What is going on in Greece

It looks like Greece has been strong-armed into accepting the terms of the Eurozone bailout. It seems like this bailout is not a bailout of Greece but of all the banks that lent money to successive Greek governments with seemingly little caution. Much of the bailout money given to Greece will immediately go out again to repay the banks, and the Greek people will be on the hook for repaying the loans with greater austerity measures.

To that end, Greece is expected to be forced to set up a separate account that would ensure it services its debt. This escrow account would give legal priority to debt and interest payments over paying for government services. That would maintain pressure on Greece to stick to promised austerity and reform measures and spare the eurozone the risk of a destabilizing default.

Not only that but the rest of Europe, led by Germany, is even telling Greece that they should postpone their elections, presumably so that a new government is not elected that would reject the deal. Wolfgang Münchau argues that if the Greek people want to preserve their democracy, it would be better for them to default on their debt.

It is one thing for creditors to interfere in the management of a recipient country’s policies. It is another to tell them to suspend elections or to put in policies that insulate the government from the outcome of democratic processes.


  1. 'Tis Himself, OM says

    The world’s economy is credit based. That means credit forms the basis of the global monetary systems. In a growing economy debt and interest can be repaid, in a declining economy not even the principle can be paid. Money is loaned with the expectation of repayment with interest. If the expectation goes away then so does the likelihood of further loans.

    So what happens if Greece, or more specifically the Greek government, defaults on their debts?

    ● Civil servants face pay cuts or don’t get paid at all. The usual response from the civil servants is to strike. Remember these civil servants include transport workers (airports, railroads, seaports, etc.). In an economy heavily dependent on tourism this can have devastating effects.

    ● Infrastructure will be minimally supported.

    ● Hyperinflation becomes a major concern. The surest way to stabilize an inflationary economy is introduction of a stable currency. The euro is such a currency but Greece already uses euros. So one of two things happen: Either Greece is pushed out of the eurozone (probably de facto rather than de jure) or the entire EU has a currency crisis.

    There are several other EU countries with economic problems similar to, albeit not as bad as, Greece. Portugal, Ireland, Spain and Italy are getting close to Greece’s economic situation. Spain has a nominal GDP of over $1 trillion. Italy is a member of the G8! If Spain or Italy, let alone both of them, start defaulting on loans, the political ramifications would be, let us say, interesting.

  2. James says

    Yes, but where is the EU getting the money to give to Greece so Greece can pay it to the banks? From the banks of course!

    So the banks replace profitable loans to a risky debtor (Greece) with profitable loans to less risky debtors (principally Germany and France).

  3. Yoritomo says

    While I agree that quite a few German politicians are Not Helping, and while I do have doubts about the course of action now forced onto Greece, I have even greater doubts about a default.
    At stake is not only the public servants’ pay but also, unless I’m mistaken, pensions. If they default, they will still have to do painful cuts – but then they will have to do those cuts straight away with even less flexibility. And I can also understand that the other Europeans, after being lied to in order to allow Greece into the Eurozone, don’t intend to just give away money for the Greek government to burn.
    Economic reforms are necessary, and the only choice the Greeks have is whether they want European help at the cost of parts of their sovereignty or whether they prefer to do it on their own.

    I actually consider the loss of sovereignty an added bonus since it might inadvertently pave the way to greater political unity among the EU – just the way England and Scotland were united in the wake of a burst speculation bubble.

  4. mnb0 says

    You mean interesting as in that Chinese wish – “I wish you’ll experience an interesting time”?

  5. mnb0 says

    Actually no – from the Northern European taxpayers. That sounds unfair, but one should not forget that these taxpayers got a bit of their welfare from selling their products to those same Greeks.

  6. mnb0 says

    Pretty much my view. In the particular case of Greece there is another measure that can be taken: a two currency financial system, with the Euro and a local one. That gives the Greek government even more flexibility.
    This is less crazy than it sounds. Since 15 years or so Suriname in fact uses three currencies: the local Surinamese Dollar, the USD and the Euro. That has immensely contributed to the economical stability of the country, to such an extent that we haven’t felt anything of the global crisis until now.
    De facto the former Yugoslav countries also use two currencies.
    Alas this won’t help Italy and Spain as their economies are too big.

  7. lordshipmayhem says

    I look at this from the opposite point of view: the borrower. Greece has borrowed rather than taxed to find their government expenditures, and not held their expenditures to their tax base. As a result, they’ve had to borrow to fund themselves.

    It’s a case of “don’t tax you, and don’t tax me – tax that fellow behind that tree.”

    Or, as Charles Dickens put it so eloquently, “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

  8. says

    Just for the sake of correctness, “May you live in interesting times,” while a cool phrase, is not actually Chinese curse, despite its reputation. No idea where the phrase originally came from and I’m too lazy/overworked to look it up.

    Must be one of those exotic “facts” made up about other cultures, like “Eskimos have 2*10^1000 words for snow.”

  9. Dalillama says

    IIRC, it’s from an otherwise forgotten 50s B-movie, spoken by the film’s inscrutable Asian stereotype.

  10. James Power says

    I see it from the point of view of an Irish tax payer, I didn’t borrow any money, Shazam! I owe 60,000 Euro! Yay! Year after year after year I voted against the low tax/high expenditure Government we had in this country but I still get shafted. Democratic Republics are rubbish. At least they are when said Fianna Fail Government makes private debt into public debt.

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