Wednesday, May 19, 2010

Don't Panic!

By Andisheh Nouraee


For the past decade, Greece has been that guy who
pays his credit card bill with another credit card

A long time ago, current Greek Prime Minister George Papandreou killed his father (former Prime Minister Andreas Papandreou), then married his own mother. After a while, the crops stopped growing, the women of Greece stopped having babies and the tzatziki curdled in the silos. Horrified, the MILF-wife killed herself and Papandreou gouged out his own eyes, then flew so close to the sun that he melted his wings, torching Greece’s bond rating along the way. The price of spits soared, rendering millions of Greeks with no place to cook their lamb. Chaos ensued.
Last week, the European Union and the International Monetary Fund responded by installing Zeus as Greece’s interim prime minister. Greece’s 12 major gods and Nia Vardalos are scheduled to gather on Mount Olympus next week to choose a permanent successor.
Sorry. That’s what happens when a columnist on deadlines mixes the Economist, D’Aulaires Book of Greek Myths and ouzo.
For the past decade, Greece has basically been that guy who pays his credit card bill with another credit card. Greece’s government went on a debt-financed spending spree made possible by general robust growth and easy credit.
In case you haven’t noticed, robust growth and easy credit currently reside on the “That’s so 2007” ash heap, right next to Anna Nicole Smith’s corpse and Taylor Hicks’ singing career.
Though the same difficult conditions plague many Western democracies (including our own), Greece’s situation is different for several big reasons.
Greece’s national debt is equal to 115 percent of its gross domestic product, and its current annual deficit is a whopping 13.6 percent of GDP. Thanks to the Great Recession, Greece can no longer pay interest on its current debts, nor easily restructure its debt. Moneyed institutions no longer have faith in Greece’s ability to pay what it owes.
Greece’s economy is also plagued with fraud. As a member of Europe’s currency union since 2001, Greece is supposed to abide by rules requiring that its budget deficits not exceed its gross domestic product by more than 3 percent. As we’ve already noted above, Greece broke that rule. But Greece didn’t just break it. It actively sought to cover up the fact. With the help of honest American capitalists like the wonderful people at Goldman Sachs, Greek governments shuffled debts from spreadsheet to spreadsheet for several years, obscuring how badly its government was overspending. Dishonesty and delay only made Greece crash harder.
Finally, there’s the gyro. Sorry, I mean the euro. If Greece still had its old currency (the drachma), it would have more flexibility right now. It could let the value of its currency plummet, thus reducing the value of its huge debt and alleviating some of the pressure its government now faces to slash spending.
But Greece’s currency is the continent-wide euro, which means: a) it doesn’t have the autonomy to fiddle with the currency on its own and, b) all the other countries on the euro have a great interest in keeping Greece’s economy from totally collapsing. It’s not unlike the situation with U.S. banks. Greece is too big to fail.
Hence the giant bailout. In exchange for a massive European Union/International Monetary Fund bailout package to keep its entire economy from becoming the Mediterranean equivalent of the U.S. real estate market, Greece has agreed to massive government spending cuts over several years. In part because Greece’s public sector accounts for half its economy, we’re seeing massive, sometimes violent street protests as a result. As we know from our own country’s politics, government waste isn’t waste when the money’s being spent on you.
Will the bailout succeed in stabilizing Greece and world financial markets? I have no clue. Greece’s political opa-sition could coalesce around the public’s anger, topple the current government and reject the bailout terms. It’s also possible that Greece’s mismanagement has exposed an unbridgeable chasm between fiscally prudent northern Europe and fiscally profligate southern Europe. If a similar crisis hits Portugal or Italy, the European currency union may collapse with it. Simply put, the euro won’t survive if the Germans and French think they’ll keep getting stuck paying Greek and Portuguese credit card bills.

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