Undressing the greek financial crisis show

Undressing The Greek Financial Crisis

-a short story in pictures-

By George Chalkias
Feb 13, 2013

There is an extraordinary place in the eastern side of the Mediterranean.

It has the most magical light in the world and the most beautiful waters.

There is something special in the air that makes you feel free

It has the richest of histories and for many it is considered the source of western civilization
and culture.

It survived empires, world wars, dictatorships and stood immune to the erosion of the human
self that was happening elsewhere.

For it is the Free Spirit that this place will protect at any cost.

But in extraordinary places , extraordinary things happen.

Good AND Bad.

This is the story of an extraordinary Bad thing that is happening there today…..

George Chalkias

For almost 35 years now, the governments in Greece
Run 4 PROMOTIONAL PROGRAMS
• Will give you a job for a vote
• Will give you a raise for a vote
• Will increase your social benefits for a vote
• Will turn a blind eye on tax evasion for a vote

…and follow 3 IMPLEMENTATION RULES
• Will borrow as much money as we can to finance our key promotions (this boomed when Greece joined the Euro
and could borrow very cheaply)
• Will not count and control our annual budget. We have created a monster of a state so counting is so difficult
anyhow. Those who will be counted will get upset and that will mean less votes.
• Will use creativity in our accounting to make sure that the E.U financial criteria are met (Debt 3% of GDP, Public
borrowing 60% of GDP) every year. If necessary we will not report them at all. After all they have been breaking the
rules also.

…create a Pathogenic System…

• Government is the biggest employer – a gigantic public sector
• Government is the biggest investor
• Unions and Powerful Individuals control votes
• Productivity is not that important (it’s a government guaranteed job)
• Public sector wages rise 50% between 2000-2007
• This leads to higher prices and lower competitiveness
• Many sectors of the economy are government protected (taxis, lawyers, land transportation, etc)
• No investment in production of goods to be exported
• High consumption with money that has come through government debt
• The country lives well but beyond its means .

….which results in deteriorating public finances…

1999 2000 2001 2002 2003 2004 2005 2006 2007

Public Debt (billion €
) 119 141 152 159 168 183 195 224 239
Public Debt as % of GDP 94.9 104 105 103 98.3 99.8 101 108 107
GDP Growth (%) 3.4 4.5 4.2 3.4 5.9 4.4 2.3 5.5 3.5
Deficit as % of GDP 3.1 3.7 4.5 4.8 5.7 7.6 5.5 5.7 6.5

Expenses Revenues
€ bil € bil
Pensions 31 Taxes 53
Salaries 18 EU grants 5
Employers
Welfare 14 Contributions 20
Interest 13 rest 6
Operating 11
Investments 8
Rest 5
Total 100 Total 84

…and a certain mentality in quite a few people.
I must get a
public sector
job! You
I have a right work less
to all these Why should I
and you get work more .
benefits (I paid better
voted for They can’t
When they fire me
stop stealing them)
I will pay
taxes!

We deserve
even more !

Hire my son
and I will
vote for you

It all seems to work fine for quite a while.

The markets keep on lending .

• Because of the Eurozone the markets are very willing to keep on lending the Greek
Government.
• Even when the numbers do not make much sense Europe acts as a strong guarantor
– We will always get our money back because Germany and the rest will pay
– If there was something really wrong with the Greek Economy the Europeans would have
intervened. After All they are part of the same economic system.

In early 2008, as the US financial crisis begins…

Europe begins to voice concerns…..

European Union : must
IMF : with your numbers
cut your wages by 20%,
if the Market looses trust
lower consumption and
you are in for a crisis
increase competitiveness

…but does not persist.
Don’t worry . In case of a
Nah! This crisis has to problem this should be
do with banks & sub dealt and contained at a
primes …not local level, i.e. a Spanish
sovereigns problem, a Greek problem
etc.

…and Markets develop a neurosis

• Trust is not enough if the numbers are not there. They start looking for weak links.
• First they assess Banks.
• No one thinks of sovereigns
• Until Dubai happens
• Then attention shifts to sovereigns
• That was really the end of Greece.

• The funny thing is that Banks in Greece are healthy. They carry no Lehman toxics and the real estate sector is fine. They carry
government bonds though. And these are highly toxic.

Greece’s finances for 2008 are getting worse

1999 2007 2008

) 119 239 263
Public Debt as % of GDP 94.9 107 113
GDP Growth (%) 3.4 3.5 −0.2
Deficit as % of GDP 3.1 6.5 9.8

Europe begins to shout

• Cut salaries
• Cut pensions
• Increase direct & Indirect
taxes

The IMF reports :

• Greece is like a bankrupt
country .
• Greece’s membership in the
Eurozone was financed by
loans.

The Greek Government does little in fear of losing the elections, keeps on
borrowing to finance its “policy” and calls for the oppositions support

• As the government has a small majority , it takes
no unpopular measures for fear of losing the
coming elections

• Borrows more both to cover an increasing deficit
and to pay for past bonds that are expiring.
• Borrows at an increasingly higher rate causing a
vicious circle

• Expenses rise abruptly to finance the Euro
elections

• Under the pressure of Europe promises to take
measures in October

• Calls for the Opposition’s consent to measures that
need to be taken on the grounds of High National
Importance

The Opposition refuses to help and elections are announced.

• The opposition refuses to consent and
asks for elections
– Political Greed
– Oblivious to the severity of the
situation
– A belief that this should be
handled not with cuts but with
stimulus packages.

• Cuts will lead to more recession by
killing spending . Instead

– Stimulate the economy by
pouring more money into it
– Do not cut salaries, do not sell
government assets
– Begin a tax reform to handle tax
evasion
– We can do this in four years

• Where will the money come from ?
• What exactly will they stimulate ?

They run on the claim :“We have Money” and
in October 2009 win the election

…but soon they are in for a surprise…

• They see that the government registers are
short of money to pay their obligations

• They realize that 2009 will end up with a
deficit of 12% of GDP, when they were
expecting half.

…and make a series of very serious mistakes.

• At first, they decide to tell the truth to Europe and promise that they will make the necessary cuts in expenses
• Then, they announce to the people that they will stick to their pre election plan and give the stimulus package
• They believe that the EU can be handled politically
• They have no idea that the audience that matters at this stage is not the EU but the Markets.
• The Markets are not handled with words but with numbers.

2010 : THE YEAR EUROPE STOOD STILL

Greece’s finances for 2009 are horrific

1999 2007 2008 2009

) 119 239 263 300
Public Debt as % of GDP 94.9 107 113 130
GDP Growth (%) 3.4 3.5 −0.2 −3.1
Deficit as % of GDP 3.1 6.5 9.8 15.6

The Credit Rating Agencies begin a long streak of downgrading the rating of Greece

Greece asks Europe to get involved and help

– The government announces that it will take some measures
– The government tries to borrow money from the markets with increasing difficulties or privately without success
– The government asks Europe to get involved
• claiming this is a speculators game
• claiming that this will spill over to the rest of the fragile economies of the south (Spain, Portugal, Italy etc.)
• warning that it will get the IMF involved.

Europe is totally unprepared to handle a sovereign crisis in its midst .
It is about to learn at the expense of Greece.

– Believes that by intervening though general
statements of support will do the trick
– Does not know how to keep up with the speed of
the Market reactions
– Does not want the IMF to get involved in its matters.

Germany is in denial and wants to punish Greece

– Does not realize the severity of the situation
– Does not have any recent experience of such crises
– Is very angry with Greece and believes the Greeks should be left alone to handle the
situation and pay for their mistakes.
– After all, when the German unions agreed to no wage increases for years, so as to
increase their competitiveness, the Greeks were partying.
– Now they should pay!

The IMF tries to help fearing a domino effect in the world economy

– Joins Greece to persuade the Germans to allow Europe to act and apply jointly with Greece
for an IMF stabilization program
– Or else the Eurozone Economy will fall.

The U.S. rings the alarm worrying about it’s own fragile economy

• The USA joins Greece and the IMF and pushes Germany and Europe to stop their inactivity
for fear of the effect this might have on the fragile US economy.

The unwillingness of Europe to help Greece immediately
does an irreversible damage

• It changes the Market perception about risk.
• This is no longer a European Risk.
• This is a Greek Risk.
• The Markets close the doors for Greece.
• No more money.

And so in April 2010 things happen…

Mattias Mors, European Commission Paul Tomsen, IMF

Klaus Mazuch, E.C.Bank

• Germany looses its denial but not its belief in punishment
• Germany takes over the leadership of the EU and brings the IMF in (experience, money)
• Europe sets up a series of support mechanisms and funds for handling financial crises amongst member states
• Decides that the EU should issue a loan of €110 billion to Greece
• Asks the Troika (EC, ECB, IMF) to draw the terms of the loan that Greece must accept by getting it voted by the majority of
the parliament.
• The terms are the measures that the Greek government must take to correct its finances and repay the loan back to the
member states and the IMF

The terms of a loan that will determine the fate of a country are negotiated
under the pressure of time and Germany’s anger

Germany and the northern countries
want to punish Greece and push for
severe austerity measures, a very
short adjustment period, immediate
Greece wants less severe austerity solutions, a high interest rate and a
measures, a longer adjustment program that should make Greece
period , a lower interest rate and return to the markets in 2013.
some growth stimulus

The IMF would prefer that a debt haircut
should occur, a 10 year period should be This is a World first situation because
allowed and that the interest rates must be the country cannot devalue its
lower. It does not persist. currency and print money to jump
start its economy while taking
austerity measures to decrease
expenses

In May 2 2010 , Memorandum 1 is signed. The country escapes default but
Social Unrest begins

• Memorandum 1 is signed for 110 billion euro in installments according to the Germany way.
• Now it has to pass though Parliament
• The opposition ( the party that brought about the mess originally) refuses to consent .
• Social unrest begins.
• The money will run out by the end of May
• The parliament votes for the Memorandum on May 6 (177 representatives vote in favor out of 300)
• The country does not go bankrupt.
• The severe austerity measures are implemented immediately but in the absence of any growth stimulus the results will be
disastrous.

Greece’s finances for 2010 show no hope

1999 2007 2008 2009 2010

) 119 239 263 300 330
Public Debt as % of GDP 94.9 107 113 130 148
GDP Growth (%) 3.4 3.5 −0.2 −3.1 −4.9
Deficit as % of GDP 3.1 6.5 9.8 15.6 10.7

2011: Greeks mourn their jobs as austerity measures galore

• In March 2011 the loan terms are renegotiated.
• Interest rate is cut by 1pt. Loan payment is extended to 7,5 years
• More austerity measures are demanded (salary & pension cuts, tax increases) to meet the targets or else the loan
installments will not be paid.
• The problems begin to spread. EU is worried.
• July 21st : a second loan for 158 billion euro (-49 billion euro still pending from the previous loan) is agreed.
• More austerity measures are implemented in the same vein.
• The results are devastating again.

This time it is not just bad financial results…

1999 2007 2008 2009 2010 2011

) 119 239 263 300 330 356
Public Debt as % of GDP 94.9 107 113 130 148 171
GDP Growth (%) 3.4 3.5 −0.2 −3.1 −4.9 −7.1
Deficit as % of GDP 3.1 6.5 9.8 15.6 10.7 9.4

Businesses are destroyed

• Demand falls
• Sales drop
• Financial objectives are not met
• Budgets are cut
• Jobs are cut
• Labor cost drops but
• Utilities rise because of government
taxation
• Prices do not decrease
• Investment drops ( banks do not
lend)
• Small and middle sized businesses –
the spine of the private sector- close
down one after the other
• The construction sector freezes
• Tourism is hurt by the social unrest

Social Decomposition begins…

• Unemployment @ 15% in 2010 , 25% in 2012
• People on the Streets
• Strikes all across the country
• People refuse to pay their debts
• The hospitals are shorting on medical supplies
• Schools are malfunctioning in the absence of funds.
• Social Movements evolve
– The Movement of Indignation
– “I shall not pay”
• Poverty rises.
• An increasing number of kids in public schools cannot afford lunches

…at a collective level…

• Strikes all across the country “God, I am afraid of hunger!!!”
• Poverty rises. 1/3 of the population is lives in poverty conditions.
• 20% of kids in public schools cannot afford lunch.

…and at an individual level.

• Unemployment @ 15% in 2010 , 25% in 2012People on the Streets
• A social stigma begins to haunt the Greek collective

The world joins in

• A social stigma begins to haunt the Greek collective

..and in Oct 2011 a final (?!) solution is proposed :
a Haircut + Money

• Europe proposes a new final plan to remedy the situation in Greece.
• This time the IMF ideas are included
• €130 billion in new money
• A haircut of 50% of Government Debt (voluntary)
• € 30 billion for the recapitalization of the Greek banks
• A target for 120% of Debt by 2020
• More austerity measures but also systemic changes
• The Greek government under constant inspection by the Troika

While the Money is running out again , a Political Thriller develops

• The Government has a very weak parliamentary majority and is unwilling to put the new terms into parliamentary vote
• The PM decides to put the choice directly to the people in a referendum
• Europe is outraged. No agreement. No money .
• The PM withdraws the referendum , resigns and a cooperation government from all key parties is formed with a non
political PM (much like in Italy) to pass Memorandum 2 through parliament, execute the haircut and get the new money
• It succeeds and sets an election date for May 6, 2012.

May 6, 2012 : Elections : No Government

• The people are really angry.
• The political campaigns are brutal.
• Small radical left and radical right parties campaign on the ground of leaving the Euro, writing off the debt, printing money and giving to
people their lives back.
• The elections have no clear winner.
• Pro Memorandum parties : 38% of pop vote
• Europe understands that this is jeopardizing the whole Eurozone.
• New elections are set for a month later

Europe is hanging by a thread : people’s votes

June 17, 2012 : New Elections: A coalition Government of the pro euro parties saves the day

A coalition government 179/300

No 5 with 18/300 reps

No 2 with 71/300 reps

Financial Results 2012

1999 2007 2008 2009 2010 2011 2012 (est)

) 119 239 263 300 330 356 344.6
Public Debt as % of GDP 94.9 107 113 130 148 171 176.7
GDP Growth (%) 3.4 3.5 −0.2 −3.1 −4.9 −7.1 −6.0
Deficit as % of GDP 3.1 6.5 9.8 15.6 10.7 9.4 6.8

• The latest loan agreement has been voted in parliament

• The worst of measures are being implemented

• The new government tries to regain the trust of Europe and raise the
country’s credibility

• Europe stops beating up Greece and understands that it must
publically support the governments efforts and communicate that the
country will always be part of the Eurozone.

• The media begin a positive approach

• A whole nation begins to realize how their high standard of living was
built on the sand of incompetent governments and corrupt systems
and is trying to come to terms with the new reality.

• Soon they will need to understand that blaming others is not a
solution.

• But for that they need to feel what in the ancient Greek drama we call
Catharsis. (CLOSURE)

• And then the loop will close. And a new dawn will rise.

2013 A .
.D

It is still a fragile balance

Some cannot part with their old ways and are seeking a a new government that will promise
them the world in exchange for their vote.

Others see no value in government and have nothing to expect from them, but to put the
house back in order.

These are the ones who seek new ways to progress.

They know that it is going to be hard
They are at a disadvantage

Their historical pride , their optimistic attitude, their cunning mind and above all the
free spirit this land protects will help them rebound.

And for our sake, lets hope that this time they will build something much better than the
system of debt we all live in today

After all, they have done it before 2500 thousand years ago.

George Chalkias

End of Season 1

…to be continued…

George Chalkias
Feb 13, 2013

Undressing the greek financial crisis show

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