Greece and the House of Cards

Greece and the House of Cards
                                         Paul Sandison

In Investment Postcards of Sunday 25th April 2010, Dan Chiu suggests we may come to see
pagodas in Greece. However I would like to offer a slightly different scenario.

Rational lenders from China would surely ask for the same or tighter assurances from the
Greek government that it will carry out its strict austerity programme. For why would Chinese
lenders depart from the current guarantees just to make Greece dependent on Chinese loans
rather than those from the IMF and some Eurozone countries? It is perfectly natural that a
lender wants to be sure that the borrower is in good enough shape to be able to repay the
loan. In turn: what would make Greece accept loans from China rather than the IMF and the
Eurozone?

Further to these questions: which lenders outside Europe in their right minds would be
prepared to lend to Greece where the entire public sector has mobilised in force to stop the
austerity package? It has not come to it yet but the public sector workers are in vital positions
and can shut down the country if they decide to. Unless of course that lender country wants
to have a pretext later to send its army into Greece and take it over when the loan ends in
default, but it should be remembered that Greece is a member of NATO.

Greece's greatest geo-political threat does not come from outside NATO at the present time,
it comes from within NATO. At the same time it also comes from greedy Eurozone banks and
Greece's own public sector workers. Both the latter are foolishly playing for high stakes
without understanding the myriad of possible dangerous outcomes.

Playing for high stakes by public sector workers has now resulted in alienating ordinary
Europeans who were prepared to put their savings in Greek bonds to help the country, but
now realise that the Greek public sector workers are not appreciative of that help. These
people have now decided to invest their savings elsewhere. The result has been
successively higher bond yields after each demonstration, each time putting Greece in an
increasingly precarious situation. Before trading stopped on the 26th April, bond yields had
risen to over 13%. These negative developments have forced the Greek government to turn
to the IMF and those Eurozone countries which have previously indicated a willingness to
lend to Greece.

Anyone who knows Greece will understand why the Greek public workers are resisting any
reform tooth and nail. Not only are their pay and pensions being cut, they will have to abide
by the government's new stringent measures to prevent them taking bribes for favours from
the public - a modern Greek tragedy which is now so widespread and ingrained that it is very
often difficult to get any Greeks to see that there is anything wrong with the practice. In fact
many Greeks often boast to me when they manage to bypass a queue or obtain a favour. I
cringe when they shamelessly reveal that they think they are some kind of brilliant wheeler-
dealer or negotiator.

When I try and explain the inefficiencies and faulty allocations that bribes create, not to
mention loss of tax revenues, I get the typical Greek shrug of the shoulders. Once such
corruption has been imbibed from birth by several generations for over half a century or more
it is very difficult to eliminate. It becomes an intrinsic part of the culture. The state has a
monopoly and so the public cannot turn to an alternative provider of essential services which
means the public sector worker is in a powerful position to obtain bribes.

I am regularly told 'everyone' in the public sector is at it and so 'everyone' fears a reduction in

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that delicious tax-free secret income. 'Everyone' has skeletons in the cupboard and does not
want too many questions asked about anybody, in case his or her own bribes come to light.
Such is the insidious and corrosive nature of corruption and the current Greek government is
very brave to begin to deal with the problem resolutely.

Being public sector workers they also have an inherent reason to favour the state as an
employer. State workers, unless they are not only very well educated and informed but also
personally incorruptible, all too often lack perspective and identify with their employer, the
state. They become naive socialists and too often wrongly believe that all public services run
by the government are more rational and economic than those run by private contractors.
Now they are hell-bent on trying to retain their short-sighted policy of resisting the recovery
programme instituted by the Greek government - not only because it includes a radical
clampdown on corruption but also because it contains measures designed to improve
efficiency, save taxes and eliminate the government deficit. They would prefer to continue as
they have always done.

Being guilty public servants on the take, to shift attention from themselves they are denying
the problem and are resorting to a convenient psychological defence mechanism - projection.
Which means finding a scapegoat. It is difficult to explain to them that low yields on bonds
and low interest rates on loans are dependent on things like trustworthiness, trueworthiness,
transparency, past good records, and an absence of corruption and fraud. It is even harder to
point out that each demonstration has made the cost that they will have to bear much worse -
well over double what it was to start with. They have already locked themselves into their
view of the problem and their solution and do not want to think through the conflict.

It would have helped if the demonstrators had had 'Foreign loans - OK, 5% interest, NO' on
their placards. That would have indicated a will to work Greece out of the crisis if offered
loans on reasonable terms. But the plethora of placards had one main common message - a
blanket rejection of the government efforts to obtain foreign loans and curb its deficit, and an
absurd idea that Greeks should pay nothing and that others should pay to get Greece out of
its predicament! The latter belief is particularly disturbing, since it is evidence both of denial
and of a false idea of how both national bookkeeping and international finance works. Hardly
reassuring to anyone considering lending Greece funds.

For the demonstrators it is just too easy to blame 'the dirty capitalists' who are demanding 5%
interest on the IMF and Eurozone loan to Greece. It is evident the public sector workers are
too ignorant to know that countries that supply the IMF with funds obtain those funds from the
taxpayers of those countries. The Eurozone banks are offering loans based on the deposits
of their everyday customers and loans from their central banks. Whether via the IMF or
Eurozone countries it is largely millions of citizens in other countries that are supplying the
funds for the loans to help Greece get its finances in order, whether the actual investment is
done by an individual or by larger funds such as pension funds.

Of course the greedy Eurozone banks are also doing their creditors a disservice by
demanding unrealistic interest rates of a country which has no chance of climbing out of the
crisis on those terms. A default by Greece on its loans could easily tip other lender countries
into a crisis and millions of their savers and pensioners into misery.

Also, greedy Eurozone banks are actually inflaming the situation. The Greek public sector
workers have some grist for their mill since the interest rates demanded by the IMF and in
particular the Eurozone countries are too high to be affordable to Greece and enable it to pay
its way out of the crisis. Bond yields and interest rates in some Eurozone countries are as low
as 2%. An interest rate of 5% would merely result in kicking the can down the road so that
the crisis re-appears later with Greece in a worse state than before. It also smacks of

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extortion.

Now this is not a new attempt to take the people of a country in trouble and try and squeeze
them until the pips squeak. The IMF and the EU lenders have not forgotten the attempt to put
Iceland into a debt straitjacket of high interest, or forgotten the resounding plebiscite by which
the Icelanders rejected the terms of the proposed loan to Iceland. They just want to turn the
thumbscrews on their new captive borrowers to see how much interest they can get out of
them. But both sides are playing with fire and the consequences can be unforeseeable and
geo-politically very unfortunate for all.

Theoretically, Greece can leave the Euro and still remain part of the EU. However, leaving
the Euro right away and resurrecting the drachma would only be for one purpose - to achieve
vastly improved terms of trade via a pegging of the drachma to the Euro on a much lower
level. That would mean that Greece's agricultural products would find it easier to compete
abroad, and tourists would once again flow back to Greece as a cheap and delightful holiday
destination.

An alternative to pegging is to allow the drachma to float on the international market. The
result achieved would be the same because given Greece's indebtedness the drachma would
sink like a stone. However, and here comes the rub with the idea of leaving the Euro: as the
drachma depreciates the Greek foreign debt in Euros will become yet more expensive, which
will depress the drachma further.

At this juncture I must relate that prior to Greece joining the Euro I bitterly advised against it,
fearing just the kind of developments that we now see. I argued that Greece would lose
control over monetary policy - absolutely vital to retain for a small country highly dependent
on exports. If one is not in control of monetary policy one has to accept the policy made by
others. An externally originated monetary policy could be highly disadvantageous to a
country such as Greece which had two main economic sectors - tourism and agriculture.
Sadly, exactly that has turned out to be the case.

Indeed, a strong Euro has made tourist destinations to other warm countries outside the
Eurozone irresistible for tourists. Greece has suffered an enormous loss of market share, and
the decline began long before the world sub-prime debacle reached its nemesis in 2008.
Then in the wake of the credit crunch last year, tourist revenues halved from the year before.

Further to my main argument was that the European Central Bank (ECB) only has a mandate
to control inflation, unlike the Federal Reserve in the US which has the twin goals of
controlling inflation and maintaining employment and economic growth. Not only that, the EU
has no treasury department that collects taxes from member states which can be used by a
federal government to stimulate infrastructure and growth and maintain prosperity in regions
which need them.

Greece joined the Euro in 2001. At the time there was an vast amount of spin about the
superiority of the Euro and prolific nonsense about the structure and nature of the European
union. A common argument was that the Euro would involve a member country being
integrated into the economic powerhouse of the EU and that would mean solidarity between
European countries and an insurance against economic hardship. Another wild belief was
that Greece with its marvellous heritage as the birthplace of Western civilisation and
democracy would infuse its values into the EU so that it would develop into a model super-
democratic power.

When I pointed out the banal facts that the EU meant nothing of the sort and that in fact it
was not a union at all but a Free Trade Area with some glorified trappings of a union and a

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heavy bureaucracy to co-ordinate product standards, I was met by great disbelief. I think that
a lot of the faulty decision to join the Euro rested on several 'pie in the sky' beliefs that were
actively encouraged by the EUphoric journalists and propaganda machines of various pro-EU
political parties and are still found throughout the EU today.

Nothing prepared me however for the next step into madness. At that time I had not imagined
that any future Greek government except a communist one intent on creating a revolutionary
collapse, would ever make things infinitely worse by trying to copy the US neo-conservative
government and implement the futile laissez-faire ideology of spending freely, running high
public deficits and covering those deficits by foreign borrowing. The economic policies of the
Greek Liberal-Conservatives until they lost the election in 2009 were an unmitigated disaster.

Unlike the US dollar, the Euro is not the world reserve currency. Thus, not being in control of
the world's reserve currency, Greece could not use the notorious US trick of creating inflation
to depreciate its own currency to reduce the size of its debt. Therefore deficit spending would
result in bankrupting the country very quickly - which is exactly what happened.

For Greece, joining the Euro has been a terrible mistake. It is a mistake all the more
disturbing because once a country has joined it is extremely difficult to leave without creating
chaos if the economy of the country is not in balance.

Therefore I cannot see that leaving it at this point in time would confer any significant
advantage in the short and middle term. Of course if it left the Euro now Greece would finally
be in control of its own monetary policy and could set its own interest rates. In the long term
that would be beneficial to Greece since it could adjust its interest rates to suit its own
national economy, something it could not do while the European Central Bank was setting
interest rates to suit such disparate economies such as those of the Mediterranean European
countries and the industrial Central European economies such as the German.

However in the short and middle term leaving the Euro would be disastrous. The unavoidable
reason for this is that if a resurrected Greek Central Bank lowered interest rates to say 1% to
stimulate the economy in order to encourage growth and full employment, yes the drachma
would weaken which would attract tourists and boost the sales of Greek agricultural produce
abroad. Yet for every weakening of the drachma the chain and ball of foreign debt in Euros or
in dollars would vastly expand in size and weight.

Default would then be the only option, and in turn Greece's creditors would suffer severe
losses which would be difficult to accommodate at this present time. The IMF member
countries and the Eurozone lender countries would not be happy bunnies. Suffice it to say
that one way or another, a default would mean an certain exit from the European Union for
Greece and the divorce from the European Union would be very messy and acrimonious.

Furthermore, due to the default, the losses to the EU financial sector would mean the Euro
would decline to the probable detriment of many Euro countries which already have a
negative trade balance. Their imports would thus become even more expensive and their
trade balance would worsen. Although their exports would become cheaper it is not certain
that the improved exports numbers would make up for the increase in import costs. The
eurozone as a whole would in effect be importing inflation. The financial system is interlinked
over country borders and so the entire Eurozone and beyond would be affected.

In turn Greece would have to devalue the drachma even more to retain a terms of trade
advantage relative to the Euro area. Most of Greece's tourists and buyers of Greek
agricultural goods come from the EU. So for every point the Euro declined, the drachma
would have to decline further. Greece would risk another severe balance of payments crisis

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and this time would not obtain any external funds from normal channels, having already just
proved itself a completely unreliable borrower.

In addition, a host of other unforeseen consequences would arise. To take one example,
various affected Eurozone countries might try and at least partially recover some proportion
of the defaulted loans by lobbying for the EU to erect import tariffs against Greek products.
This is despite the fact that import barriers are a two-edged sword for the importer and
actually result in the population of the importing country paying more on the market for the
same goods from other countries or its own producers. However this negative effect has not
dissuaded the EU from mounting trade barriers in the past.

As I see it the best option for Greece and its demonstrating opposition would be accept the
need for loans, negotiate a very low concessionary interest rate, secure a fair distribution of
the burden across socio-economic classes and then take the austerity pain for three years
and pay off the debt. Thereafter, when the country is debt free, a decision to stay in or leave
the Eurozone can be made.

Leaving the Euro in a disorderly fashion would be playing games with fate. It would very
unwise for both Greece and the Eurozone countries to end up on bad terms with each other.
It would end with both further weakened economically and with Greece isolated. Being a
proud nation keen on guarding its autonomy to the nth degree is no longer appropriate in
today's world of interdependencies. It also begs the question why, if one is very keen on
autonomy, did one allow oneself to get into debt in the first place? For to be sure: to be in
debt is to be unfree. In this case the problem arose through too much government spending.
If it is for the first time the lesson is a tough one but the only way out is to grit one's teeth and
to help one another out of it.

The Greek opposition should therefore avoid unfreezing the present geo-political structures
and rather support its government in demanding reasonable interest rates on the loans
needed for re-structuring. Although membership of the European Union club is membership
of a paper tiger, it is quite another thing to turn erstwhile fellow club members and the club
itself into an enemy. Greece would be turning itself into a sitting duck.

At that point it might be Turkish Mosques rather than Chinese pagodas that suddenly appear
along the coasts of Greece. Although Turkey and Greece are both in NATO, what is NATO
seriously going to do when two NATO countries fight each other? NATO did nothing last time
Turkey attacked a Greek-speaking country, Cyprus, even though 90% of the much larger
majority in Cyprus had just opted to re-unite with Greece in a referendum.

For all its debt to Greek civilisation, which includes of course mathematics, philosophy and
democracy, modern Western Europe does not have a very good record in supporting
Greece. Britain, France and Italy first negotiated an unrealistic Treaty with Turkey in 1920
(Treaty of Sévres) encouraging Greece to take back its ancient land in Asia Minor. Then
France, Italy left their military positions in Asia Minor and negotiated separate treaties with
Turkey. Greece was finally left in the lurch by its very own ally Britain in 1921 which
negotiated behind Greece's back in secret and changed its allegiance overnight.

As a result Greece lost all the areas in Asia Minor that had been designated by the original
Treaty - even the Greek cities and land of the coast. In 1922 over a million civilian Greeks in
Asia Minor were either slaughtered or exchanged for Turks living in Greece. Similar anti-
Greek tones are being heard today when prominent voices now being heard in Germany
clearly regard Greece as expendable.

Since Turkey has been fighting a losing battle to gain entry to the EU, it might just make the

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capture of Greece a new linchpin in its plan B - the restoration of the Ottoman Empire, which
would ultimately include an expansion into Armenia, Turkmenistan and the Levant. From the
toe-hold of Thracian Greece the march to Austria would be the ultimate step in the next grand
plan. It was only 350 years ago when the Turks were last at the gates of Vienna and Greece
only regained its sovereignty in 1832 after some 400 years of Turkish rule.

It would matter little to Turkey that the last Ottoman expansion took 400 years to reach its
maximum. Empires seldom expand to their limits overnight. One step enables the next. The
Third Reich was somewhat of an exception, but then it was gone almost as quickly as it
expanded.

The elephant in the room is why the IMF and the European lender countries insist on a 5%
interest rate or more on the loan to Greece when interest rates are so low in the Euro area at
the present time. They too are guilty of playing for very high stakes. The mind boggles. One
knows from history that for banks, country boundaries, allegiances, religions and ideologies
are irrelevant, because they believe that money enables them to do deals with everyone and
the Devil.

Are not banks on the take just as bad as public sector workers on the take? Can European
leaders not see that they could provoke a socialist and/or isolationist revolution in Greece?
Could the EU have a better and more reliable friend in Greece than the present Greek
government? If the present Greek government fails to secure a loan on reasonable terms and
Greece collapses, the economic and geo-political consequences could be very sudden,
unforeseen and nasty.

See      http://www.creditwritedowns.com/2010/04/greece-and-the-potential-upside-in-an-imf-
rescue.html
for a discussion of various financial mechanisms to save Greece. None of which have been
acted upon in typical EU slow-coach fashion.

One wonders whether the Eurozone political leaders have not been completely captured by
their bank directors. Have they forgotten the origin of the 2007-2009 credit crunch already?
Lending to borrowers who cannot afford the interest rate terms only leads to bubbles,
foreclosures, defaults and systemic collapse. Is this not another sub-prime catastrophe in the
making? There are thankfully a few sane voices cautioning the Eurozone. George Soros has
said that Greece needs concessionary rates from both the IMF and the Eurozone countries to
be able to make the re-financing work.

Extracting excess returns from a member country in trouble could be the first way of
dismantling the house of the European Union. The European Union is not built on a rock. It is
a house of cards, each card gingerly balancing on another. It has a dysfunctional democracy
with a parliament largely out of the decision loop, a massive bureaucracy, no executive
branch, no Treasury, and no defence.

Decisions are taken by the heads of state of some 27 member countries who meet for a day
once a month, have lunch, and then go home, each to his or her own country. Some
European countries are in the Union, some not. Some EU countries are in the Euro, some
not. Some EU countries are in NATO, some not. The moral of the story is: don't be greedy
and try and apply predatory bank behaviour, and if you live in a house of cards, don't remove
a card from the house.

© Paul C Sandison, Europe, 2010

Paul Sandison, 63, is a social critic of contemporary society. Although born in South Africa,

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he has lived in Europe for nearly 40 years. His forebears include an ancient ancestor to King
Niall of Ireland and Charlemagne. Paul is currently promoting American and European
arrangements of contemporary Irish music. His hobbies are reading, development economics
and jogging.