Jean-Claude Juncker (left), Luxembourg prime minister and chairman of the Eurogroup of Eurozone finance ministers and George Papandreou, Greek prime minister, Brussels, June 23, 2011.|
In 2010, the public debt of the 17 Eurozone countries increased from 79.3% of
GDP (gross domestic product) in 2009 to 85.1% last year.
Eurostat, the EU statistics office,
reported that from the EU27, Greece topped the rankings with a 142.8% government
debt to GDP ratio, followed by Italy (119.0%), Belgium (96.8%) Ireland (96.2%),
Portugal (93.0%), Germany (83.2%), France (81.7%) Hungary (80.2%) and the United
Greece's level may well exceed
170% by 2013 - - Finfacts
Dr. Peter Morici:
Greece is insolvent. No amount of new loans from rich EU governments and the IMF
can save Athens from default on sovereign debt, and that poses a clear threat to
the global financial stability. Moreover, the solutions being imposed will
reduce Greeks into poverty to sustain German prosperity. Welcome to the New
Greece’s national debt exceeds 175% of GDP, and investors view its debt so risky
that its bonds are deeply discounted in the resale market, pushing up yields to
20% and more. At those rates, Greece simply can’t refinance existing bonds as
those come due.
Either bondholders accept new notes with longer maturities and paying much lower
effective yields than the notes they currently hold, or Greece must default on
bonds coming due. However, bonds with longer maturities and lower effective
yields will be immediately worth less than their face value in the resale
market—this makes such a rollover a soft restructuring or soft default. Bond
rating agencies, if they apply established standards, must declare Greece in
default in the face of such a maneuver.
This poses a twofold challenge for rich EU states. Their banks are extremely
vulnerable and Greece has another way out if Athens has the sense to use it.
French and German banks hold $14bn and $23bn, respectively, in Greek sovereign
debt, and even greater exposure to Greek private debt.
A soft restructuring on maturing debt should require those banks to recognize
losses on their balance sheets, and if the bond rating agencies do their
job—declare Greece in default. SWAP contracts guaranteeing the entire Greek
sovereign debt, which exceeds $500bn, will trigger. In addition, contracts on
the debt of some European banks could trigger, and U.S. banks have considerable
exposure to EU banks.
The global economy could easily replay the tragedy that followed the 2008
failure of Lehman Brothers and then AIG, which wrote SWAP contracts it could not
honor, and threw the global financial system into chaos.
The French-German solution--Greek austerity measures and sale of public assets,
and $157bn in EU and IMF loans over several years—coupled with either a
voluntary soft restructuring by French, German and other banks is bogus.
German and French politicians expect to persuade private banks to lie to their
stockholders and domestic regulators, by not writing down Greek bonds on their
books, and to persuade bond rating agencies and SWAP contract holders to ignore
what is a default. A sort of grand fairy tale without a handsome prince to kiss
and transform the Greek frog into something it is not—solvent.
Of course, the EU is demanding and will obtain more than $40bn in budget cuts
from Greece, but those will surely slow GDP growth and reduce the ability of the
Greek government to collect taxes to pay its foreign creditors in future years.
Austerity will also drive down prices and wages, but leave private debt
unchanged. Ultimately, many Greeks will default on their mortgages and lose
their homes to foreign investors.
Even if the bond rating agencies choose to turn a blind eye and the SWAP
contracts don’t trigger, Greece will face another crisis next year or the year
after, when the cost of cleaning up the mess will be even greater.
The whole scheme is irresponsible and incomprehensible, except when you consider
who is selling it—French and German politicians. To understand why, consider
Greece could abandon the euro and resurrect the drachma, unilaterally remark
public and private debt into drachma, and let the drachma float to a value on
currency markets that balances Greece’s export revenues against its imports and
debt servicing obligations.
Abandoning the euro for the drachma would cause Greek GDP and debt servicing
capacity to grow more rapidly. Whatever the losses imposed by remarking on EU
banks, other private creditors, richer EU governments and Greek citizens, those
would be smaller than the total losses that will be imposed through the annual
ritual of crises, aid packages and debt rollovers—conditioned on ever more
draconian austerity—and the ultimate absolute default when the final charade
The rub is Portugal, Spain and several other poor EU states might follow Greece
out of the euro, and Germany and France don’t want a downsized euro zone
consisting of just the rich exporters.
The euro is undervalued for strong economies like Germany and France, boosting
their exports and growth, and overvalued for poorer debt laden countries like
Greece and Portugal. This permits Germans, for example, to enjoy a huge trade
surplus, work only 32.5 hours a week in factories, and have single earner
households, while the Greeks and Portuguese suffer under the yoke of then new
imperialism—EU imposed austerity and deflation
Surely, the poorer countries are in need of fiscal reform, but they can’t
accomplish that without selling off all their national assets and being banged
down into poverty if they continue doing business in the euro.
Finfacts article, June 2011:
German historian says Germany was 'biggest debt transgressor of the 20th century'
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone