It’s All Greek to Me

Among the non-Eastern Bloc countries, Greece has always lagged economically behind the rest of Europe. And Greeks have a reputation – apparently deserved – of playing fast and loose with numbers, avoiding taxes and living beyond their means, often paycheck to paycheck, smiling at the social safety nets and healthcare supports that define modern Greek life. Mega-billionaires don’t even think twice about evading taxes, making sure their numbers and investments fall far outside the reach of inquiring Greek tax collectors… when those inquiring minds haven’t been sated with “incentive compensation.” To become true stylistic Europeans, without the supporting exports and industry, Greece and Greeks needed either to maintain a “Spartan” lifestyle or borrow against “expected” future growth. Guess which direction they chose.

The global financial institutions, looking for new customers (particularly one who could be talked into credit cards and easy lending standards), hit pay dirt. Greeks with credit cards! European finance ministers, who feared that Greece’s deficits would pull them under, were assuaged when Greece presented statistical evidence that their perpetually slow economy and growing deficits were vestiges of the past. Greece joined the European Union and embraced the euro in 2001. However, it became clear that the Greek government had been less than candid in the numbers they presented to the EU. In November of 2004, the truth came out: “Greece admitted … that the budget figures it used to gain entry to the euro three years ago were fudged. The Finance Minister, George Alogoskoufis, said the true scale of Greece's budget deficit was massively understated enabling Athens to dip below the qualification bar and into the EU's single currency.” The Independent (UK), November 16, 2004.

So we now look at an angry Greek electorate, with a failing economy and government borrowings that have absolutely no realistic chance of being paid off on time and in full, who have watched at EU-imposed austerity measures that have dropped wages and pushed the unemployment rate to 20% and cut social programs everywhere. And since this is an imposition from the outside, Greeks feel that their democratic rights have been trampled. The EU130 billion bailout wasn’t enough. The 50% haircut to private lenders to the Greek government wasn’t enough. And the very recent agreement to drop the minimum wage by 20% and cut another 15,000 government jobs – even more austerity – wasn’t enough. Another EU325 million needed to be cut before the European Union would consider a further EU130 million bailout, plus some additional proof that Greek leaders would actually implement the additional cuts amid a firestorm of local protests.

Had Greece retained its drachma currency, the solutions would have been tough but more directly implementable. The Greek currency would simply inflate to reflect the reduction in true economic values. Greeks would live less well, but they wouldn’t be taking pay cuts. Instead, their currency would simply buy less in the international market. Unsympathetic Germans, pushing their Chancellor to “just say no,” are the bulwark of European value that would support an additional bailout. They want the Greeks to learn their lesson, downsize their lifestyles and drill down and work harder to earn back economic credibility. In Greece, Chancellor Angela Merkel is pictured as a modern-day Hitler, and anti-German sentiments are raging in the streets. Unions and more than a few political leaders are leading strike and other protests. Austerity is making life in Greece simply miserable.

With the recent announcements of further austerity, the traditional response from the markets has been an immediate upward tick. But the opposite happened, and markets fell at the news. Why? There is this harsh underpinning reality that the more austerity is imposed on prodigal Greece, the harder it will be for them to turn their economy around because there is no investment or incentive that would push them to greater productivity. The February 10^th Los Angeles Times tells it like it is: “The constantly changing news illustrates again just how many actors there are determining the future in the European drama, and just how many chances there are for it still to go off the rails. In rejecting the Greek agreement [on February 9^th], European leaders have said they want all three Greek political parties to sign off on the deal so that they cannot back out later.

“Greek economy itself is likely to go to shambles. A large proportion of the cuts are expected to come from the pensions of workers, to ensure that international bond-holders get paid… The anger was visible [February 10^th] when Greek workers went on strike, and, more unexpectedly, the Greek police union said they would issue warrants for the arrests of the European leaders who had approved the deal, according to Reuters. As if things weren't bad enough, Greek hospitals are dealing with a deadly super bug that nurses are unable to treat with medicine, when they are lucky enough to have medicine.” And despite assurances from the Greek government that a further bailout should do the trick, you can’t wonder why European leaders are still skeptical. Very, very skeptical.

Increasingly, the global economic community is beginning to believe that a Greek default is inevitable and that the country would be best served by going it alone outside of the Eurozone… that Greece should go back to its dreaded dreary drachma. That default would take the global recovery down a notch, impacting the U.S. as well, but with 11 million people, it won’t have nearly the impact that a comparable default from Spain (45 million) or Italy (60 million) might have. But the markets just told the world: brace for a Greek default. Living in Greece is not for the faint of heart these days.

I’m Peter Dekom, and we are anything but clearly heading in the direction of a strong near-term recovery.