The Moody’s downgrade of Portuguese debt link was a quick blipvert for a current event, but I wanted to do a somewhat longer roundup of pieces on the Euro debt crises and the potential for more shocks down the line. Unfortunately for both me and pretty much everyone in the world, things have been moving too fast to get a good handle on before the next crisis erupts. And after the Obama downgrade, things are moving faster than ever.
Which is pretty fast indeed. The Eurocrats, in best shoot-the-messenger style, have decided to start ignoring bond rating services in the wake of Moody’s downgrade of Portugal. If that weren’t enough, Italian police raided the offices of Standard & Poors following their downgrade of Italian credit ratings.
How did Greece get in the position of being the first domino to fall in the Euro crisis? The election of Andreas Papandreou as Prime Minister helped start the ball rolling:
On October 18, 1981, a charismatic academic with rather limited government experience and with a one-word slogan, “Change,” was elected prime minister of Greece. His name was Andreas Papandreou. Greeks may now wish that 30 years ago they had had a Tea Party movement. Things could have turned out differently.
Thirty years ago, Greece was in an enviable position on the matter of national debt, with its debt just 28.6 percent of GDP. Few advanced countries can manage that kind of debt-to-GDP ratio. By the end of Papandreou’s first term in office, that ratio had nearly doubled, with debt at 54.7 percent of GDP. By the end of his second term, the figure was in the mid 80s.
But that was just the first step. The second was letting Greece join the Eurozone in 1999 despite their patent unwillingness to get their financial house in order. “Repeatedly, and for 30 years, the Greeks have played Europe like a harp.”
June’s European Union summit illustrated the chaos perfectly: a last-minute deal with Athens to raise the Greek income-tax threshold and increase levies on heating oil was hailed as a breakthrough even though everyone involved knows that this will buy, at best, a few months’ respite from Greece’s creditors. Thus are deck chairs rearranged, as the Greek pleasure yacht (classified, of course, as a fishing boat to escape taxes) sinks below the waves. The markets duly marked up the five-year probability of a Greek default to 80 percent.
The advice to Margaret Thatcher decades ago from the Foreign Office mandarin charged with European policy was clear: Greece was unfit to join what was then known as the European Community. The backward, chaotic archipelago would be an enduring drain on European coffers. Not only that: once through the door, Athens would bring nothing but trouble.
That foolish decision to allow Greece to join lies at the root of the crisis engulfing the euro zone and lapping America’s shores. Consciously, among its pampered political elite — and subliminally in society at large — Greeks got the idea that being Europe’s backward, indulged delinquent was a highly profitable game.
A piece quoting and summarizing two different Financial Times pieces (behind their paywall, alas), both of which predict a bad end to the Greek debt crises, albeit partially from differing reasons.
Andrew Butter makes parallels with Weimar Germany. Don’t agree with everything the author says, although you I do admire this sentence: “It’s getting harder to do the austerity thing these days, now that it’s considered politically incorrect to shoot at rioters with live ammunition, which wasn’t an issue in 1923.”
So if pretty much everyone agrees that Greek default is inevitable, why keep shuffling the deck chairs? Simple: So they can stick taxpayers with the bill. “Foreign financial institutions currently own 42 per cent of Greek debts, and foreign governments 26 per cent, the rest being owed domestically. By 2014, those figures will be 12 per cent and 64 per cent respectively. European banks, in other words, will have shuffled off their losses onto European taxpayers.”
So an effort to shield Euroelites from the worst effects of the debt crisis may end up destroying the Euro entirely.
Given the already considerable length of this post, I doubt I have time to address some of the ramifications of the Obama Downgrade, so that will have to wait for another post…
