GREEK CRISIS

Leaving aside questions of how big the black market and smuggling is in Greece, or whether it has used several questionable techniques for disguising the country's true GDP/GNP, debt and deficit, or the passionate left/right politics, Greece is being singled out as the comparative example within the EU whereby the other states may feel only relatively virtuous. What did the country's economy really do and what was the cost benefit to it of Euro membership? Greece's Prime Minister warned his country’s debt woes are a ‘European problem’. But he issued a plea for EU help as deeper-pocketed nations led by Germany continued to wrangle over what kind of rescue is appropriate. Spain, Ireland and Portugal are thought to be most vulnerable to a loss of confidence among investors as they grapple with massive debt mountains. Spain is the most worrying case given the size of its economy. Economists at BNP Paribas estimate that bailout costs of Europe’s fiscal crisis could be £280bn, of which nearly £175bn is attributable to Spain. In Greece's case the requirement is only a few tens of €billions.PM Papandreou says, ‘We are a country which cannot alone deal with the speculation. So this has become a European problem, because if we do have a major problem, this could create a contagion for other countries too who are not to blame,' which is putting the matter kindly. There are some domestic policy problems. Germany’s Finance Ministry yesterday says it has no specific plans to help Greece after a magazine claimed eurozone governments may offer £22bn of financial aid. In fact, that much they have already supplied. It is a test for the flexibility and integrity of the Euro Area idea. It is also a domestic political test in a country, and Athens especially, where political protests are a well-honed art form. Greece has a massive shipping sector, biggest port in the Medittaranean, valuable tourism, and reliable agricultural exports, but not enough to balance the external account at a tolerable level. These and other productive industry sectors did not grow their borrowing or were denied loans by the Hellenic banks that were obsessed like banks in UK, USA, Spain, and Ireland with mortgage boom, but also growing their banking networks in Turkey and the Balkans.
In Greece's case, fast growth in home ownership was a new and novel experience, especially exciting for the economy, part of its catch-up with the aggregate average of the EU. Greece has been much transformed for the better by its decade of fast credit-boom growth. It embraced credit-boom, but the external trade deficit rose to 18% ratio to GDP, the highest in the OECD. This would not have been possible without Euro membership that secured it from currency risk, but could not help it to balance its external account better. Yet, for most of the last decade the economy felt very positive.
Doom-monger economists like myself and real banking experts recognised the boom must eventually end and the property bubble would burst - as it did, if later than for UK and USA, and 90% of bank capital, as I predicted in 2006 for 2009-2012 for several banks including the Central Bank, would be nominally wiped out - at least until debt recoveries and economic recovery would restore matters. Warnings and advice to restructure lending by the Bank of Greece in 2006 and 2007 to the commercial banks were ignored. The banks securitised a fifth of their loanbooks, grew their funding gaps, just like banks elsewhere were doing, and thereby financed the trade deficit to worsen, and grew their property lending gloriously, just like Ireland. And like Ireland, while recognising the perilousness of the situation Greece expected the Euro Area economy would take care of them and the Euro Area economy would bounce back. The ECB did not, however, prove as flexible and as resolute as The Bank of England and The Federal Reserve in scaling up to deal directly with the Credit crunch.
The Euro Area's members like Greece and Ireland that had for some years been the fastest growing and much above average contributors to general Euro Area growth might have felt they had the right to special temporary emergency help when the crisis hit them - a false hope. One intersting difference surprisingly between Ireland and Greece is that the problems of Greece not Ireland were able to knock 50 points off the S&P 500!
What Greece like Ireland under-estimated was the implication of their central banks not having access to their own money market facilities, which had been given over to the ECB. This has meant that unlike UK and USA, bank bailouts had to be negotatiated with ECB or paid for by special loans from EU/ECB or paid for on-budget by bond issuance - most painful in Maastricht terms. It is the fact of having to resort to on-budget bond issuance that makes the deficit and debt ratios especially high, but as sanguine realists have commented, this is a small and temporary problem in the wider scheme of EU-wide economic concerns.
The Bank of Greece had before the crisis advised its member banks to lend more to help exporters and reduce the share of their loanbooks dominated by property. This remains urgently important advice. We must hope that the Greek banks take this advice seriously and now act upon it.