Thursday, November 3, 2011

It’s all Greek to US

I love Greece --- the country, though the 1970's musical is fun too. I enjoyed “My Big Fat Greek Wedding” and even went to see the quasi-sequel “My Life in Ruins” that aptly describes what is happening there now. I was fortunate to visit the beautiful islands of Santorini and Mykanos a few years back. I’m not a big fan of their Salad, but I do appreciate how they do the dishes.




The tradition of breaking of plates is considered a part of "kefi" - the irrepressible expression of emotion and joy. There has been little joy in Greece for some time. The financial crisis has been especially dramatic in Greece.

 

In 1974 Greeks, with the help of their Turkish neighbors, overthrew the military dictatorship that had ruled since 1967. Greek governments since then have run significant deficits in order to finance public sector jobs, pensions and other social benefits. Few people pay taxes. Since 1993 the country has had debt to GDP ratios in excess of 100% - meaning that the country borrows more than it brings in during any year. 

The Euro was introduced in 1999 and is the official currency of the Eurozone which is made up of 27 countries. The Euro eliminated many different currencies and is the second largest economy in the world with more coins and banknotes in circulation than the U.S. Dollar. There are criteria that each member country agreed to in order to be part of the Eurozone and the currency…including having a debt ratio of less than 60%.

Greece joined the Eurozone in 2001 and converted the drachma to the Euro. During this period the government misreported the country's official economic statistics in order to stay in compliance with the monetary guidelines.  Currently the debt to GDP ratio is 116%. ht

Financial rating companies like Standard & Poors converted the bonds that the Greek government had sold (the debt) to junk status. Investors wary of potentially losing their money stopped investing and the Greeks ran out of cash and had to turn to their neighbors in the Eurozone for help. Europeans helped out with a number of strings attached. So for the past couple of years every time Greece needed money the Eurozone would dictate austerity measures which impact the lives of everyday Greeks.


Finally after months of the possibility that Greece would default on all of its obligations and every investor would lose everything…the banks and Europeans agreed to take 50% reduction in what they are owed in order to loan new money but Greece would have to meet further austerity metrics. The world breathed a sigh of relief. And then this week the Greek Prime Minister said that he’d allow a popular vote by the people of Greece to either pass the proposal, stay in the Eurozone, or obtain some other approval – none of which is likely to pass given the protests and discord other austerity measures have had.

The essence of capitalism is risk/reward. If you invest in something and it pays off, then you get a great reward. If you invest in something and it tanks, then you take a loss. It really is that simple. The concept only works because there is a consequence for risk. Take a risk and it fails then there must be failure. That just hasn’t been the case since George W. Bush (#43) said to CNN in 2008: “I've abandoned free-market principles to save the free-market system.”  Bush instigated and supported a series of bailouts that took away any responsibility the institutions had for their own actions. President Obama continued and expanded them.

Today ordinary Greek citizens are living the consequence of their governments actions by losing lifelong pensions and other social promises that had been made over the past 40 years. Eurozone leaders are beside themselves over the idea of a popular vote to ratify the bailout. Since the Eurozone is passing a large part of the consequence onto the people, it will not be surprising when the people opt not to bear that responsibility alone and will want the rest of Europe (and the world) to do so.  Nobody likes the risk side of capitalism.

The U.S. debt to GDP ratio was 92.7% in 2010 and is expected to exceed 100% in 2011. Standard and Poors dropped the AAA+ rating for U.S. bonds. Benefit programs that have been part of a social contract with Americans for generations are being changed. People are demonstrating in the streets. Will there be a consequence to the U.S. Government for its actions over the past 40 years? Or will free market principles be sacrificed again? Consider the Greek crisis a prequel of things to come. It’s all Greek to US.


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