This page has been archived and commenting is disabled.
Why Greece Is The Precursor To The Next Global Debt Crisis
Submitted by Charles Hugh-Smith via PeakProsperity.com,
The one undeniable truth about the debt drama in Greece is that each of the conventional narratives—financial, political and historical—has some claim of legitimacy.
For example, spendthrift Greeks shunned fiscal discipline: here’s an account from 2011 that lays out the gory details: The Big Fat Greek Gravy Train: A special investigation into the EU-funded culture of greed, tax evasion and scandalous waste.
Or how about: Greek reformers want to fix the core structural problems but are being stymied by tyrannical European Union/Troika leaders: The Greek Debt Crisis and Crashing Markets.
Rather than get entangled in the arguments over which of the conventional narratives is the core narrative—a hopeless misadventure, given that each narrative has some validity—let’s start with the facts that are supported by data or public records.
The Greek Economy Is Small and Imbalanced
Here are the basics of Greece’s economy, via the CIA’s World Factbook:
Greece's population is 10.8 million and its GDP (gross domestic product) is about $200 billion (This source states the GDP is 182 billion euros or about $200 billion). Note that the euro fell sharply from $1.40 in 2014 to $1.10 currently, so any Eurozone GDP data stated in dollars has to be downsized accordingly. Many sources state Greek GDP was $240 billion in 2013; adjusted for the 20% decline in the euro, this is about $200 billion at today’s exchange rate.
Los Angeles County, with slightly more than 10 million residents, has a GDP of $554 billion, more than double that of Greece.
The European Union has over 500 million residents. Greece's population represents 2.2% of the EU populace.
External debt (public and private debt owed to lenders outside Greece):
$568.7 billion (30 September 2013 est.)
National debt:
339 billion euros, $375 billion
Central Government Budget:
revenues: $119.5 billion
expenditures: $127.9 billion (2014 est.)
Budget surplus (+) or deficit (-):
-3.4% of GDP (2014 est.)
Public debt:
174.5% of GDP (2014 est.)
Labor force:
3.91 million (2013 est.)
GDP - per capita (Purchasing Power Parity):
$25,800 (2014 est.)
Unemployment rate:
26.8% (2014 est.)
Exports:
$35.8 billion (2014 est.)
Imports:
$62.8 billion (2014 est.)
Imports - partners:
Russia 14.1%, Germany 9.8%, Italy 8.1%, Iraq 7.8%, France 4.7%, Netherlands 4.7%, China 4.6% (2013)
Reserves of foreign exchange and gold:
$6.433 billion (February 2015 est.)
By 2013 the economy had contracted 26%, compared with the pre-crisis level of 2007. Tourism provides 18% of GDP.
What can we conclude from this data?
- Greece’s central government is roughly half of its GDP (by some measures, it’s 59%), meaning that the national economy is heavily dependent on state revenues and spending. For context, U.S. government spending is about 20% of U.S. GDP. As a rule of thumb, the private sector must generate the wealth that pays taxes and supports state spending. This leaves a relatively small private sector with the task of generating enough wealth to support state spending, pay interest on the national debt and pay down the principal.
- Greece runs a trade deficit, i.e. a current account deficit of almost $30 billion annually. In the 14 years that Greece has been an EU member, this adds up to roughly $400 billion—a staggering sum for a nation with a GDP of around $200 billion.
- Austerity and a reduction in borrowing/spending have devastated the Greek economy, as GDP has shrunk 26% while unemployment has soared to 26%.
- While public debt is pegged at 175% of GDP, external debt is roughly 285% of GDP—a much larger sum. By all accounts, a significant portion of the Greek economy is off-the-books (cash); even if this is counted, the debt load on the private sector is extremely high.
- Foreign exchange reserves and gold holdings are a tiny percentage of government spending and GDP.
This data reflects an imbalanced, heavily indebted, heavily state-centric economy with major systemic headwinds.
The Problem with Not Having a National Currency
The problem with not having a national currency is that there is no mechanism to rebalance trade (current account) imbalances.
Ideally, a nation’s exports and imports balance, but in the real world, nations generally run trade surpluses or deficits. A trade deficit is a negative balance of trade incurred when a country's imports exceed its exports. A trade deficit is settled by an outflow of domestic currency to foreign markets.
Countries with trade surpluses end up with cash from their trading partners, while countries with trade deficits must pay the difference between their exports and imports.
Trade must balance: every nation cannot run a trade surplus. The problem for nations with current account deficits is: where do they get the money to settle their negative balance of trade?
Nations with their own currencies can simply create the money out of thin air. This is in essence how the U.S. supports its massive trade deficits: the U.S. imports goods and services and exports U.S. dollars in exchange for the goods and services.
This works as long as the country running trade deficits doesn’t print its currency with abandon. If a nation prints its currency in excess, the currency loses value, and imports become more costly to residents. As imports rise in cost (priced in the local currency), people can’t afford as many imports as they once could, and imports decline, reducing the trade deficit.
On the other side of the trade ledger, the exports of the nation that is depreciating its currency becomes cheaper in other currencies. This makes the nation’s exports a relative bargain, and this tends to increase exports as global buyers take advantage of the cheaper goods and services.
In this way, national currencies provide a mechanism for rebalancing trade deficits. By eliminating national currencies, the Eurozone also eliminated the only market mechanism for rebalancing trade imbalances.
With no currency mechanism left, nations borrow money to fund their trade deficit. This is the engine of Greek debt since that nation adopted the euro in 2001.
If Greece had kept its national currency, trade deficits would have declined as the Greek currency depreciated and the cost of imports soared. Lenders would not have based their loans on the illusory guarantee of Eurozone membership.
For nations running large structural trade deficits, membership in the Eurozone was a guarantee of financial disaster, as the way to fund the deficit within the Eurozone was to borrow more money.
There is no way for Greece to fix its debt problem if it keeps the euro as its currency. Every purported solution that doesn’t address the core cause of the debt is mere theater.
The Subprime Template
In the subprime mortgage bubble of the mid-2000s, people with modest incomes were able to buy costly McMansions under false pretenses by exaggerating their income (via “stated income” or liar loans). The mortgage originators issued the mortgage under equally false pretenses—that there was proper risk assessment/due diligence and a fair appraisal value for the property.
These false pretenses enabled unqualified buyers to borrow enormous sums—for example, someone with an actual annual income of $25,000 borrowed $500,000 with no down payment and very low initial rate of interest. While the borrower bought into the dream of get-rich-quick “house flipping,” the real money was made by the originator and the lender.
It is widely accepted that Greece was admitted to the Eurozone under false pretenses—national debts were masked or understated, reportedly with the assistance of Goldman Sachs.
That a few at the top of the political/financial heap gained from Greece’s entry into the Eurozone is demonstrated by the “Lagarde List” of 2,000 individuals who transferred 50 billion euros out of Greece to Swiss banks in 2010, when the debt crisis was first making headlines. These are clearly not middle-class households getting their assets out of risky Greek banks; these are oligarchs and the top .1%. (Source)
Since these transfers do not include money that fled Greece into the shadow banking system or hard assets, we can estimate the total sum taken out of Greece by the top 2,000 is more on the order of 100 billion euros—roughly half the nation’s GDP.
In the U.S. economy, this would translate to 60,000 households taking $8.5 trillion out of the U.S.
It is also widely accepted that at best 10% of the bailout funds trickled down to the Greek people—the vast majority bailed out private banks and other lenders. (Source)
These charts demonstrate how private loans to Greece have been transferred wholesale to the public ledger, i.e. taxpayers:
This is roughly the same template the too big to fail banks followed in the subprime mortgage crisis: after skimming vast profits from originating the loans, the banks faced insolvency as the phantom collateral of subprime mortgages evaporated. To rescue the financial markets, the federal government bailed out the banks.
Faced with the prospect of a Greek default bringing down their overleveraged banking sector (i.e. the European equivalent of a “Lehman Moment”), the EU leadership opted to bail out their own too big to fail banks on the backs of their taxpayers.
Two Conclusions
There are two conclusions to be drawn from all this, and they have nothing to do with who is demonizing whom or the political theater currently being staged:
- Greece can never escape the cycle of increasing debt until it exits the euro and returns to a national currency.
- The debt is so outsized compared to Greece’s private sector that it must be written off. What cannot be paid will not be paid.
These facts matter not only because contagion from Greek debt defaults may ripple in dangerous ways through the financial system, but because they are also true for many other members of the Eurozone. As I predicted in my first article for Peak Prosperity four years ago, the Euro is a fatally-flawed monetary concept and what we now seeing playing out was eminently predictable from the start.
In Part 2: More Sovereign Defaults Are Coming - Prepare Ahead Of The Turmoil, we look at structural causes of the global debt crisis that are not limited to Greece. Many other countries are teetering on the same brink Greece is now falling off of. When they fail, the ripple effect their debt defaults will debilitate their creditor nations, causing a massive shrinking of the world economy.
The key takeaway is this: even if the countries we live in can't live sensibly and within their means, we as individuals have the power to do so. But we need to seize that power now, before the next crisis arrives, for it to matter.
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
»
- 33986 reads
- Printer-friendly version
- Send to friend
- advertisements -
Next??
False flag event on its way....
Major Politician's Airplane hijacking..
Nuland's "Operation Nemesis" will need some kind of problem, to become the "solution", but this keeps dragging on. It's a war of attrittion. Greek banks need reinforcements.
It seems this Greek tragedy has become a cheap horror movie, no matter how fast you run the murderer is always steadily walking behind you. It can't be killed and it can't be stopped.
Greece has the island and beaches that make the intellect and soul soar. LA has Malibu and gang bangers.
Lesson from Greece: Those that save and have their financial ways in order have the most to lose/be taken.
Greece is setting up like the European Union equivalent of the Lehman failure circa-2009, especially if reports in financial press as of an hour ago are true (there's no way Greece will be able to stay in EU no matter what it agrees to at this late juncture, and Portugal is on deck, as northern EU block has done the math and decided neither can pay even 30% of existing debt back, let all e new credit extended, under any scenario - watch for Spain to be interrogated next).
But that's not the biggest global worry from a macroeconomic viewpoint - China's meltdown (which the Chinese Central Planners can't arrest, even halting 50% of stock market liquidity) is, coupled with sickness in Italy, Spain, France, and the Asian "Tigers" plus Brazil and India.
All accumulated debts of past 6 years in sovereigns plus record debt on books of publicly traded corporations (issued to buy back stock and fuel acquisitions), plus record private/household debt is now rearing its ugly, monstrous debt at the most inopportune time.
Foreknowlege of a crash is overrated IMHCO. It's like living in eastern Russia and having foreknowledge of Barbarossa before anyone else. What good does it do you? Sure you can try to leave town for points east, but on the road you're likely to be strafed by dive bombing Stukas.
These kind of mega events -- wars and economic collapses being at the top of the list -- the facts of history are, a lot of people don't survive them when they otherwise would have. Look in the mirror, you may be one of them. I have.
The US is worse on all counts.
hope greece morphs over to the drachma, and gives the german, french, and italian banks. along with goldman sachs a nice big shitburger to eat.
anyone else ready for the next chapter of this EPIC saga?
They're out of booze and the whores want their money, but the party must go on. The markets should be quite schizophrenic tomorrow......
"JUST UNPLUG THE DAMN THING!
(But, sir...THE COMPUTER WILL ASSUME THAT IS AN ATTACK TOO AND LAUNCH THE MISSILES ANYWAYS!)
WHATTT? GET ME THAT GOD DAMN PROGRAMMER AND GET ME THE PRESIDENT PLEASE!"
I would like to see the dominoe hop a couple of countries and hit France. That would speed things up. France is a fucking basket case and one of the biggest Greek supporters. Wonder why?
Zion isn't done with their recalcitrant Greek fiefdom yet.
The violence is still to come, as no one reneges on tribute to Zion, or threatens their pipeline routes.
Liberty is a demand. Tyranny is submission.
https://theuglytruth.wordpress.com/2015/07/12/the-only-abe-foxman-interv...
Several counties are worse off in the USSA. WTF is this crap Tyler? Must be mating season
It appears to me Greece allowed their country to be used (like the parent of a kid being molested) as long as Greeks weren't subjected to forced tax collection or property seizure.
Now, those that are/were responsible are in the wind.
Going after GS is a misdirection to shield (ex) Greek government officials.
Go after all of them if you want any sympathy from me.
Watch how fast the ECB/EU/IMF are ready to sit down and deal when GS colleges are under indictment and being prosecuted.
Why the Lagarde list with 2000 greek names with 50 billions in Switzerland is still secret???
Because they're all Davos buddies of Merkel and Yellen, et. al.
The Dukes of Hazard [ Politically Correct ].mpg - YouTube
Looks like the special interest groups and PC Brigade are not getting the anal fucking they were hoping to receive. Above video is from 2009.
Enjoy.
This post lost me when he quoted CIA factbook. That agency is a terrorist organization and should not be trusted for anything, including its fact book as who knows if they are CIA "facts" or true facts.
"or the political theater currently being staged"
You get the sense that a room of sadistic billionaire globalists are laughing their asses off at our collective serf expense. Because they are.
Well I guess we can imagine there is no "lazy Greek" politics involved here.
Or "lazy Spanish" or "lazy Portugese" or "lazy
Well, we get the message.
The Eurozone is a fucking STRAIGHTJACKET.
"Next up the IMF"!
and I ain't talking Greece either. "They are now free" actually.
Papyrus is going to make on this?
Bwhahahahaha.
Having read this....WITH WHAT EXACTLY?
It is not true that the only way to rebalance a trade deficit is with govermment money printing. For example, a country can export investments, where the cash that left comes back in to create productive assets (factories, apartment buildings, etc.).
Also, look at the US. There exists a acommon currency with some of the 50 states exporting more and some importing more (trade surpluses and deficits) yet it still works fine.
forgetting the eight hundred pound gorilla in the room. The people got to want to come off the dependency wagon. Otherwise you will be there within 5yrs
"look at the US. There exists a a common currency with some of the 50 states..."
and 12 regional FEDs, of which the NY-FED is the "special one" with ties to the Treasury, and one big FED org on top
the usual argument of the relentless propaganda "the EUR can't... won't..." etc. in this case is: "but the US has fiscal transfers"
which is just a bogus argument, but a "helpful one" when it comes to explain why "taxes have to be more federal and less local"
fact is that the US fiscal transfers aren't calculated on the basis of the local effects of the US common currency. they are just political, aka "pork barrel" politics
if you balance your budget, do you need transfers of any kind? no.
so it all goes back to: "please finance my budget/trade deficit, something I would do with currency depreciation if I could"
and depreciation of currency is just a form of tax, albeit one where politicians don't have to own their shit too much about it
regarding trade deficits - not in the case of Greece, obvi - but if you are ever given the chance to obtain, say, a new car or fridge merely by printing some paper with cool designs on it...
take that every chance you get.
Greece is fucked, most of all - because it doesn't have a "real economy" -doesn't make much, doesn't grow much apart from olives, didn't skip industrialization to get into the information economy like Ireland and India...
its a 3rd world country of beach bums roped into Europe by people who knew it didnt fit.
Look, take or leave the above - but anyone who thinks Greece's debt is ever going to be repaid is batshit crazy.
They are probably the luky ones. they are poor and have very litlle (in a way) to loose. Imagine the rich countries that have built their standard of living on debt by printing money. When the next depression comes, very soon, the greeks will go fishing, eat their olives and probably still dance the Zorba one, but we will have to deal with angry people, well armed and ready to take your life or a loaf ofbread.
There is something strange on all this. On one side we now that the moment of truth is coming, not just for Greece but for all of us. We are a lot of people who have been preparing for this since 2009 and still it seems that has taken a lot of time to come about and now that we are so close and ready, it scares the shit out of us.
There is something strange on all this. On one side we now that the moment of truth is coming, not just for Greece but for all of us. We are a lot of people who have been preparing for this since 2009 and still it seems that has taken a lot of time to come about and now that we are so close and ready, it scares the shit out of us.
You know, and dont give me a hard time about this, but lindsey williams (lol) said that his "elite friend" (lol), told him they had planned to crash the eurogroup. Maybe lindsey and his elite friend are not so "lol" after all. Altho, there have been others that said the same thing. Maybe this was the plan all along to bring in the NWO currency with no cash, just computers monitoring everything we do. Lindsey said it was start with eurogroup and then bring down the U.S. etc. I dont know, just chatting.
Not impossible. Wolfgang Schaeuble is deliberately forcing Greece out of the Euro so obviously that it's going to break the EU. And he has been caught taking illegal political donations more than once, so it's pretty certain he's for sale -- sold. The people who have the most to gain in the short term (all capitalists ever think of) are the Anglo-American banking establishment, who compete with the European bankers. Their currencies will remain solid and strong as the Euro plummets. So they could have bought him. It's a typical move in byzantine-style politics, which is how the banking system works.
No currencies will remain solid for much longer. The shadow banking system is much larger than the system we know about (derivatives etc.) When the crash gets going it all crashes. No country will be immune.
Since I grew up in Ohio, these Political Correctness fucker's have ended their career in Charleston and surrounding state cities.
Donald Trump, visit Boeing and explain why they moved from Seattle to South Carolina.
I don't spend a dime in sales tax in Ohio. My tenants do. Let the Ohio cunt rags suffer. We just pay property tax.
Can anyone here spell derivative? Heneghan says JP MORGUE is full of them.
Using GDP to analyze a country which relies on tourism like Greece is a flawed approach.
I really do hat any calculation based on GDP. It's the same as if one treats the income of at least a hundred neighbours as mine. That is a lie, I will not buy that any more. No state can conquer all the GDP for his needs, that's impossible. And the only thing which should count are the income and expenditurs of all government levels. That's the only right way doing things.
"By eliminating national currencies, the Eurozone also eliminated the only market mechanism for rebalancing trade imbalances. With no currency mechanism left, nations borrow money to fund their trade deficit. This is the engine of Greek debt since that nation adopted the euro in 2001."
one wonders how the world functioned in the era of gold standard, when nations couldn't print their currencies left and right to rebalance trade either.
+1, according to the modern neo-Keynesian mantra being propagated, it did not function at all, and you need to keep away from such barbaric thoughts