“Timeo danaos et dona ferentes” – Virgil in Aeneid (II, 49)
If in the ancient world, one was to beware of the Greeks bearing gifts, the modern day analogy would be the bankers. The ongoing saga of the European debt issue underlines two issues. First, the lack of understanding of the problem at hand and second, the attempted solutions that benefits the banks at the expense of the taxpayers.
The problem at hand is rather a complex one. Greece is at debt-to-GDP ratio of 160% coupled with unemployment rate of 16% and a GDP that’s been contracting since 2009 at an annual rate of 5.5%. The solvency of Greece is in question. The EU/IMF through the ESM framework is addressing this fiscal issue. However Greece also runs persistent current account deficits to the tune of 10% p.a. The interbank market within the EU broke in mid-2007. The PIGS were able to source funding through ECB’s replacement lending which has now ballooned to $500 billion. This problem is well elaborated by Hans-Werner Sinn, the president of the IFO institute. Hence no amount of adjustments to fiscal balance sheet will account for the ballooning external funding and create massive imbalances in Target2 Accounts for ECB. The Euro framework has to be radically restructured and restructured pretty soon. Privatization of assets is also being pursued as a solution. If a corporate were to reduce its total debt-to-total working capital, it doesn’t proceed by liquidating all the assets. Not only does this reduce its revenue but also hurts the viability and the going concern of the company. The idea is beyond preposterous!
The EU/IMF is willing to extend more debt for Greece in exchange at senior grade for full repayment of the existing debt. The size of the current loan is roughly $150 billion for 10 million Greeks, that’s about $15,000 per Greek at sub below market rate of 5%. This is at the expense of 50% haircut to the pension fund, further budget cuts and layoffs. Pain is good for the average Greek. During the Asian currency crisis, IMF enforced high-interest rates, tightened money supply, bankrupting most banks and corporations. Millions fell below the poverty line especially in Thailand, South Korea and Indonesia. Pain was good for Asians and Asian corporations. The banks made additional 3% by lending to Greece than to Germany. The additional return reflected the increased risk, which has to be borne by the lender. Surely an unpleasant consequence, but pain isn’t good for the European bankers.
To put in perspective, Goldman Sachs helped Greece and other countries to mask their debt and deficits to join the Euro. Why are they not being prosecuted for aiding a country to falsifying documents and “massaging the numbers”? This adds to mortgage securities scandal, foreclosure fiasco, insider trading, aiding Libyan governments and wealth funds in embezzlement. The list is endless.
Financial corporation’s sole purpose is to allocate capital efficiently. Instead they are replete with criminal activities that endanger the political and societal structure in the world. Wonder when the citizens of the world will wake up to the simple truth.
