The Ticking Euro Bomb What Options Are Left for the Common Currency?

AFP

Part 2: Greece Adrift


Greece was adrift in a storm of mistrust, unleashed by the rating agencies and reinforced by the financial markets. The lower the country's rating fell, the more expensive it became to refinance debts, the greater the debts became, the lower the rating went, and so on. All of this spelled a golden opportunity for foreign currency traders, hedge funds and speculators. They could bet on the decline of the euro and on the euro partners bailing out the Greeks. One of the instruments they used was the credit default swap, which the financial crisis had already spread around the globe following the Lehman bankruptcy.

Although CDSs were designed to insure against the risk of credit default, someone who holds government bonds can also use them to speculate. It's as if someone had purchased fire protection insurance for a house he didn't own. He could conceivably have a strong interest in the house actually going up in flames. Those who bought CDSs for Greek bonds without owning any bonds themselves were betting that the bonds would lose value. If that happened, they could sell the swaps later on at a higher price.

A €26 trillion gray market for CDSs had developed outside the official markets. The premium that had to be paid to hedge a Greek government bond doubled within a few weeks, and by now it was 10 times as high as the premium for a German bond.

Junk Status

In June 2010, Greece's credit rating was downgraded by four additional notches, due to "considerable" general economic risk. Greek government securities now had the status of junk bonds. Investors in Greece had already begun moving their money to Cyprus, Malta and Switzerland. Greece had been ejected from the family of creditworthy nations. But the effect of the downgrade was also detrimental to the entire euro project, even through Europe felt that it had reacted firmly and decisively, and that it had the Greek crisis under control.

This belief was triggered by the European Central Bank's purchase of €25 billion in Greek government bonds only a month earlier, in May 2010. It did this to stabilize prices for the bonds and bring calm to the markets, but the strategy only worked for a few days.

From then on, the ECB would buy more and more Greek bonds, even in 2011, and soon it was also buying Portuguese, Italian and Spanish bonds. The ECB was filling its own house, which had been created as a stronghold of euro stability, a Fort Knox of the new currency, with junk bonds. In doing so, it was ruining the credibility of the euro.

Questions about the beginnings of the euro kept resurfacing. Why did the leaders of France, Germany and nine other countries believe that Greece's way of running its economy could be compatible with other economies under the umbrella of a common currency? How is it possible that a currency was developed exclusively for good times and phases of growth, only to be dangerously in jeopardy during a crisis?

The Truck Drivers' Strike

In Greece, the plunge in the value of government bonds triggered unrest, because EU assistance was tied to austerity requirements and demands for tough reforms. The government was to shrink the public sector, which had become inflated over the decades, by one-fifth. And the markets were to be liberalized to facilitate more growth.

As a truck driver, Antonis Dimitriadis belongs to a group known as the "kleista epaggelmata," which consists of about 70 closed professions, a curiosity of Greek labor law, including attorneys, notaries, architects and taxi drivers. The members of these professions had been protesting since the reforms began, because they were losing their privileges. Until then, their rules had not been set by the market but by the state.

Dimitriadis was one of those who demonstrated in the summer of 2010 against what they believed were unreasonable government austerity measures. Trucking companies nationwide went on strike, shutting everything down. For eight days, filling stations were unable to get gasoline, while supermarkets quickly ran out of fresh products. Tens of thousands of tourists were stranded, flights were delayed and ships were unable to leave port.

There are 33,500 licenses in Greece for independent truckers like Dimitriadis. They were issued under the country's military junta in the early 1970s, but no new licenses were added after that, even though the Greek economy is now four times as large as it was at the time.

A trucking license became something of a guaranteed livelihood and even a retirement plan. When truckers retired, they would sell their licenses to the highest bidders, and licenses for large tanker trucks were being sold for up to €350,000. But now, under the debt regime dictated by Brussels and Washington, the licenses were to be made available to anyone starting in 2014, which of course caused the value of truck licenses to plunge. Today Dimitriadis's license is worth only about €12,000-15,000.

He received the license, which guarantees him his profession, as a gift from his father in 1993, for whom he had worked since he was 13. He cleaned the truck, filled the gas tank and accompanied his father throughout Greece, just as his 11-year-old son Manolis does today -- as if it were a law of nature. Of course, Dimitriadis took care of his father after he had given him the keys to this truck, if only in gratitude for the truck license, and he would expect the same from his own son.

Family is everything in Greece, a country of pre-modern, almost archaic labor structures that have been cemented into law in the form of an elaborate system of rules and regulations. As a result, the family-owned business has remained the DNA of the Greek economy. Of Greece's working population of 4.4 million, roughly 1.5 million people work for the government, while another 1.5 million are employed in small businesses with between one and nine employees, or are self-employed. And these people were now being expected to accept, in the space of a few weeks, changes to a system that had developed over decades. An economy dominated by guilds and family owned businesses was to be converted into a market economy that satisfied the requirements of politicians in Brussels and Berlin.

A Country on the Verge of a Nervous Breakdown

The truck drivers' strike did immense damage to Greece's image around the world. Until the summer of 2010, the Greek crisis had remained a relatively abstract phenomenon for the global public, one that was analyzed primarily in the business sections of newspapers. But now there were images the media could use, images that portrayed a country on the verge of a nervous breakdown, images of irate tourists, empty shelves and barricaded streets, and of soldiers driving truckloads of kerosene, gasoline and diesel around the country. The images depicted a country that was no longer functioning and was unlikely to become functional again in the foreseeable future.

They also depicted a society deeply suspicious of its own government. With tax revenues of less than 30 percent of economic output, Greece has the second-lowest tax rate of all euro-zone countries. The Foundation for Economic and Industrial Research (IOBE) in Athens estimates annual black-market sales at €59 billion -- a quarter of the official economy.

Outsiders may be shaking their heads about all of this, about the Greeks and their stubbornness and backwardness, about their way of doing business in general, which is alien to the economic systems in Central and Northern Europe. But they should be even more taken aback by Europe's politicians and its movers and shakers, and the years they spent doggedly looking the other way, repressing and denying the realities of the Greek economy.

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andrewpurdy 10/09/2011
1. Greece may not be the spark
Everyone is concentrating on Greece, but Greece has not been willing to default, and has used its enormous leverage to get bailout after bailout over the last few years. The spark that brings down the Eurozone, if this happens at all, will most likely be something intrinsic to the private markets, something outside of government control. I am thinking along the lines of an electronic panic bank run. If all the corporate big boyz pull out their Euros at the same time and convert those Euros into foreign currencies or gold, the EZ banks could go down very fast. Too fast for EZ governments to act in time. It could be over within hours. There was an electronic bank run after Lehman failed, and the US Government stopped it by guaranteeing money market accounts. Is the ECB politically capable of doing the same? If the Euro collapses, I would buy Siemens stock. Siemens has a banking license, and can stash its Euros with the ECB. Very few industrial companies have this privelege.
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