The fact that Iceland was not part of the Eurozone gave it more independence of action.

One interesting fact is that the deal that the French and German governments are offering the Greeks only say that they will find the money to buy Greek bonds, not necessarily that they will provide all that money themselves out of their own treasuries, something that is not at all popular with their own people. What those governments are doing now is shopping around trying to find other countries to provide the money. i.e., buy the risky Greek bonds. China is their main target since they seem to have the money. Why would China want to wade into this mess? The argument being used is that if the Greek government defaults, followed by the other countries that make up the so-called PIIGS group (Portugal, Italy, Ireland, and Spain), then Europe will go into a deep recession and China's export markets will shrink.

So that's where things seem to stand. It is no wonder that the Greek people are demonstrating in large numbers against their government's subservience to international financial interests.


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The guy who managed my retirement account years ago told me that short-term stock market gains benefit the wealthy who buy and sell stock daily, but long-term, less dramatic gains benefit everyone, even those without money directly in the stock market. The problem is, the gains aren't realized immediately, and the gains are often indirect, such as businesses selling more products, etc. A rising tide indeed lifts all boats.

Posted by Scott on November 9, 2011 09:56 AM

A better explanation of the Greek crisis can be found here:

Posted by zaybu on November 9, 2011 12:56 PM

What I can't understand is, what was the ECB doing when Greece was managing its economy recklessly. I thought the ECB was like a watchdog. Surely it should have known what was coming long before s**t hit the fan.If this is not the role of the ECB, or the ECB is that inept the Eurozone as a concept is dead in the water. This won't be the last time we will see messes like this. Although Mano seems to feel that China should not get involved, I was thinking that countries that have large foreign reserves should seriously think of baling Greece out. If my memory serves me correctly the IMF formula of austerity did not work when that was a condition for lending to third world countries sometime ago. Although I am no expert, I doubt austerity will solve Greece's problems. A well coordinated conditional stimulus maybe the answer. It is in the interest of the export dependent countries to avoid a huge disruption in the world economy, which is very likely to happen if Greece, Italy, Spain, Portugal, Ireland etc go in for severe austerity measures, on top of the US stagnation and record unemployment levels. The interconnectedness of the World Economy means that one countries problem often becomes a problem for many.

Posted by manik on November 9, 2011 08:08 PM

You mentioned Iceland and that it is true, they are solving their economic problems with a great discipline, but still suffering some banking restrictions like international bankwires or loans to mention a few.
Possibly the advantage of Iceland is its population, only 300,000 people.

Posted by Islandia on November 21, 2011 07:37 PM

Some of us already know that there is a conspiracy behind all these problems. But whatever it is, one of which led Greece to bankruptcy is that they are too indulgent people with subsidies. Subsidy is a good thing for the short term, but is a threat if it lasts long.

Posted by Danny FC on November 25, 2011 02:58 AM

I wonder if by some strange and crazy idea.
Those families in control of the banking systems around the world are crashing the whole system because they think 2012 doomsday theories are true
and they just don't care any more.

Posted by Fred C on November 29, 2011 07:23 PM