The Greek fiscal crisis could have momentous consequences, but it is very simple. All of the countries in the Eurozone have enjoyed extremely cheap credit for the last decade. Before the euro, interest rates in Greece were often in double digits, which means that to attract investment the Greeks had to offer a very high rate of return, because investing in their inefficient economy was so risky. Interest rates in the Eurozone currently stand at 1%, a more appropriate level for efficient economies like Germany.

Because Greece has been allowed to share these low interest rates, it has been able to borrow money at much cheaper rates than it would have been able to on its own merits. It has been using this to expand social programmes rather than to improve its economy. In fact, its economy got spectacularly less efficient over the last decade, because credit was so cheap that there was no need to compete for it by being efficient. The Greeks then lied to everyone else about what they were doing; fine, so long as the money kept flowing. When it stopped because of the credit crunch, all hell broke loose.

The Greek government was basically operating a huge pyramid scheme: it paid its debts off by borrowing more and more cheap money. Now it can't borrow anymore, it has to cut the amount of money it spends on social programmes so it can repay its debt. Greece's woes could end in it abandoning its obligation to repay its debt, which could mean the end of the euro. Or it could end in social revolution. It could end in both. It is hardly the only country that faces these possibilities; this is the legacy of the decade of political illusions sustained by cheap money.


What's the big deal?

In early 2010, the economy of Greece took centre stage in world finance as the inability to secure new loans on acceptable terms threatened to leave the country in danger of default. Which often would not be such a big deal since larger economies such as Argentina had suffered similar pressures without causing global fiscal pandemonium. The debt markets, though, were already jittery after no less of a global tiger like Dubai needed bailing out by its neighbours and were seasick from sailing the roiling waters of the worldwide recession. The notion of a member of the eurozone defaulting had people, if not jumping out of windows, assessing the distance to the ground.

There is precedent for not paying debt, of course. Argentina was just the last of the mid-size economies to be naughty enough to get spanked by the International Monetary Fund in 2001. Most recently Ecuador gave the international financial establishment the finger in 2008, unilaterally halting payments on the country's debt. Ecuador's economy is a sixth the size of Greece's. It is not a member of the world's largest trading bloc and is expected to contribute nothing to the US dollars that it uses as currency. So it's understandable that there were more nervous puns about Greek dramas than about llamas making the rounds. But Greece has been there before, more often than any European country.

Teething problems

The Greek fiscal crisis began in 1826. Hold on a minute, you say, as your brain tries to retrieve data from the morass that's Balkan history. Greece did not become an independent state until the Treaty of London in 1830. To which I say, correct, and hand you a fat-cat capitalist Cuban cigar (labelled as Honduran if you're in the States). Foreign powers were not at all indifferent to the Greek people's struggle against a mighty empire (or the Ottoman response) and some cared enough to place a high-risk wager. Or not. Only 20% of a 2.8 million pound loan negotiated by the Greeks was actually disbursed.

With a negligible tax base and no institutions to collect money, the Greek non-state was facing bankruptcy even before it was bailed out militarily. And, if you thought that the military bailout was all about atrocities and European public opinion and did not have something to do with protecting Anglo-French assets and the customer who owed them money, you would probably be mistaken. So Ibrahim Pasha, minus a fleet, slunk off to his Egyptian lair but the creditors remained. Indeed, the whole war of independence almost failed because of fiscal sloppiness. You'd have thought that the shipping tycoons who led the revolution could have done a better job of managing money. You'd have been wrong. It's also really hard to repay a loan when you never saw most of it.

Independence did not do a whole lot for fiscal discipline. While Greece was now a sovereign state, it was also sovereignly irresponsible and poorly managed. 1843 was another landmark year. Even while veterans of the war for independence were twisting Bavarian-born king Otto's arm into accepting a constitutional monarchy, the state was defaulting on loans. Otto himself had wangled sixty million francs out of French and British investors, a third of which went to the Sultan as compensation for lost territories and to support a standing Bavarian army, and more than half of which was used to service the old loan. Which did not leave a whole lot to apply to something productive.

Growing up pains

1843 did not teach anyone a whole lot of anything. The acquisition of the Ionian Islands and Thessaly in 1864 and 1881 respectively did improve things a bit, the former having better institutions left by the occupying powers and the latter being the country's breadbasket. While Greece gained a sort of monetary legitimacy by joining the Latin Monetary Union in 1868 and ending up on a gold standard, fiscal policy and the loans it took out were still rotten to the core. Once a de facto embargo that forced the state into exclusively domestic borrowing was lifted in 1879, the country went shopping in London and Paris again like some shopaholic socialite.

There were some attempts at better management but the logic of assuming debt was still questionable. The primary goal of foreign borrowing in the latter half of the 19th century was... to reduce dependence on foreign borrowing! I'm sure there is a financial wizard somewhere who can explain how external debt will solve an external debt problem. I am not that wizard. Despite best efforts, a recession in 1884-5 quadrupled state debt. The state was bailed out by Greek commercial banks for the time being.

In 1893 serial prime minster Harilaos Trikoupis, shortly after starting the last of his seven stints in the office, faced reality and coined a phrase that became proverbial in Greece. He stood before parliament and announced that "Gentlemen, unfortunately we are bankrupt." Trikoupis himself was not at all blameless in this affair but, in his defence, more of the money did go towards capital projects like roads, railways, and the Corinth Canal than under any other regime before. The country was almost 600 million francs, or six tons worth of gold bullion, in the hole.

A few years of limbo just let things stew for a while. Then, following a costly and ill-conceived military escapade aimed at taking Crete from the Turks in 1897, the Great Powers had had enough. The next year Greece was "invited" to hand over its pursestrings to a body of international monitors. These imposed a number of state monopolies on consumer goods such as matches and playing cards as well as on commodities like petroleum, and then siphoned off the proceeds to pay foreign creditors.

Greece kept paying its bills one way or the other deep into the 20th century. Even the German occupation in 1941 did no more than halt the payments temporarily, and that was mostly because the Nazis helped themselves to all the gold in the treasury. By then the Great Depression had resulted in default number four in 1932. At that point it was all a bit less dramatic and bit more business as usual. The country did not dig itself out and assume a relatively normal schedule of debts and obligations until the 1960s.

What sort of an economy gets itself into such a state?

For much of its existence the Greek economy was entirely reliant upon the primary sector as a source of revenue. However, being a nation of subsistence farmers is much less profitable than being a nation of industrialists or shopkeepers. Greece never created a solid, export-oriented manufacturing base to add value to its meagre natural resources. Manufacturing was always rather small-scale and oriented toward domestic consumption first. In the latter half of the twentieth century, Greece became a country of emigres and was dependent on remittances and later on tourism. The only branch where Greece did become a world power was shipping, which is a fickle and notoriously dirty business that is also highly vulnerable to downturns in the world economy. The proverbially rich Greek shipping magnates were able to take advantage of the global nature of their enterprises and the political clout that came with their wealth and stashed money where the Greek state could not touch it. Not much of a tax base there either.

As one of the notoriously bureaucratically corrupt states of the world (fill this out in triplicate, go to the third floor for a stamp, return here to be told to go the the fifth floor, who will send you to the fourth floor and back here, where we may or may not stamp it Ourselves after you pay the bribe), Greece has a hopelessly bloated public sector. The elimination of the spoils system in public service in 1911 did not result in a more neutral or competent public sector. Instead, election winners who could no longer fire the previous regime's clients added their own. That's how up to 40% of the country ended up on the public payroll. With that came a culture of entitlement with no incentive to produce any goods or services. This mentality manifested itself in powerful trade unions that jealously guarded their members' privileges and did not hesitate to fight the government even when their leadership belonged to the ruling party.

Governments right, left, and centre expropriated private monopolies in critical sectors like water supplies and transport. This just added more bodies to the public sector and these governments' successors were reluctant to let go as it offered them more places to put their ever-demanding army of loyal followers. Not until the 1990s did the state begin to divest itself of large state-run enterprises. Needless to say, the ones that were sold were not those that were losing money and in desperate need of reorganising but the profitable ones, depriving the state of more poorly run but nonetheless legitimate sources of income.

A lackadaisical attitude to government is embedded in the culture and those governing find it easier to go along than to fight it. In 2009, the newly elected socialist government of prime minister George Papandreou did some accounting and detected another problem with the debt: Consistent with the usual mismanagement of the economy, the outgoing conservative government, building on the legacy of earlier governments, had fudged the numbers to the point where the books were a work of fiction rather than accounting. This was the "uh-oh" moment that inevitably followed decades of "whatever" moments. The Greeks came clean about the reality of their debt. The global markets were Not Amused.

Who let the PIGS in? (♩ oink, oink, oink-oink ♬)

Who's to blame for 2010? Well, who's in control? Call me an idiot but it's France and Germany. You can tell off the five-year-old with a belly ache and a broken cookie jar. But you also have to consider the responsibility of the parents who left the jar full and within easy reach. Greece is a fiscal five-year-old. It has never been anything else and anyone who took Greek assurances that they were growing up at face value was deluded and irresponsible. As far as I'm concerned letting Greece into the Eurozone was the dumbest Euroidea since the butter mountain and only marginally less cringeworthy than Eurovision. This was part of the same mindless rush toward European "integration" that let in countries like Romania and continues to mention Turkey and Ukraine with a straight face.

Along with membership of the Eurozone, Greece got access to the same cheap credit as Germany and France. A weak but flexible drachma was replaced with a strong euro tied to economies with radically different circumstances. Cheap credit for an economy that doesn't know what to do with it is a bad idea. Money was borrowed and merrily diverted to pay for entitlement programs that produced very little worth exporting but smug reports of an improved standard of living and inflation. So these Franco-German parents gave their profligate son a credit card and were surprised when the repo man showed up.

Greece was the low-hanging fruit for the crisis. As the markets turned up the heat on Greece, the rest of Club Med started sweating. Portugal and Spain are in almost as precarious a position as Greece. Spain in particular accounts for enough of the eurozone economy to qualify as Too Big to Fail. Ireland and Italy aren't sleeping quite as easily either. The UK, despite not being a eurozone country, is taking a look at its own accounts and will be watching closely. Even on the other side of the Atlantic the Greek crisis prompted some anxious looks at the United States' own balance sheet.

Local reactions

Naturally the Greeks, already highly political animals, talked about little else during the first half of 2010. Apparently they took to the net, too. Should you have entered two particular letters in a Google search during that time, the first result in the auto-complete was not a movie star, a health question, or even a common word but the equivalent phrase of "sovereign default". If you were counting, we reached four Greek defaults and are debating the possibility of a fifth.

"Man in the street" reactions were mixed. On one hand you had entitlement and social programs that the inflationary money surplus had made necessary for ordinary people to get by during the recession. On the other hand you had certain categories of people capable of excesses such as retiring from the public sector before the age of 50 and who were not likely to be happy. The sentiment that a broad segment of the public agreed upon was that the Greek economy had it coming but that the working class was reluctant to shoulder the burden in a state that continued to permit outrageous feats of tax evasion by the rich and professional classes. Even as the usual suspects like the IMF, the US, and the EU were verbally assaulted in massive street protests, the real anger was directed at domestic institutions and practices.

Everyone recognises that any "bailout" is not a gift. It is another debt burden that could easily drive debt up to 150% of GDP from the 120% that triggered the crisis. The 12% deficit would have to turn into a 12% surplus just to make payments. Whoever provides the funds is just helping roll over existing debt and push the problem into the future. Such is the nature of the beast and the Greeks were unusually adept at riding the beast... until they fell off and got a good, long look at its jaws.

Sovereign debt is still a solid investment if one is prepared to stick it out. The "friendly" lend-lease arrangement of World War II had the British public picking up the tab until 2006. Germany was due to discharge its last obligations from the Treaty of Versailles in late 2010, 91 years later. And the last remnant of those loans due in the Greek default of 1843 was paid off in 1967 (that's nineteen sixty-seven). Institutional creditors have a long memory. Despite all the handwringing, the worst they can suffer in a restructuring of the debt is being persuaded to concede a portion of the interest and none of the capital. Ultimately the big loser here is the Greek public.

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