A Sovereign Debt Crisis Hits Greece

 

In October of 2009, a new Socialist government came to power in Greece on the promise of injecting 3 billion euros to reinvigorate the Greek economy.[44] Greece had suffered particularly hard during the economic crisis; it experienced riots and protests. In December of 2009, Greece said it would not default on its debt, but the government added, “Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state.” As Ambrose Evans-Pritchard wrote for the Telegraph in December of 2009:

 

Greece is being told to adopt an IMF-style austerity package, without the devaluation so central to IMF plans. The prescription is ruinous and patently self-defeating. Public debt is already 113pc of GDP. The [European] Commission says it will reach 125pc by late 2010. It may top 140pc by 2012.

 

If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower state workers, rising to 20pc for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral. 

 

Evans-Pritchard wrote that the crisis in Greece had much to do with the European Monetary Union (EMU), which created the Euro, and made all member states subject to the decisions of the European Central Bank, as “Interest rates were too low for Greece, Portugal, Spain, and Ireland, causing them all to be engulfed in a destructive property and wage boom.” Further:

 

EU states may club together to keep Greece afloat with loans for a while. That solves nothing. It increases Greece's debt, drawing out the agony. What Greece needs – unless it leaves EMU – is a permanent subsidy from the North. Spain and Portugal will need help too.[45]

 

Greece’s debt had soared, by early December 2009, to a spiraling 300-billion euros, as its “financial woes have also weighed on the euro currency, whose long-term value depends on member countries keeping their finances in order.” Further, Ireland, Spain and Portugal were all facing problems with their debt. As it turned out, the previous Greek government had been cooking the books, and when the new government came to power, it inherited twice the federal deficit it had anticipated.[46]

 

In February of 2010, the New York Times revealed that:

 

[W]ith Wall Street’s help, [Greece] engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

 

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

 

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.[47]

 

Even back in 2001, when Greece joined the Euro-bloc, Goldman Sachs helped the country “quietly borrow billions” in a deal “hidden from public view because it was treated as a currency trade rather than a loan, [and] helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.” Further, “Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.” Both Goldman Sachs and JP Morgan Chase had undertaken similar efforts in Italy and other countries in Europe as well.[48]

 

In early February, EU nations led by France and Germany met to discuss a rescue package for Greece, likely with the help of the European Central Bank and possibly the IMF. The issue had plunged the Eurozone into a crisis, as confidence in the Euro fell across the board, and “Germans have become so disillusioned with the euro, many will not accept notes produced outside their homeland.”[49]

 

Germany was expected to bail out the Greek economy, much to the dismay of the German people. As one German politician stated, “We cannot expect the citizens, whose taxes are already too high, to go along with supporting the erroneous financial and budget policy of other states of the eurozone.” One economist warned that the collapse of Greece could lead to a collapse of the Euro:

 

There are enough people ­speculating on the markets about the possible bankruptcy of Greece, and once Greece goes, they would then turn their attentions to Spain and Italy, and Germany and France would be forced to step in once again.[50]

 

However, the Lisbon Treaty had been passed over 2009, which put into effect a European Constitution, giving Brussels enormous powers over its member states. As the Telegraph reported on February 16, 2010, the EU stripped Greece of its right to vote at a crucial meeting to take place in March:

 

The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty [i.e., foreign economic control].

 

While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty.

 

"We certainly won't let them off the hook," said Austria's finance minister, Josef Proll, echoing views shared by colleagues in Northern Europe. Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from "receivership".

 

The EU has still refused to reveal details of how it might help Greece raise €30bn (£26bn) from global debt markets by the end of June.[51]

 

It would appear that the EU is in a troubling position. If they allow the IMF to rescue Greece, it would be a blow to the faith in the Euro currency, whereas if they bailout Greece, it will encourage internal pressures within European countries to abandon the Euro.

 

In early February, Ambrose Evans-Pritchard wrote in the Telegraph that, “The Greek debt crisis has spread to Spain and Portugal in a dangerous escalation as global markets test whether Europe is willing to shore up monetary union with muscle rather than mere words”:

 

Julian Callow from Barclays Capital said the EU may to need to invoke emergency treaty powers under Article 122 to halt the contagion, issuing an EU guarantee for Greek debt. “If not contained, this could result in a `Lehman-style’ tsunami spreading across much of the EU.”

 

[. . . ] EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of “brinkmanship”. The core issue is that EMU’s credit bubble has left southern Europe with huge foreign liabilities: Spain at 91pc of GDP (€950bn); Portugal 108pc (€177bn). This compares with 87pc for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.[52]

 

Fear began to spread in regards to a growing sovereign debt crisis, stretching across Greece, Spain and Portugal, and likely much wider and larger than that.

 

[44]      Ed Harris, Greece turns to Socialists to fight economic crisis. London Evening Standard: October 5, 2009: http://www.thisislondon.co.uk/standard/article-23752278-greece-turns-to-socialists-to-fight-economic-crisis.do

 

[45]      Ambrose Evans-Pritchard, Greece defies Europe as EMU crisis turns deadly serious. The Telegraph: December 13, 2009: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6804156/Greece-defies-Europe-as-EMU-crisis-turns-deadly-serious.html

 

[46]      Elena Becatoros, Greece prepares economic crisis plan. The Globe and Mail: December 14, 2009: http://www.theglobeandmail.com/report-on-business/greece-prepares-economic-crisis-plan/article1399496/

 

[47]      LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ, Wall St. Helped to Mask Debt Fueling Europe’s Crisis. The New York Times: February 13, 2010: http://www.nytimes.com/2010/02/14/business/global/14debt.html?adxnnl=1&adxnnlx=1266501631-XefUT62RSKhWj6xKSCX37Q

 

[48]      Ibid.

 

[49]      Sam Fleming and Kirsty Walker, The euro? It's a great success, says Mandy as Greece turmoil sends single currency into worst ever crisis. The UK Daily Mail: February 12, 2010: http://www.dailymail.co.uk/news/article-1250094/Greece-debt-crisis-Britons-pay-3-5bn-bailout.html

 

[50]      Kate Connolly, Greek debt crisis: the view from Germany. The Guardian: February 11, 2010: http://www.guardian.co.uk/world/2010/feb/11/germany-greece-tax-debt-crisis

 

[51]      Ambrose Evans-Pritchard, Greece loses EU voting power in blow to sovereignty. The Telegraph: February 16, 2010: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7252288/Greece-loses-EU-voting-power-in-blow-to-sovereignty.html

 

[52]      Ambrose Evans-Pritchard, Fears of 'Lehman-style' tsunami as crisis hits Spain and Portugal. The Telegraph: February 4, 2010: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7159456/Fears-of-Lehman-style-tsunami-as-crisis-hits-Spain-and-Portugal.html

 

 

 Andrew Gavin Marshall is a Research Associate with the Centre for Research on Globalization (CRG). He is currently studying Political Economy and History at Simon Fraser University.