F£$k the Greeks (and praise the IMF)

Is it all Greek to you? What’s going on at the Southern end of Europe? And why should you care? You will have heard that Greece is the basket-case economy which is causing current concern. This is because Greece’s national debt is approximately 250% of its annual production. This does not include private interbank or company borrowing, nor outside investment in Greek enterprises.

To give this some perspective, let’s look at the collapse of South-East Asia in 1997. Three years before, economist Paul Krugman pointed to the apparent success of those tiger economies in Thailand, South Korea and Indonesia, observing that all the growth was coming from capital investment, and not from intrinsic productivity. It was therefore not sustainable.

No-one took any notice and loads more credit was pumped in. Much of it went to those in power, rather than those who knew what to do with it. Asset prices were pushed up. Property was built faster than needed. A bubble was created, and it burst. There’s other factors involved such as exchange rates and the transfer of Hong Kong into Chinese hands, but one way or another, confidence broke. Countries raised interest rates to encourage foreign investors to not withdraw their capital, but this only damaged the internal economy more deeply.

And what happens when an economy is failing? The International Monetary Fund rides in. On the surface this looks like rescue. The IMF takes a load of money, supplied by governments (your money and mine) and injects it into the economy to “save it”. It’s just like Quantitative Easing, but from outside. In return, the country concerned devalues its currency and agrees to “be good”. It stops public spending, increases taxes, raises interest rates to “control inflation”. Nowadays we call it “austerity”.

If you saw Adam Curtis’ series “Machines of loving grace” recently you will have heard his view that most of the money pumped in by the IMF was quickly pumped back out in repayment of debts. Who was owed the money? The speculative investors who pumped up the bubble. Who did the money come from? You and me, Jean and Joe Public. Taxpayers. What happened to the Asian economies? Years of devastation.

So how does this compare with the Greek situation? Well there’s differences for sure. Greece is in the Euro so it can’t devalue its currency. But it is being asked to pay 18% on new loans. What does that do? It ensures that they can never get out of debt, and meantime that accelerated payback of outside investors takes place. The loans will come (largely) from German and French governments (central banks). So this time it is their taxpayers who ensure that outside investors are protected. Some of those investors are French and German commercial banks – so it’s French taxpayers supporting French banks etc. They have to pretend that it’s a heroic effort to keep the Euro stable, and while there’s truth in that, it’s not entirely altruistic. You can put lipstick on a pig, but it’s still a pig.

You could argue that the Greek attitude to taxation has always been iffy. You could wonder why they were ever allowed to enter the Euro given the nature of their economy. And you would be right. But the promise of European membership is that the weak will be supported with investment to rise to the level of the strong. That’s not charity – it’s designed to ensure that there is a bigger market for Germany, France and Britain to sell into. It also supports the generation of economies in our neighbourhood which can match the low wage levels of the Far East, so Rumania and Poland can compete with China. In theory we all rise together. It’s enlightened self-interest. So the Greeks might also have cause to feel aggrieved that all this help was promised, and now that times are tough, they are the ones who owe. The Irish are in a similar position – their bubble was encouraged from outside too.

The rescue packages for Greece come from European governments supported by the IMF, coming over the hill like the cavalry in a black and white Western movie. And if you listen carefully to what is being said, you will hear that this is a stop-gap. Asked if this is throwing good money after bad because the Greeks are already in default, some of those involved will say “yes”. In a year’s time we will be back here, but by then the German taxpayers will be shouting “enough”. But in the meantime, the loans will have been pumped back out to the banks and investors. Just like Indonesia, the Greeks can then go to hell.

Unfortunately there are several flies in the face-cream. Unfortunately the Greeks will not go there alone. Firstly the Greek people are very close to saying “no” to all the good behaviours that are conditions for the loans. They have had a year of austerity and life has got worse. They are indignant; why do it again? That could mean that the deal collapses. Then banks will have to write down their debts now, which might take one or more into instability, leading to dominoes of default around the world economy, because as we know these days, everyone owns a piece of everyone else’s debt. Secondly, the Greeks are part of the Euro, so loss of value in their economy threatens to take the whole currency on a slide, with massive instability all around (another stack of dominoes). Thirdly, the Greeks are not alone. Spaniards are making similar complaints against their government, and theirs is a much bigger economy. Even here in the UK, the austerity effect on pensions is causing big-time unrest. There’s a social domino stack too.

And lastly, perhaps the biggest issue of all is that everyone knows that these problems exist. Every morning for a few years now I have listened to the financial reports (Today programme, 6.15 am) and I hear a consistent shift in tone. Confidence is wavering, and the stock markets in both US and UK are down by over 6% – about 1% per week for seven weeks. If you know anything about the financial sector, you know that it is about confidence.

I have had three conversations today relating to the UK property market. There is consistent experience that 1) lenders aren’t lending 2) hardly anyone is viewing those properties which are on the market and 3) that the few who are buying, are offering well below the asking price. There is widespread fear of collapse. Yesterday’s news included the data that many UK families will not be taking their customary summer vacation this year. 17 million according to the Daily Mail, so that’s probably about 8 million. But still a lot.

So should you be worried about the Greek situation? Well yes, because they could bring the house of cards down. But (and I apologise – don’t shoot the messenger) it might not be the Greeks that are the first card to wobble. It could come from anywhere. Some very greedy people have been responsible for many years now for irresponsible and selfish behaviour. Arguably they have done so since the beginning of “Orange” style capitalism three centuries ago (check out the South Sea Bubble if you want to know more). The upside of this very probable collapse is that it will be so big, and affect so many of us that perhaps this time we will change our attitudes, adjust our own expectations and build economic systems which are fit for today’s world. Right now, it’s our opportunity to prepare for some tougher times or using the Greek expression for foreplay …. “brace yourself”.

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