Why is the entire world afraid of Greece going bust? Greece is one of the smaller economies in the euro zone whose primary export is olives. The major reason is that the country has gone on a borrowing spree and their current government debt to gross domestic product ratio stands at 160%. In absolute terms, it works out to around $500 billion.
But the hugeness of this number is just a part of the problem. So why is Greece so important? As John Mauldin and Jonathan Tepper write in Endgame - The End of the Debt Supercycle and How It Changes Everything “Because so much of their debt is on the books of European banks. Hundreds of billions of dollars worth… Bond markets require confidence above all else. If Greece defaults, how far away is Spain or Japan? What makes the US so different…The global financial system is all connected. Tiny Greece can make a difference in places far removed from Europe, just like subprime debt created a crisis all over the world.”
The authors feel that even bailouts won’t work. “Today, there is some kind of bailout for Greece. But that is just a Band-Aid. The crisis will not go away. It will come back, unless the Greeks willingly go into their own Great Depression by slashing their spending and raising taxes…What is being demanded of them is really bad for them, but they did it to themselves.”
What also does not help is the fact that Greece faces huge rollover risk on its debt. As the authors write, “By this, we mean that when a bond becomes due, you have to roll over the bond into another bond. If the party that bought the original bond wants cash to invest in something else or just does not want your bond risk anymore, you have to find someone to buy the new bond. Greece has a large number of bonds coming due soon. It is not just the new debt; they have to find someone to buy the old debt. And that is why they need so much money.”
Typically, countries which are in the situation that Greece is in, devalue their currency and export their way out of trouble. Greece uses euro as its currency, which is used as a currency by other countries in the EU. So Greece cannot devalue the euro.
As far as productivity goes, Greece has one of the worst productivity parameters in Europe. As the authors write, “barring some new productivity boost in olive oil…production, there is no easy way. Since the beginning of the euro in 1999, Germany has become some 30% more productive than Greece. Very roughly, that means it costs 30% more to produce the same amount of goods in Greece than in Germany. That is why Greece imports $64 billion and exports only $21billion…What needs to happen for Greece to become competitive! Labour costs fall by a lot, and not by just 10 or 15%... In short, Greece lifestyles are on the line. They are going to fall. They have no choice. They are going to willingly have to put them into a severe recession or, more realistically, a depression.”
But the chances of labour costs coming down are rather low. Greece categorises certain jobs as arduous. For such jobs the retirement age is 55 for men and 50 for women.
“As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, musicians…” write Mauldin and Tepper in Endgame. What also does not help is the fact that the average government job pays three times the average private sector job.
“The national railroad has annual revenues of €100 million against an annual wage bill of €400 million, plus €300 million in other expenses. The average state railroad employee earns €65,000 a year. Twenty years ago, a successful businessman turned finance minister Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs,” write the authors.
And it doesn’t end with this. “The Greek public-school system is the site of breath taking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest ranked, Finland’s.” The worst thing of course is that the Greeks never learnt to pay their taxes because no one is ever punished.
All these reasons ensure that the chances of Greece coming out of the huge mess they have built for themselves are very low.
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