• The Euro, German and French banks did Greece in

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    How the heck could Greece, a nation of just 11 million souls (probably Metro Manila’s daytime population), rack up total foreign debts of €320 billion ($352 billion), or $32,000 per Greek, so that the country’s default now threatens the stability not only of Europe but even the world financial system?

    To put that amount in perspective, when we defaulted on our foreign debts in 1983, our loans stood at just $25 billion, for a country with 50 million — that’s just $500 per Filipino.

    Mainstream western media explain it as a tale of a Mediterranean nation (read: lazy, sun-loving, partying country, like us) spending more than it can afford, especially in building the best infrastructure for its 2004 mega-fiesta called the Olympics. (Indeed, I got hooked to motorcycle-riding when on weekends in Greece, where I was ambassador there, I could get out of Athens in 15 minutes, get on a huge Ro-Ro ship to go to an island in the Aegean, tour it on a six-lane highway, and see only an occasional car.)

    Or of a nation (like us) that had four centuries of colonization by a foreign power (to them, Ottoman Muslims, very bad for a Christian nation, Catholic Spain to us) that created an anti-government, anti-tax culture. Of decades of socialist government, led by the Pasok (Panhellenic Socialist Party) that tried to create a welfare state, a paradise for pensioners.

    These may all have figured in creating the Greek quagmire.

    You may not believe it, though, that the Greek debacle in structure and essence may have more in common to the 2007-2008 global financial crisis that started in the US, and which was essentially due to the greed of America’s biggest banks.

    Greece20150710

    The build-up of French and German debts started right after Greece joined the eurozone. Source: Bank for International Settlements

    In Greece’s case, the fault really is mainly on German and French banks that got the Greek government and companies to be debt-addicts in the last decade, when its currency became the euro, especially as the euro interest rates seemed so cheap. Interest rates on euros after all, were the same, either lent to less developed Greece or to highly developed Germany.

    These are, in fact, the same “usual-suspects” banks in debt crises anywhere in the world: BNP Paribas SA, Credit Agricole, Commerzbank AG’s 3 billion euros, Societe Generale, ING Groep, and Deutsche Bank AG’s 1.6 billion euros.

    In our case, we got to be credit addicts in the years to the debt crisis in 1983 when dollar rates were cheap because of the glut of petro-dollars in the mid-1970s.

    The Greek roof started to crash, though, when it was discovered in 2010 that its debt stock was understated. And who was responsible? That bank which figured in the US financial crisis, Goldman Sachs, whose derivatives sold to the Greek government were structured that allowed Greek debts to be reported below their actual levels.

    Too bad for the Greeks, though, their government didn’t have the tools like the US had to resolve the debt crisis.

    First, France and Germany were determined that their banks don’t get their balance sheets hit with loan defaults, which led to a solution worse than the problem. And most importantly, they don’t have a currency they can control. What they use is the euro, which bureaucrats in Brussels control.

    The accompanying chart shows dramatically how German and French banks’ loans got bloated right after Greece adopted the euro in 2002. The level of such loans peaked in 2009 at €120 billion.

    If you’re wondering why German Chancellor Angela Merkel whom you see more often in TV news on the crisis, rather than French President Francois Hollande, it is probably due to the fact that the French proved to be smarter. By 2014, French banks’ debts had gone down from their 2009 peak of €75 billion to just €1.85 billion. German banks, on the other hand, still have €28 billion in debt, which is obviously why Merkel has been very passionate for another Greek bailout plan.

    How they pared their debts to Greece is half of the story – a scandalous one – of the Greek tragedy, one which makes you understand why Greeks now are so angry that graffiti (popular in Athens) in the capital portray Merkel with a Hitler moustache and a swastika on her sleeves.

    It would make you understand why the country’s political leadership had moved from the conservative New Democracy Party of the early 2000s, to the center-left Pasok, and finally to the Syriza, which is a backronym for the Greek words that mean “Coalition of the Radical Left.”

    When world interest rates rose and panic broke out in the wake of the 2008 global financial crisis, the tap for foreign loans started to close for Greece, and by 2010 it couldn’t pay off interest on its foreign, mainly French and German, loans.

    If Greeks defaulted on these loans, the French and German banks’ balance sheets would have gone into the red. A contagion effect was feared: that the rest of Europe’s so-called PIGS (Portugal, Italy, and Spain) would fall into default like dominos, and the banks would go deeper into the red.

    Rather than allowing the German and French banks to write off their debts, the so-called Troika – European Union, the European Central Bank, and the International Monetary Fund – which the two countries obviously control, put together “bailout programs,” basically their own loans to Greece so the country can pay its creditors, and for the creditor-banks to convert their exposures into Greek and European bonds.

    Protecting the banks

    Karl Otto Pöhl, a former head of the Bundesbank, was quite frank in describing the bailout, that it “was about protecting German banks, but especially the French banks, from debt write-offs.”

    Since 2010, the Troika has lent €252 billion to the Greek government. Of this, €34.5 billion involved sweeteners for the European banks for the 2012 restructuring of their debts. Some €48.2 billion was used to bail out both and foreign private Greek banks following the restructuring. Some €149.2 billion has been spent on paying the original debts and interest from lenders. This means less than 10 percent of the money was used directly for the Greek’s welfare.

    How much does Greece owe? (In billion euros)
    German Banks 28.4
    French Banks 1.90
    Bailout Funds 246
    Others 44
    TOTAL 320
    Out of Bailout Funds:
    European Central Bank 20
    Germany 56
    France 42
    Italy 37
    Spain 25
    Other Eurozone 34

     

    Out of Greece’s current €320 billion debts, €247.8 billion – 78 percent of the debt – is now owed to the Troika. Debts to private banks, mainly French and German, were converted to debts to governments and the IMF, plus costs of the conversion.

    If you’re wondering how a bailout fund could grow that big, remember the episodes in your life when you failed to pay on the due date your credit card bill, with interest charges and penalties eventually becoming bigger than what you originally owed. The financial world just has its own versions of those penalty charges.

    The cure — the bailout funding of €247.8 billion — proved to be worse, much, much worse than the disease. It buried Greece in a much bigger debt that would take them decades to pay.

    Worse, the two bail-outs had its “conditionalities,” a term that became well known here during our own debt crisis from 1983-1984, when the IMF required government to undertake such measures as increased taxes, reduce government spending, and issue high-interest Treasury bill to contain inflation.

    As in our case during our debt crisis, and Greece’s, these were designed to assure the creditors that the government manages to generate budget surpluses so that its debts could be repaid in an orderly manner.

    The bailout program, however, didn’t, couldn’t work for one major reason: the “Greek currency” was of course, the euro of the European Union, which does not reflect its economic situation, but that of all Europe, which is dominated by the huge and robust economies of Germany and France.

    Peso depreciation

    In our case, the peso depreciated steeply from P8 to the dollar in 1982 to about P18 by 1984, and P20 by 1986. The peso’s rate, therefore, served as an automatic mechanism of sorts to adjust the economy in crisis. For instance, it cheapened the peso, therefore, making our exports more competitive, while discouraging more imports. In Greece’s case, the euro remained strong, which didn’t bring in more dollars for its tourism industry, a pillar of its economy.

    Without its currency as a mechanism, Greece had to resort more and more draconian ways to try to produce budget surpluses in order to pay its debts, such as higher taxes, reducing pension payments, and even paring its government staff.

    The result has been near catastrophic. Greece’s GDP has contracted continuously for four years form 2010 to 2013 for a total decline of 30 percent. In our case, our GDP shrank only for two years by 14 percent, and it took us 10 years to get back to when the economy collapsed in 1983. It probably would take Greece double that, a generation even, to recover. Unemployment rose to 25 percent of the working force, with half of the youth jobless.

    On June 26, Greece missed the scheduled payment of €1.55 billion ($1.73 billion) to the IMF — the largest, single missed repayment in the IMF’s history. That put it officially on default, not only for its loan to the IMF, but because this triggers cross-default provisions on nearly all of its debts; all have become due, and Greece doesn’t have the euros to pay for them.

    The Greek tragedy is really mind-boggling, if you think about it.

    Logically, a nation-state has its own currency, which is essentially, “merely” a social artifact invented to facilitate the exchange of goods within its borders. But Greece doesn’t have its own currency, and is now running out of it. It has to beg a super-organization of states — the EU — to provide it with the currency it uses , the euro, so its people can undertake such basic transactions as buy coffee and sugar in the supermarket.

    Can you believe that? A world crazier than ours.

    tiglao. manilatimes@gmail.com
    FB: Bobi Tiglao

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    15 Comments

    1. Can’t blame the German and French governments for protecting the interests of their banks.After all if the Greeks defaulted the two countries’s banking systems could be jeopardized and considering their proportionate size in the European economy it could impact the global financial system negatively.

    2. Ngayon ko lang naintindihan maigi kung anung nangyayari sa Greece sa ngayon. News that we received here in Austria are not as good as this one, most of the time it’s only about blaming the Greece government for what happened to their country. The info’s are so short, as if “that’s it”..”That’s their fault, period”..

      I am married to a farmer and sinasabi niya sa akin na since na sumali ang Austria sa european union marami nang naging problema ang mga farmers dito. Napakaraming laws na halos kung minsan napaka stupid na raw at napakaraming tax ang dapat na bayaran. At ang laws na ito ay nagbabago at nadadagdagan halos taon-taon at unti-unti nitong pinapatay ang mga small farmers. Marami na ring small farmers ang huminto at pinarentahan na lang ang kanilang mga lupa, mas malaki pa raw ang gagastusin nila sa mga papers na kailangan nilang i-submit sa government at tax na kailangan bayaran kaysa sa pwede nilang kitain sa farm nila, at iyon ay dahil sa european union law na dapat nilang sundin, since na kasali sila dito. Mas mabuti pa raw nung hindi sila kasali sa european union at schilling pa ang gamit nila, hindi raw kasing kumplikado ang buhay… Just sharing.

      Anyways, Thank you for a well written article Mr. Tiglao.

    3. Two comments for this article:

      1.) The $25 Billion debt during 1983 should have been adjusted for inflation. $25 Billion was much more material then compared to the present day. The figure would be around $60 Billion after being adjusted for inflation. – which, however, is still small compared to Greece’s debt.

      2.) Banks are not the ones to blame for the crisis. The Greek government itself is the primarily responsible for their own downfall, because in the first place, Greece should never have been allowed in the Euro.

      Do you know how Greece was able to enter the Euro? They cooked their books! They hid the fact that they didn’t satisfy the minimum economic standards set by the EU and they didn’t post the billions of debts they owed back then.

      Greece was already in a difficult financial position before the 2008 Olympics, but they just had to host it out of some misguided belief that the additional tourism revenue can make up for the cost – well it didn’t. In fact, the Olympics is what is considered by many experts as the event that dealt the fatal blow to Greece’s economy.

    4. Munizki Swavurzki on

      Congratulations Ambassador Tiglao! This is an enlightening, nourishing article that gives us a lesson to ponder in the upcoming ASEAN integration this year. I can see that in putting up a regional currency has its legal loopholes. This Greek experience should be a good lesson to us Aseans. When the time comes that the ASEANs think of putting up a regional currency, your article should be first discussed. Again, congratulations Amb. Tiglao!!!!!

    5. How can Mr. Tiglao put the fault “mainly” on the banks?. The Greek hired Goldman Sachs to qualify them to join the EU. Goldman Sachs got them qualified by hook or by crook. The banks gave Greece a credit card and access to their wallets, at the going interest rate. With so much credit at their disposal, the Greeks when from driving tricycles to BMWs overnight. Now Mr. Tiglao wants to fault the banks for giving the Greece government virtual unlimited credit.

      The other day I loaned my friend 10,000 pesos. Without my knowledge he used the money to buy a gun. Mr. X helped my friend qualify for a license to carry arm. My friend use the gun to hurt his family. Am I to be blamed for lending the money? Is Mr. X to be blamed for helping my friend qualify for a license to carry arm? Are the banks to be blame for the Greeks’ stupidity? Or maybe Mr. Tiglao thinks the banks should have known that the Greeks will overspend and mismanage the funds; therefore, they are to be blamed.

      Let us stop pointing fingers and assume full responsibility for our actions. That is what the Greek government should do: Assume full responsibility and ask for mercy.

    6. 5 million working Greeks, relying mainly on tourism to pay Euro 320 billion debt which will bloat further in the incoming 3rd bail out. It is impossible for the FEW working Greeks to pay, even for 2 decades of eating piece of bread with olives and dressed in bikinis only, men and women to temp tourist….. Sell some Greek islands along with its ladies or write off the debt. France, Germany and Euro banks greed to offer loans was the culprit that tempted Greeks to enjoy life by borrowed money. All the sinners must amend for their sins. Write off 50% of Greeks debt. Otherwise there will be 4th, 5th, 6th, 7th….. bail outs.

    7. i don’t understand its relevance to our daily lives. but i think this piece was only copied and pasted from some other source/s.

      • The relevance IS > BS Aquino, PH S2pid president contributed 1 Biilion US dollars to the IMF for Euro zone financial crisis bail out.

      • Dahil hindi mo maintindihan, assume ka na lang na nangongopya na lang si Bobi? Dagdagan mo pa kaya ang pagbabasa. Puro lang yata kasi si Xaviera o sa espiya o sa pserotica ka nagbabasa eh wala ka nga matututuhan dun. Simulan mo lang lagi magbasa ng The Economist o kaya sa Business World man lang.

    8. The Euro, German and French banks did Greece in? In my opinion It is more like Greece did it to themselves for living a life style they cannot afford! Some States, Counties and Cities of the U.S.A. went through this same cycle too and just like Greece they cannot print their own currency but solved their economic problem in the way that Greece’s Creditors are now asking them to do.

    9. Mr. Tiglao,
      You are one of the best columnists. Your columns are always enlightening, easy to read even on complicated issues. The accompanying figures or graphics make your columns credible. I enjoy reading them!

    10. Allen llamar on

      Greek govt.are trying their to put a best plan for another bail out with its creditors after the no won last referendum.

      Compare to ours the noytards govt. had a habit of pointing their fingers every time they are at fault and never credit where credit is due. Glad Mr. Binay mention that on his speech and fil. people heard that.

    11. Justaskingseriously on

      It is good to know these things from a former Ambassador to Greece. First hand info, I must say. Thank you very much. Even without your authoritative backing, the Greeks are known to have enjoyed their borrowed money while it lasted. Makes one wonder if the leftist eminence grise gave them so much assurance to drink and be merry for the whole world is about to make a left turn. It is no mere coincidence that the greek governance is now in the hands of the left; somebody must be manipulating the greek cruise ship’s rudder while the passengers are living it up. It is definitely crazy and worthy of the Titanic epic and all the Greek tragedy plays.

      The Philippines is not that crazy. It is actually crazier. The leftist governance masking as rightist (oligarchic) is being taken for a ride on a freeway with more lanes than people can see: precious and hard-earned BPO and OFW dollars are being thrown away along the highway to the left all the way to London to enrich a hyphenated lord (as in female keeping her own along with his name). There are more of these dollars to be thrown in Mindanao. Still more are slated to be thrown throughout the archipelago to buy votes next year. Cases like the Laguna de bay dredging that never happened but must be paid for anyway: peanuts compared to the DAP and PDAF. MRT and LRT: also chicken feed. DND procurements: more chicken feed. Department of Public Highways: concreting and reconcreting and more reconcreting to make sure that the kickbacks are concretized — all chicken feed for the yellow chicks who will change colors upon leaving the chickhood stage. Chicks are so fluffy yellow just like Secretary Singsong. Oh, there are more lanes to the highway: Customs, Immigration, LGUs — lots of lanes for the LGUs, even the DBM has to resort to counting bottoms up. And let’s not forget the basic utilities. Even those are thrown away. The PPP? Ben Kritz was happy to report that the U.S.A.’s congressional source for PPP loan guarantees has halted. Imagine the technocrats relying on loans to throw away to the private sector! What really makes it all over the top? There are no safety nets to speak of. CCT? What is that? So what DOES the government do for the common good? Noynoying?

      The Greeks rely on their safety nets. The Pinoys are a throw-away society engaging in high risk flying circus without safety nets! How much crazier can it be?