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Why Greece Is The Precursor To The Next Global Debt Crisis

The Eurozone fantasy will be one of the early casualties
Friday, July 10, 2015, 10:48 AM

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?

  1. 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.
     
  2. 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.
     
  3. Austerity and a reduction in borrowing/spending have devastated the Greek economy, as GDP has shrunk 26% while unemployment has soared to 26%.
     
  4. 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.
     
  5. 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:

  1. Greece can never escape the cycle of increasing debt until it exits the euro and returns to a national currency.
     
  2. 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)

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48 Comments

Boomer41's picture
Boomer41
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French View

I'm in France and have been conducting an informal, very unscientific, poll of French citizens asking them about the Greek crisis. So far everyone I have asked has told me they expect that the Greek situation will eventually spread to France. They don't think it is imminent, but most say they think it is inevitable.

When I ask if they are making preparations, I get the same blank stares I do in the US.

Nate's picture
Nate
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another unscientific poll
Boomer41 wrote:

I'm in France and have been conducting an informal, very unscientific, poll of French citizens asking them about the Greek crisis.

I work with individuals native to many countries around the world.  During this past week I asked a native German and a native Greek what they thought about the Greek crisis.  Both are bright, informed individuals with PhD's in physics or chemistry.

The German blasted the Greeks for their lack of productivity, laziness, and inability to collect taxes.  He was angry that his 'people' would end up eating a large chunk of the Greek debt.

This is part of what the Greek emailed me:

The game is deeper than you see and Greece is not as desperate as the media here want to present. They are expecting that this will not work and have been preparing for some time now. They have taken their money out of the banks (ECB has shipped over 150 B to greek banks in the last 4 months). 

The USA government is concerned and they have repeatedly stated that. But this is  about the Germanization of Europe, which I cannot believe will happen. WC once said that “we need to bomb Germany every 50 years and we do not need to know why, they will know”.

Too bad they haven't read that classic by Strauss and Howe.  Don't think it would have made a difference anyway.

 

 

 

Tall's picture
Tall
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Dependence upon oil for energy

Gail Tverberg suggests that the lack of cheap oil has unraveled oil dependent economies:

"We all know one thing that Greece, Cyprus, and Puerto Rico have in common–severe financial problems. There is something else that they have in common–a high proportion of their energy use is from oil. "

http://ourfiniteworld.com/2015/07/08/what-greece-cyprus-and-puerto-rico-...

Carlos P's picture
Carlos P
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One small correction on an

One small correction on an otherwise great report:

"For context, U.S. government spending is about 20% of U.S. GDP.".

That´s only federal spending. Total public spending, including state and local, is about 6 Trillion or 35% of GDP.

 

Arthur Robey's picture
Arthur Robey
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Rhodesia was not colonised at

Rhodesia was not colonised at the point of a bayonet. The Matabele king, Mzilikazi kept Henry Harley in a goat kraal for months before deigning to meet him. So much for going in guns blazing.

Mziliazies indunas advised letting in the Moffats (missionaries) because they had better dental tools than the Matabele, and the indunas were old with bad teeth.

Mzilikazies successor, Lobengula allowed Rhodes to take a column to the emptied Mashonaland to look for gold, which the Nguni people had no use for. Lobengula was addicted to heroine for his gout, which gave us some leverage, but we still had to mind our Ps & Q's. The Matabele are a warrior nation. (For instance, never allowing ones head to be above the kings. Penalty instant death.)

Rhodes had to take a large detour to avoid contact with Lobengula's impies, each one consisting of 10,000 men.

Trouble started when the Matabele stole copper telegraph wire to make jewelry. More trouble was created when the the Matabele prey, the Shona, (hence Mashonaland) took refuge in our mines. We miners took advantage of their very straitened circumstances for cheap labour. The expected life span on the Jumbo mine where I grew up for whites was six months. (Malaria).

The Matabele were outraged that we were interfering in their affairs and attacked, threatening our existence.

That was when the gattling gun was first used.

You asked for that lecture, European.

charleshughsmith's picture
charleshughsmith
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thanks for the addition

Carlos, thanks for the additional information. As I recall, federal spending is around $3.2 trillion, state and local govt spending is around $1.5 trillion, but these might be higher now. US GDP is around $17T.

As large as govt spending is in the US, it is still considerably lower than countries such as France, where (as I recall) govt spending is 50% of total GDP.

charleshughsmith's picture
charleshughsmith
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spectrum of colonialism

Most interesting, thank you, Arthur--yes, there is definitely a spectrum of colonialism and control. I recall that England maintained its rule over India with around 25,000 soldiers and administrators--a small army given India's vast size and population.  The trick was (as I understand it) maintaining control over the rajas. Control the local elites and you control the region, and without bayonets.

I confess I wanted to work in the word "bayonets"... even though it is not entirely accurate, it has such a dramatic ring to it... buying the complicity of local elites is less dramatic and a lot easier. 

Arthur Robey's picture
Arthur Robey
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Waves of Humanity & the Industrial Transition.

Weaving the industrial transition into my rant, the aBantu of Zimbabwe (Nee Rhodesia) have embraced industrial civilization.  

However it is not clear to me whether they have left their run up too late. In order to make the transition,  they have to rid themselves of their excess population. The Europeans sent their surplus to Africa and now the Africans are returning the favour.

I expect that in the long run it will yield the same result on both continents, the expulsion or extermination of the immigrants. Europe may collapse before it feels the full brunt of it's colonisation.

http://www.slideshare.net/mobile/thelawofscience/human-population-26811774

climber99's picture
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Total population projection following a logistic curve ?

I just don't believe that the total population will follow a logistic curve (s- shaped) as you have shown in your picture.  That is wishful thinking.  Over time the death rate will go up as resources and fossil energy deplete which would make the total population resemble a Gaussian curve (bell shaped).

climber99's picture
climber99
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Billiant article

This article is the best explanation of the Greek situation out on the web so far. Billiant.

We are going to learn that we can't live beyond the carrying capacity of one's country for long.  Greece, welcome to reality.  Coming to the rest of Europe and the rest of the world soon. 

Ed

Jbarney's picture
Jbarney
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That a few at the top of the

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%.

 

For me....this was the most infuriating part of the article.   While the point was to focus in on the reality of Greek's situation, this small thread sparked enough interest for me to investigate the sources given.  Only remember small tidbits of this when it was actually published, and I am not sure what the most recent news on any of this is.  I know this money would be a fraction of the tax receipts needed to right the ship in Greece, but it is sickening.  So many of these elites play the system, sucking resources, not getting punished. 

It's like when the bankers buy physical silver in massive quantities because they know the silver price will rise.  Making money off a crisis.  Avoiding taxes.  It is sickening.

It is so sad.  Admittedly I don't understand all of the taxation laws, even in my own country....but has anyone been arrested/prosecuted for this?  I mean except the guy who published the names, of course.

JB

pinecarr's picture
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I agree with climber99; brilliant article Charles!

Climber99 nailed it:

This article is the best explanation of the Greek situation out on the web so far.

You and Chris both have a wonderful gift for sorting the wheat from the chaff, and bringing clarity of understanding to what was previously a morass of unfiltered, conflicting and diverting information.  Thank you!  So glad you are a regular contributor here now!!

jennifersam07's picture
jennifersam07
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great movie about colonialism in India

Lagaan -- illustrates the place of the elites in colonialism. Plus great music.

KugsCheese's picture
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charleshughsmith wrote: Most
charleshughsmith wrote:

Most interesting, thank you, Arthur--yes, there is definitely a spectrum of colonialism and control. I recall that England maintained its rule over India with around 25,000 soldiers and administrators--a small army given India's vast size and population.  The trick was (as I understand it) maintaining control over the rajas. Control the local elites and you control the region, and without bayonets.

I confess I wanted to work in the word "bayonets"... even though it is not entirely accurate, it has such a dramatic ring to it... buying the complicity of local elites is less dramatic and a lot easier. 

 

The caste system helped too.

jennifersam07's picture
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That's it for me and WSJ

The Wall St Journal had a front page article this morning with the headline, Greek, Chinese, Puerto Rican crises all fall short of going global. Nothing to see here. Really.

http://www.wsj.com/articles/greek-chinese-and-puerto-rican-crises-all-fall-short-of-going-global-1436570565

Kevin Cobley's picture
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Greek Default

It's quite clear that Greece has to default on all foreign debt, that of course means no more money will be lent until their economy is restructured in a way they may be able to repay future loans.

This doesn't mean they have to leave the Euro, it just means that all trade will need to be done on a cash basis, no cash no goods.

All imported luxuries and most consumer goods will vanish from the shelves. That includes oil, coal and gas. The EU will probably make grants for fuels for essential services. Cars, trucks and aircraft will not be imported. Export of Euros will be prohibited and funds exported to Swiss banks over the last few years will be recovered.

All of the Greek banks will have to default on their customers deposits (a bail in), all banking deposits are in effect unsecured loans not "your money" placed for safekeeping. The only question is how much in the Euro each customer will receive upon default.

The Greek government will also have to default on all bond issues.

The Greek Government will have to rationalize their oversized military, there is little they can do if their perceived enemy Turkey attempts to over run them, they need to get rid of their air force and navy and reduce their army to a civil disobedience and border protection force.

They need to collect their taxes and utility services payments, water, gas electricity and public transit aren't freebie's as the Greek seem to think.

All investment in the future needs to be devoted to import replacement, especially energy. It's a nation that can't afford a car and plane based transport system.

I don't see any arguments for Michigan leaving the US and implementing the Michigan Mark, so why are all the YouTube and internet Greek problem solvers splashing the Grexit as a solution when it's not. No Greeks want Drachma's, they know within a couple of months they will be worthless, a wheelbarrow load of money to buy a piece of Chinese underwear.

The only solution is to default let the chips fall wherever and start again with a complete rationalization of Government services that enables Greece to live within it's means.

4thinkers's picture
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France and debt

I too am an expat in France. Who are you talking to? How do you think the French should prepare? You have no understanding of what you are reporting.

1.French household savings are rising faster than their GDP. (That means the French are saving more money and not spending). That is how they are preparing! Duh! They also want cash and will take more and more euros out of the ATM prior to September 1, 2015 when the new limit of 1000 euro transactions goes into effect. Imagine, they realize Greece could happen to them too! Wouldn't it be amazing for Americans to realize that?

2. It's out of the question for Livert A rate not to drop.(They also know their Livert A interest rate will drop, so that makes them save even more money).

Americans don't know that the French DO NOT HAVE CREDIT CARDS. The French only have DEBT CARDS which they call "credit cards". There is no credit in France. The only possible long term debt would be for a car or a mortgage. What is in their bank account is all the money they own. Repeat...their are no credit cards in French culture. So get that straight, Americans! 

They have a universal health care system which provides them with doctors and medicine at very cheap prices. An MRI recently done for a friend cost 22 euros! A doctor's visit cost the same.

Their company provides them with 8.10 euros each day they work to buy lunch or eat in their cafeteria. They also take the metro or bus to work which is also paid for my their company. Most Parisians do not own cars and only take public transporation. Again, France is not America.

So what more do you think the French should do? They are not American debt serfs. They have labor rights, vacations, and a 35 hour work week. If all of those things go, at least, they are not in debt.

 

Time2help's picture
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The only solution...
Kevin Cobley wrote:

The only solution is to....

I love it when someone says "the only solution is...". Automatic yellow flag on the field.

Just sayin'.

Time2help's picture
Time2help
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Finland Echoes Germany,Wants Greece Out, Five Others Back Grexit

Finland Echoes Germany, Wants Greece Out; Five Other Nations Back Grexit

sand_puppy's picture
sand_puppy
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Question: Transfering private debt to taxpayers

A request for more explanation:

These charts demonstrate how private loans to Greece have been transferred wholesale to the public ledger, i.e. taxpayers.

I have heard this mentioned by others but don't understand it.

1.  Who were the private loans from and who were they to?  Individuals?  Corporations?  Greek Banks? Other nations?  The ECB?

2.  Once I understand which loans we are speaking of, then what is the mechanism by which they are transferred to the public ledger (taxpayers).  (Is this the taxpayer bailout of the insolvent Greek banks?)

Thanks in advance.  And I so appreciate having financially sophisticated people here to ask these questions to!

charleshughsmith's picture
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not financially sophisticated...

I am by no means financially sophisticated, but I believe what happened is the initial loans were from mostly French and German banks.  As a direct and planned result of the various EU-engineered "bailouts" (of EU banks, not Greece), the new loans from the EU Stabilization fund and funds pledged by EU nation-members, the initial private loans were paid off with the new public EU loans.

This might shed additional light: 

https://www.foreignaffairs.com/articles/greece/2015-07-07/pain-athens
A Pain in the Athens: Why Greece Isn't to Blame for the Crisis
"We’ve never understood Greece because we have refused to see the crisis for what it was—a continuation of a series of bailouts for the financial sector that started in 2008 and that rumbles on today. It’s so much easier to blame the Greeks and then be surprised when they refuse to play along with the script."
 
Michael_Rudmin's picture
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Federal spending 20%, government spending 35%...

... but now add in legally required spending. That is, money that, officially, you spend, but the government mandates that you spend it.

Include licensing, health insurance, auto insurance, social security, workman's comp, unemployment insurance...

I think we can add in another 20% at least, bring the US to 55%.

Oh, and don't forget city spending and public-university spending.

sand_puppy's picture
sand_puppy
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CHS: Initial loans to whom?

I am still not understanding to whom were these initial loans made?

Greek companies?

Greek Banks?

The Greek government?

Greek individuals?

Thanks.

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(No subject)
cmartenson's picture
cmartenson
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Re: Initial Loans
sand_puppy wrote:

I am still not understanding to whom were these initial loans made?

Greek companies?

Greek Banks?

The Greek government?

Greek individuals?

Thanks.

SandP,

The quoted Greek debt is just money lent to the Greek government.  It is sovereign debt.

CHS noted another classification of debt that was more expansive - total external debt - which includes both government and private debt (that is held by foreigners) but I am not sure if that figure was net or gross.

If net, that means that after you subtract all the debt instruments held by Greeks, such as French bonds or BMW debt, amounts to nearly $570 billion.

But this number is rarely bandied about in the press.  Everything you read refers to the total outstanding sovereign debt of Greece which would be equivalent to the $18 trillion of the US...or possibly the $14 trillion that exists outside of the SS system, depending on how things are being counted in Greece...

Arthur Robey's picture
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Greece out in Front

Greece cannot support it's present population with olive groves and goats cheese Kevin.

Or can they?

The Limits to Growth study says that capital will have to be moved from industry to agriculture. It would appear that Greece is showing the way.

Perhaps a radical re-think of their agricultural practices may produce surprising results. I am not prescribing anything, but Permaculture, food forests and Mycelia spring to mind.

Does anyone know what the natural environment of Greece was before man got there? It is my contention that the environment is very degraded and neglected and is capable of much improvement. And will yield surprising results.

However, the people will need to abandon the present industrial rewards system. They will all have to row together, or starve. 

The problem then becomes how to defend their creation?  Other, less farsighted people will see Greece as a green and virgin empty land, just waiting for "improvements".

This is a pattern that has many presidents.  Terra nigra of the Amazon, the chanampas of Mexico, the carefully manicured meadow-like bush of Australia. There are many examples. Wasn't the east coast of the USA covered in Beech nuts?

robie robinson's picture
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Chesten nut maybe

its a relative of the beech?

Arthur Robey's picture
Arthur Robey
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Making Love

I am not imposing any one-size-fits-all means of getting our daily nourishment Robie. Neither am I excluding any.

However the thought of a pleasant walk through a mature food forest and eating whatever presents itself for free,  without shopping, with no dishes to wash and all that is required of you is to bury the seed in some possibly viable soil is just too attractive. 

Instead of rapeing the Earth we could be making love to her.

CrLaan's picture
CrLaan
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Total debt EU member states

http://postimg.org/image/jyhrv88ur/

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I apologize for what seemed impositional

it is easy to give and get wrong ideas when these typed means are all we have for communicating, we haven't devolved sufficiently to employ such.

a poor and reluctant typist

ps American Chestnut Foundation

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At the end of the British

At the end of the British occupation of India, the number of British soldiers in India stood at about 3 million.

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They have just agreed to a third bailout loan

Ok. They have just agreed to a third bailout loan in return for structural reforms.  This is my order of events

1. Greece will increase their debt to GDP ratio as a result of this bailout loan but this doesn't matter because it buys them time to increase tax receipts, reduce costs such as pensions, welfare state, military spending etc. and generally get their finances on a sustainable footing

2. When they have their finances sorted out, they will default on 100% of their debt.

3. European tax payers will foot the bill, which will be even larger now because of this bail out.

4. .... anyone's guess.  My guess is Germany will leave the EU to stop footing the bill for rest of Europe when they start to default, if they can.

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Comparisons

Fed spending (3.8) + State (1.6) + Local (1.2), or about 6.8, or about 40% of GDP

[1] You, as do many others, note that all public spending must be paid for by the public sector, but whether education, garbage collection, medical care, roads (toll), transit, etc are public or private sector does not much matter in the end in terms of (end-user) costs. European countries have a larger public sector but also more public services, which makes a comparison between any two countries much more complicated than it seems at first blush.

[2] Another point: The Federal debt is about 6x revenue. In Greece it is less than 3x, and in most European countries it is under 2x [Government spending comes from revenues, not from GDP]. On top of that, Fed debt does not include GSE liabilities and those at other levels of government, whereas in Europe the public debt is the consolidated public sector debt.

[3] The automatic rebalancing of trade deficits by currency trades that you mention does not work half as well in practice as it does in theory. There are numerous studies on this topic. It is kind of like the doctrine of free trade and Ricardo's comparative advantage. Many studies show that in practice this does not work as predicted. The US$ example of printing money (reserve currency) is also quite different than is the case for Greece and other countries.

I do like to read your analyses, by the way. You are one of the most incisive commentators I know about.

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So now, with the Greek "deal" this morning...

...it seems like (IMO) we're entering a new stage of the financial "crisis" (and who never lets a good crisis go to waste?):  from bailouts to strip-mining sovereign assets (which can include bail-ins too, I suppose [hi Cyprus!]).  

It's developments like these that make me feel as if this will go on for another decade-plus before reaching some sort of endgame state.  

There are still so many assets left to loot.  The "game" is not even half over.

The bad news:  this is social, financial, and political engineering on a planetary level.  And it's not an egalitarian full-of-opportunity world that's being created.  

The good news:  IMO we have quite some time (10-15-20 years?) before TPTB run out of things to loot and we reach the real termination of the crisis (war? revolution? utter collapse?).  (Having said this, it'll all come crashing down later this week, right?  <smile>)

The bad news:  they're going to come for everything you have too, given enough time.

The good news:  you have plenty of warning and if diligent, crafty and hard-working, you can make it difficult (or perhaps more trouble than it's worth) for them to expropriate your assets.  So get to it...

Viva -- Sager

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10-15-20 years...

The Thing might have something to say about such things.

We are dealing with a pile of massive non-linearities.  

Albert Bartlett wrote:

“The greatest shortcoming of the human race is our inability to understand the exponential function”

The "collapse" is right now. You are living it.

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including Indian and british armies?

Do you have a source for this number? I think this must include the Indian Army, which was a separate entity, and the British Army. Clearly they worked closely together, but in terms of soldiers from England serving in India, I think the number was still very small at partition in 1947.

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good points all

Thank you for making these points, Reb, all good.  We can also add the complexity of assigning services to public or private in the US, for example, healthcare is public (Medicare etc.) and private, but much of the private spending is controlled by the state, i.e. quasi-public.

How is defense spending categorized when contractors are private firms but the funding is govt?  Same issues arise in higher education and other sectors. Govt. probably accounts for more than 40% if we count mandated spending etc.

That's a good point about rebalancing being of mixed efficiency. Some people feel labor market flexibility is as key as currency rebalancing, no doubt that's also a mechanism but terribly disruptive. I suppose global wage arbitrage is another mechanism.

Flexibility and speed of adaptation are important but hard to quantify. This may be one reason why the US gets away with a much higher state-revenues to debt ratio. That, and the reserve currency as you mention.

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Time2help wrote: The
Time2help wrote:

The "collapse" is right now. You are living it.

 

I have no doubt about it, Time2help.  But the more I see/observe of the process of collapse, the more it seems to me in my opinion to be a decades-long "instant"...  And it also seems to me that to the extent TPTB can manage to draw it out and "gradualize" the process, they also minimize dissent/blowback -- because the process is so incremental, there are too few points at which people might be shocked into pushing back.  The gradual bef#%kening of the world comes to seem "normal"...  Ask kids who were born in 2000 -- they'll likely tell you that the current state of affairs is just how it's always been.  Implying:  always will be.  

Not only are we bad at exponential functions, we are also bad at long-term perspective.

Just one dude's opinion, naturally.  And I'll reiterate:  now that I've gone out on a limb with my "prediction," things will utterly collapse by the end of the week.   <smile>  

Viva -- Sager

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not to quibble, but Greece revenue-ratio is over 5

Not to quibble, but according to the OECD, Greek tax revenues total 65 B euros (incl. VAT and social security payments) and its public debts are now 340+B euros, which puts the ratio at well over 5... http://www.oecd.org/ctp/tax-policy/revenue-statistics-and-consumption-ta...

 http://www.nationaldebtclocks.org/debtclock/greece

Also, the more important number may well be *total* external debt which I mention, as there is only so much national income to service public and private debt.

What nobody measures (because it's difficult) is the actual wealth generated by a nation minus the external and future pension-healthcare costs that have been pushed into the future.  By this measure, every nation-state on the planet is likely bankrupt, with the exception of Bhutan (just a guess; slight exaggeration here...)

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Greek Pudding

From James Howard Kunstler's blog:

Greek Pudding

JHKunstler wrote:

"The proof of the pudding is in the eating, the old saw goes. This one, alas, is a mélange of several old shit sandwiches bound in a liaison of subterfuge and seasoned with political absurdities. Having been fooled in this bistro before, citizen-patrons leave the table resigned to yet another bout of food poisoning as the music of universal upchuck rings across the European Union from Helsinki to Lisbon.

What is on display more brightly and clearly than ever, though, is the utter fakery of international banking. The players have lost faith in their own shenanigans. They simply go through the motions now awaiting the political fallout, which is to say the revolt of the people who can still do arithmetic. So, now Greece can supposedly expect another $90Billion-equivalent in new loans on top of the $350Billion-equivalent already racked up. That’s rich. The loan repayment schedule must look like a map of Middle Earth.

Most perplexing — especially for those on summer hiatus in which time seems to be suspended — is the fact that the rescue package will take weeks, perhaps months, to gin up while Greece is right now so utterly paralyzed in bankruptcy that no goods can move, no bills can be paid, and the economy cannot deliver the necessities of daily life. The old refrain, “your check is in the mail” may not be so reassuring to folks who haven’t eaten for three days. Personally, I would expect the gasoline bombs to be flying around Syntagma Square before the middle of the week.

Has anyone noticed the eerie paucity of news emanating from the other hard-luck nations of the EU, namely Spain, Portugal, Italy, and Ireland? The money hole that these deadbeats are in makes Greece look like a dimple in the sand. What, I wonder, is the message to them from the Greek negotiation melodrama? (Lend more money to real estate developers to build more houses and condos that will never be sold? That’ll work!) No, the entire EU debt fiasco harks back to the original meaning of “ring around the rosie” — a theme song of the Black Death. The eventual implosion of the European Union, and the banking system hugging its face vampire squid style, will be the financial equivalent of the Black Death. Kingdoms will fall and social systems will be turned upside down.

The agonizing wait for that outcome is obviously fraying the nerves of all concerned to the degree that all their exertions seem like little more than tragic and pointless exercises in futility — for instance, the terms arrived at in last weekend’s negotiations. Nobody has a shred of faith that they can or will be carried out. In effect, what they’ve done is put together a Potemkin framework allowing them to go just give up for a month or so and go on vacation.

That would, of course, set things up for a mighty financial convulsion in the autumn — history’s favorite season for ruin — when all the ministers and their factotums venture back to the dismal realities they left fermenting at the office. Of all the many things apt to happen, we can count at least on the current Greek government falling and a failure of Greece to make any gesture of repayment in their just-negotiated loan schedule. That would leave the “Troika” (the EU, the ECB, and the IMF) with zero credibility and initiate the epochal widespread repudiation of the entire EU loan structure — in short, the collapse of Europe.

That wouldn’t necessarily be the end of the world, but it would be the end of nearly seventy-year period of peace, prosperity, and stability. The sorting-out would be epic. The standard of living across Europe would sink to the level of the 1830s. The fundamentals of banking and currency would have to be rebuilt from ashes. More nations will break up into smaller units. Western intellectual life would suffer immense shock as all the certainties of the Enlightenment project seemed to go up in a vapor of insolvency and political upheaval. You have to even wonder whether Europe could defend itself against an onrushing Jihad.

But these are admittedly gloomy thoughts for a morning so early in summer. Myself, I’m going to shop for an outfit to wear to Diddy’s annual party in the Hamptons. Coonskin caps may be oddly coming back in style as people all over America try to emulate Donald Trump and the furry creature that lives on the top of his head. Something tells me that the ladies will not be buying many Hillary-style pantsuits. Wouldn’t it be cunning if Diddy’s caterer came up with something like miniature Greek Pudding bites? That would bring a real frisson to the doings, something to chat about besides the marketing genius of Kim Kardashian."

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Meh...

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The Money Map.

This is the part of Kunstler's piece that got my attention. 

Western intellectual life would suffer immense shock as all the certainties of the Enlightenment project seemed to go up in a vapor of insolvency and political upheaval. 

Would this lead to a rebalancing of the two hemispheres of the brain which was damaged by the Enlightenment?  This whole finance thing is the result of excessive model use. No Harriet, the map is not the terrain. 

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Tsipras vs Merkel (this weekend's negotiations)

Courtesy ZeroHedge:

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Greece is the word
As ever, a great read from Charles. Thank you. I'm vascillating between wondering if this is merely Round 1 of a 10-Round bout & the Greeks will have the last laugh, and thinking that Europe deserves everything it gets for stitching up the Greeks in the first place (via Goldman Sachs).
 
My news frontpage is saturated with gloomy Greek news, my inbox stuffed full with similarly themed updates about the indignancy of Greece's continued debt servitude and future misery of its people. I'm all Greeced out at the moment.
 
So I decided to go with a brief interlude of levity. Because all those tears have to dry sometime, yes? That's right - resilience through humour.
 
 
Some years ago a small rural town in Spain twinned with a similar town in Greece. The mayor of the Greek town visited the Spanish town. When he saw the palatial mansion belonging to the Spanish mayor, he wondered aloud how on earth he could afford such a house. The Spaniard replied: ‘You see that bridge over there? The EU gave us a grant to construct a two-lane bridge, but by building a single lane bridge with traffic lights at either end, I could build this place.’
The following year the Spaniard visited the Greek town. He was simply amazed at the Greek mayor's house: gold taps, marble floors, diamond doorknobs, it was marvellous. When he asked how he’d raised the money to build this incredible house, the Greek mayor said: ‘You see that bridge over there?’
The Spaniard replied: ‘No.’
 
As of this week, all new Euros are to be printed on Greece-proof paper.
 
What are the first three letters of the Greek alphabet? I.O.U.
 
I'm investing in a new currency...the George Foreman Euro. Same as the other Euro, but no Greece.
 
Alex Tsipras has said that Greece will "Bounce Back". Just like its cheques (or "checks" if you speak American).
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It's only money

" By this measure, every nation-state on the planet is likely bankrupt"

It's only money !

Introduce a New Euro which equals 10 Old Euros. Wages, goods and services get paid in New Euros while debt, savings, pensions and other liabilities stay in the old Euros. Sorted. No longer bankrupt.

Ed

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Europa Dysfunction at the Junction

My wife and I had dinner last night over at some friends’ house, a couple who’d just gotten back from a visit to family in Portugal. The wife is Portuguese, and they stayed with her father, who has owned a small farm there for ages. He’s likely a bit better off than most. She said that throughout the visit, her father was obsessed with the news out of Greece. I’d suggested to her a year or two ago that if her family had any substantial money left in the banks in Portugal, they might want to consider moving it out of the country. My guess is that if he hasn’t already, he’s doing that now. The “post-resolution” news coming out of Greece regarding their banks should scare any bank shareholder or depositor in the PIIGS, and a few more besides.

Apparently, capital controls will likely become a continuing marathon for Greek banks. The fate of investors foolish enough to still own Greek bank shares and savings of those foolish enough to still (theoretically) have large amounts of money on deposit in Greek banks is seriously in doubt. According to Reuters, the Germans and others are strongly resisting the notion that members of the happy Eurozone family are responsible for re-capitalizing the Greek banks. But forcing Greek depositor bail-ins as occurred in Cyprus might prevent the Greek economy from even being able to function, let alone recover, (and, IMO, holds further serious implications for anyone with a brain and a bank account anywhere in the Eurozone).

Germany has a long and colorful history of burning witches and heretics. One of my friends in Germany let me know we’re about to arrive near Constance on the Bodensee there just in time for the fabulous 600 year anniversary gala celebration of the Burning of the Heretics in Constance. It happened back in those lazy, crazy days of summer 1415, before they had the internet and TV for distraction. Witch burnings are always great fun to attend until the authorities suddenly turn to start asking exactly what you were doing the last time the moon was full.

http://www.reuters.com/article/2015/07/26/us-eurozone-greece-banks-idUSKCN0Q005P20150726

“There are more than 20 billion euros of such deposits in Greece’s four main banks, dwarfing the roughly 3 billion euros of bonds the banks have issued.
Imposing a loss, something the Greek government has repeatedly denied any planning for, would be controversial, not least because much of this money is held by small Greek companies rather than wealthy individuals.

‘This is not like Cyprus where you can say these are just Russian oligarchs,’ said an insolvency lawyer familiar with Greece. ‘It’s the very community everyone is hoping will resuscitate Greece, namely the corporates. You’ll end up depriving them of their cash.'”

I’m sure that this is nothing that a few hundred meetings, a few hundred new “mechanisms”, and a few trillion spanking new Euros can’t fix. No wonder US Treasuries continue to rise in value, floating hopefully upward on the last weakening gasps of hot air emanating from the Myth of the Prudent Banker. The Myth, now embodied by Yellen, Merkel and Schaeuble, is ever vigilant, ever faithful, spreading the Gospel of balanced budgets, austerity, and as always, strict monetary discipline worldwide, at least for anyone who’s not a VSIP – very systemically important person, Too Big to Fail, Too Tubby to Flop. Let’s see – where is that monetary discipline? Only in economies being forced to fail? Hmmmmmmm, can that be right?….

  1.  
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government and taxes

One of the things I try to explain to people is, government workers really don't pay taxes, nor do they add to the GDP. As an individual they do pay taxes but as far as the government is concerned they add to the deficit/debt. A government worker making 100k, but paying 35k in taxes, is really a 65k debt that can only be covered by taxes from private/non-govt workers. So as the government gets bigger, the private sector must shrink but their tax burden must increase, or the state must borrow from future private sector workers. They also can not add to GDP, since any money they spend is money that would have been spent by private sector tax payers or future private sector tax payers. Government spending needs to be cut in half, at least, if not more. But that won't happen until the house of cards collapses, and may be not even then. 

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