Is there a simple explanation to what is going on Greece?

[ol]
[li]How did Greece get to this place?[/li][li]What is the significance of the resent “no” vote?[/li][li]In discussing the US national debt, one argument that I have heard (and personally advanced) is that sovereign debt is different than consumer debt. How does this difference apply in the case with Greece?[/li][li]How does this affect me, a middle-class professional in Texas? I’ve read that people’s 401Ks may be affected. Why? (I’m a public employee, so I don’t have a 401K.)[/li][/ol]

Is there an apolitical way to answer these questions?

There’s generally no answer that is both simple and correct to a wide amount of people. For example, a right-winger may find it simple to say “Greece acts like an undisciplined child, and that’s why they’re in this mess”. But many people would take umbrage with that answer.

As for number 4, this situation may make it less expensive to visit Greece on vacation. You could lose money if you or your pension fund held investments in Greek sovereign debt, Greek banks, or German banks, which invested in Greek debt. If you don’t have investments in Greece, you won’t be affected.

Oops. Please replace the word “resent” in question 2 with “recent.”

To answer your first question:

If you listen to Bob Brinker’s Money Talk on a regular basis you’ve heard him open the show for the last month saying bluntly that Greek politicians “cooked the books” (His words, not mine) to look attractive enough to enter the Euro.
They offered many citizens the ability to retire as early as 53. He mentioned the train system (for example) was spending more on pensions than it could take in.
You can only operate that way for so long.
If the nation of Greece can no longer service it’s debt it will probably declare bankruptcy. This wouldn’t be the first time. I remember reading that one of the first nations to go bankrupt was…Greece…more than 300 years BCE.

Brinker mentioned that the Greek domestic product might account for 2% of the total of all nations in the Euro, so it should have a small impact there. Beyond that he didn’t see how a Greek default would have much of any impact on the majority of U.S. citizens.
Unless, of course, you had an international fund that invested heavily in Greek equities and debt. And if your fund WAS invested that way you’d want to fire the fund for gross mismanagement. What you’re seeing now has been coming down the pike for years.

Nm

  1. When Greece joined the Eurozone (meaning they abandoned their currency and started using the Euro), nearly all relevant actors (politicians, banks, investors, the public, etc.) overestimated Greece’s ability to repay loans, for various reasons. Consequently, Greece began to take out loans somewhat in excess of what they were able to pay. Then the recession happened, and it hit Greece harder than most places. Their total economy shrank 30%. They have 25% unemployment, and have used up all their goodwill over the last five years. Almost no one is willing to do them any more favors. With no lifelines left, they have begun missing payments on their loans.

  2. Europe’s politicians offered Greece a deal to continue the current arrangement; the net effect would be that their banks could stay open but unemployment would probably not get better and the economy would possibly shrink more. The current Greek government wanted a better deal, and went to the public for confirmation that they shouldn’t back down. The public agreed by a 61-38% margin that their negotiators shouldn’t take the current offer, hoping for a better one. It’s still unclear if this will work or backfire.

  3. The situations of Greece and the USA have almost nothing at all in common.

  4. It likely does not affect you at all. The economic disaster has been playing out in slow motion for five years, and any damage to the world economy is now mostly done.

While people keep saying there is no spillover, that the Greece situation “is contained”; in actual fact the stock market in Europe and elsewhere has declined in reaction to this.

It’s all apolitical, no matter how people try to shoehorn it into ideological lines.

The first thing to know is that nobody knows how economics works. We just haven’t been doing it that long, and we have a pretty small set of countries to draw conclusions from. We have picked up a few basic principles, but nobody is able to make accurate predictions about the big picture and new developments regularly take everyone by surprise.

Right now, there are two schools of thought on how to get out of a slump. One believes that if countries cut government spending, accept a high unemployment rate, and sell off whatever they can, eventually they will be able to reap the rewards of their sacrifice and return to normalcy.

The other school of thought believes that sharp cuts in government spending depress consumer spending, which only leads to more unemployment and a deeper depression. They advocate for targeted use of economic tools in order to short circuit the recession.

Both sides have examples of it working, and both sides have examples of the other side failing.

So in comes Greece. Greece is in a deep depression. Greece also owes a lot of money (which isn’t an abnormal state for a poorish country to be in) to the EU. The EU, and specifically Germany, have decided that austerity is the way to go. After five years of pretty brutal austerity, Greece is now at 25% unemployment and there is no hope that things will improve any time soon.

Many Greeks would like to give the other approach a shot, but that would require them being in charge of their money. They could default, get kicked out of the Euro, and go from there. But that’s also a risky road that isn’t likely to be rewarding any time soon.

How did Greece get to this place?
See twhitt’s #1. I would only additionally note that there’s a further problem which is that modern economics (if applicable to anything at all) is really only concerned with and relevant to economies which are centralized around big business, strong central governments, growth economies, and the rule of law (e.g., that if the law mandates that people pay tax, they actually pay tax). Greece is not really a growth economy. It has a yearly income from tourists, but that’s fairly flat. The people don’t pay their taxes. The central government, due to the take-up of the Euro, is not very strong (economically speaking). These all exacerbate the situation since people assumed (and assume) that standard economics works with Greece, and consequently that loaning them money was a viable business investment, and it also makes it difficult for Greece to correct itself appropriately.

What is the significance of the resent “no” vote?
None, really. It’s symbolic.

In discussing the US national debt, one argument that I have heard (and personally advanced) is that sovereign debt is different than consumer debt. How does this difference apply in the case with Greece?
In the mid-1800s, I could probably have bought land and built a nice house on it for a couple of thousand dollars. That’s not an option today, because the dollar has been inflated since then.

If, in 1850, I entered into a contract with you in which I said, “I will pay you $5000 in 2015, for you to build me a 3 story mansion.” You might think that pretty reasonable, because $5000 is a ton of money. Of course, 150 years later, when it’s time to actually build the house, you’re not going to be quite as happy. In 2015 dollars, you could have gotten a lot more money, to construct a house, but now you’re stuck doing it for $5000.

This rather stupid loophole in contracts, that they enshrine a dollar value independent of time, is useful for governments. Generally, they try to earn money (via taxes) to pay off debts. But they always have the option to just go, “The heck with it”, and print fresh new dollar bills to send to the creditor. That inflates the currency, devaluing it, but it does get them out of the contract.

The government, as the manager of inflation, can take advantage of the loophole as it wants. A regular household is generally going to be unable to take advantage of it.

How does this affect me, a middle-class professional in Texas? I’ve read that people’s 401Ks may be affected. Why? (I’m a public employee, so I don’t have a 401K.)
It would probably depend on what your 401k is investing in. If they’re tracking “European Financial Institutions”, then you’re probably not going to be doing great, since there’s going to be more bad news coming out of the region than good. If the 401k is tracking “Australian mineral exports to Asia”, probably you don’t need to care too much.

Greece does not have authority to print Euros in order to pay their debts. They gave up the power to print their currency when they joined the Eurozone. One of the ~18 physical locations where they print bank notes happens to be in Greece, but they lack legal authority to use it for their own benefit.

I don’t think Greece is likely to directly affect you, but Puerto Rico might. From what I’ve read, PR is similarly broke, and has a ton of bonds out there which are rated at the lowest class of junk bond (meaning it is absolutely guaranteed they’re going to default on them). Supposedly, many retirement funds have exposure to PR bonds, because bonds are normally considered a safe investment. It’s not likely to wipe people out, but it’s possible that many pension funds & 401Ks might take a hit.

Next question: profit.

How do I do this?

When the EU was formed, Greece was paying roughly 3x what Germany was paying to borrow money.

If you are paying 10% and somebody organizes a club in which members pay 3%, you just might want in the club - even if you are not rich enough to meet the membership requirements.

But, if you are a clever person, you can manipulate your books to show more wealth (and income) than you have.

Once in the club, you start borrowing as if there is no tomorrow.

Tomorrow came.

With the history of 2 horrendous wars in the last century, all of Europe really, really wanted everybody to join as one (esp. Germany and France). They probably overlooked the structural problems in Greece in their eagerness for “One Europe”.

Of course, the average Greek citizen had no idea that they had entered into a club where the rules were different, and are now angry because they just did what they had always done, and now they have no money and no jobs, the kids are leaving and not coming back, etc.

Are there any new indicators that this might work? Everything I was reading a couple of days ago suggested that the belief it might get them a better deal was delusional.

I’ve read that tax collection is almost non existent in Greece, and it’s not very good in Italy either, that would seem to be a factor?

One thing that contributes to the problem is the common currency. Normally, a country with Greece’s level of debt could improve their situation by increasing their money supply, effectively devaluing their currency. Greece can’t do this because they use the Euro. This is one reason many Greeks want to dump the Euro and go back to the Drachma.

One could separate three distinct problems:
(a) Economic problems of Greece: chronic unemployment, poor governance, corruption, logistical problems associated with small islands, and excess welfarism during the good years.
(b) The world-wide Banking Panic of 2008. Like the Y2K crisis which “never happened”, Americans who benefited from the multi-trillion dollar monetary and fiscal injections the U.S. enjoyed, often overlook how severe the Panic of 2008 was. Don’t forget that several large Wall Street firms failed, including the largest insurance company in the world. The after effects of that huge Panic are still very visible in the U.S., let alone in places like Greece.
(c) Greece lacks the benefit of sovereign currency. They use the Euro common currency.

Attention rightly focuses on point (c). What happens when two countries of starkly different economic strengths, like Germany and Greece, are using the same currency?

This is a non-trivial question. Some will tell you that the weaker country benefits in such a currency union. Others will tell you that it’s a way for wealthy countries to exploit the weak, almost a latter-day colonialism. Closer to home, we have Mississippi and Puerto Rico bound together with New York and California by the dollar. Mississippi does just fine – mobility tends to equalize wages as Mississipians have the option to seek jobs elsewhere. Huge billions flow from the rich states to the poor states due to Federal spending on military, Medicare, etc. Puerto Rico hasn’t done so well lately.

Cambodia has remained locked to the U.S. Dollar. I hope some expert will comment on that situation.

Had Germany fully “adopted” the Greeks, much as it did the East Germans, the Greeks could continue to enjoy prosperity, but patience is wearing out. Greece refused to make the political reforms needed to qualify for the Eurozone. Now Greece is plunged into Depression. Finally, in hindsight, there is strong belief that the union was a bad idea. (I and others warned 15 years ago.) **The three normal ways to escape from recession: increasing money supply and lowering interest rates; stimulative deficit spending; and currency devaluation are all unavailable to Greece given its lack of sovereign currency.
**

(2) What is the significance of the recent “no” vote?

Will the No vote induce further concessions from the troika? If not, should/must Greece leave the Eurozone?

Many say the central banks (i.e. troika) must hold firm, to avoid encouraging further moral hazard (refusal to adopt austerity) by countries like Spain. There is growing agreement that, in the absence of significant concessions by the troika, Greece must and should abandon the Euro. I’m whimsically calling their new currency the Greuro. IIUC, a parallel currency already exists with bank account money trading at a big discount to Euro banknotes.

(3) In discussing the US national debt, one argument that I have heard (and personally advanced) is that sovereign debt is different than consumer debt. How does this difference apply in the case with Greece?

That’s the whole point. If the U.S. central bank (FRB) is regarded as an agency of the U.S. Government, then the U.S.Gov prints its own money, sets short-term interest rates and money supply, can target inflation and exchange rates, etc. But without a sovereign currency Greeks don’t have a Central Bank; their monetary finances are controlled by bankers primarily in Germany.

(4) How does this affect me, a middle-class professional in Texas?..

:frowning: Greece is a small economy, about the size of Dade Country, Florida, so market turmoil is focused on contagion: Spain and other weakening Eurozone countries. Like Greece, Puerto Rico uses an external currency and is in trouble for similar reasons. Times are tough and getting tougher for those directly affected. But am I really the only one who finds it almost unseemly for a middle-class person on a different continent to focus on him/herself?

I’m going to attempt to keep this response GQ, but it’s getting tough.

New indications that it might work? There’s one. Greece’s Finance Minister, Yanis Varoufakis, was reportedly too confrontational, and his personal style may have been an obstacle to reaching a deal. He said he would resign if the referendum returned a Yes. In spite of the landslide for No, he resigned just hours after the results came in. He’s been replaced as finance minister by the former lead negotiator, which may make it more likely for them to come to terms.

It’s likely not enough. Given the entrenched positions of northern European lenders (Germany, Austria, Finland, Netherland, others), and wary politicians in the periphery (Spain, Portugal, Ireland, Italy, others) that are afraid to see Syriza win too much electoral success, there’s probably no longer any leadership willing to strike a deal. Germany, Austria and others are, to all appearances, prepared to see Greece leave the Eurozone, and I doubt there’s any way forward without their enthusiastic support.

How did Greece get to this place?
Simple. They borrowed a lot, can’t pay it back. Why did they borrow a lot? Because it was easier than collecting taxes. (Tax evasion is the national pass-time.) They cooked the books to make it look like they had more money than they did. Either the European banks were monumentally stupid (a possibility for all banks, considering 2008) or greed overrode common sense (also a possibility, considering 2008). The banks lent like there was no tomorrow, and the Greek government borrowed and spent on frivolous things like inflated civil service salaries and pensions. Most likely the banks assumed if Greece fell short, politicians from the rest of Europe would jump in and make sure the banks got paid. They were right. Since 2008 when the world economy tanked, most of the Greek debt has been owed to the European national banks rather than private banks. The national banks have effectively bailed out their private banks (much like Wall Street got saved) and now the politicians are left holding the empty moneybags.

What is the significance of the resent “no” vote?
The rest of Europe has been saying “If you want us to save your bacon, time to cut the fat”. In fact, they want to cut to the bone. Why should national bank fat cats miss a payment when Greek pensioners could lose their income instead? Oddly enough, the Greeks don’t understand this logic. Now that they’ve voted 60-40 against cuts, the Greek government can tell the other politicians, “Whatever solution you want us to try cannot involve cutting Greek pensions and salaries or firing civil servants”. Of course their other wiggle room is collect more taxes (not popular) or don’t pay the European bankers (popular).

It’s fairly obvious that beyond a certain point, putting the screws to the taxpayers has a negative effect on revenue. We see that with Greece, with unemployment in the 25% range and no economic growth.

In discussing the US national debt, one argument that I have heard (and personally advanced) is that sovereign debt is different than consumer debt. How does this difference apply in the case with Greece?
In normal people bankruptcy, you forget all debts, shed all assets (all your money) which the debtors take and split, and start over. Obviously, a country can’t do that. Private banks can’t take part of a country, nor can they really “garnishee” future tax revenue or take ownership of the national parks to do as they wish. So basically, a country does not go bankrupt - it just keeps re-negotiating its debt repayment rate. Greece is effectively insolvent because it cannot generate enough revenue (taxes, etc.) to cover obligations (civil service salaries, pensions, etc.) plus repayment of debts.

The USA, despite right wing claims, is nowhere near the steep slope where debt payments overwhelm other expenses.

How does this affect me, a middle-class professional in Texas? I’ve read that people’s 401Ks may be affected. Why? (I’m a public employee, so I don’t have a 401K.)
The Greek situation will drag down Europe. Someone borrowed a fuck-ton of money and won’t pay it back. That will depress Europe, which could depress the world… but probably not much. A politically and socially chaotic Greece could have repercussions for the rest of Europe, especially if some important controls get left behind - quarantines, migrant flow limits, etc. It may drag down 401K’s for a year or two.

Is there an apolitical way to answer these questions?
Probably not. To paraphrase Obi-Wan, “Who’s the more foolish? The fool who lends money, or the fool who borrows from him?” One side blames the government, another blames the banks.

**Next question: profit. How do I do this? **
If it were that simple, there’s be a million people as rich as Warren Buffet.

Greece will eventually either cave in or print their own “money” (IOU’s). During the transition, things will be in chaos. People will be desperate. Someone will buy the new IOU currency for pennies on the Euro. Other profiteers will figure out how to buy for peanuts some very valuable assets from very hungry people. If only Greece had gotten the Elgin marbles back, they’d have something to sell. Setting up fake foreign sales to bypass currency controls would probably be another profit point. Pimping or white slavery is also an option, desperate women might do just about anything.

But seriously, like in any market downturn, quite often the “down” overshoots and worthwhile assets are undervalued for a time.

Thank you for the helpful conversation. I do not mean to indicate that I am focused only on myself. This story has gotten heavy play in the US and some of the coverage has indicated that Americans should be personally concerned. Hence my question. However, I don’t think that my own selfish interests are the only, or even the most important, factors here.

If Greece were to print their own Drachmas, who would want them? Wouldn’t an investor say, quite reasonably, “I loaned you Euros and I want Euros in return”?

Puerto Rico is not an independent country. Does the full faith and credit of the United States help them at all? As a taxpayer in Texas, I pay federal taxes that help other states (especially since our state’s leadership has rejected billions of Fed dollars). But, we’re all in this together.