3 May 2010

PARIS –  Ah, romantic springtime Paris! Angry farmers  drove 1,100 tractors through the city of Light last week. They fired volleys of wet manure from a terrifying farm machine.  Train unions, teachers, and postmen threaten more strikes. 

But France’s  biggest headache has been  financially shattered-battered Greece and other members of Europe’s Club Med of debt.   France’s banks are Europe’s biggest holders of Greek debt, some $67 billion, that is fast losing value.   There is was even talk of a bond market crash.

These worries have been postponed by this morning’s announcement by the European Central Bank of a long-expected rescue package for Greece.  The European Bank and the International Monetary Fund are lending Greece 110 billion euros, or $146.2 billion,  over three years.  The European Union is contributing 80 billion euros; the IMF the rest. 

Greece was clearly headed for a default on its massive debt, a catastrophic act that could have ignited a chain reaction among Europe’s other financial weak sisters, Spain, Italy, Portugal, and Ireland.  Doom was imminent: Athens was facing payment of 8.4 billion euros – which it did not have – on 19 May.    

Today’s rescue package heads off the default.  But will it be enough?  At least the euro has been stabilized, for the time being.  In a very  important decision, the European Central Bank has allowed Greek bonds to be used as collateral and bank reserves. 

Greece has dodged a near death experience, but it will have to pay a very high price for decades of profligacy.  Athens must cut 30 billion euros from its budget, which is now 115% of gross domestic product.  Even so, by 2013, Greece’s debt will hit 149% of GDP before it begins to drop.   

The EU and IMF have forced Athens to embark on a painful, three-year austerity program to save 30 billion euros.  One can almost hear the howls of protest from Greece all the way here in Paris.   Pensions, welfare payments, defense, and education will be slashed.  Taxes will rise, with VAT going as high as 25%.  Greece’s financial bacchanalia  is over. 

 But this is precisely the right medicine for Greece’s dangerously ill economy and dishonest bookkeeping.  Too bad the United States is not being forced to swallow the same bitter remedy.

What is it about Mediterranean sunshine that makes people forget the basics of sound finance, and live on debt?  

The great 17th century French fabulist Jean de la Fontaine  epitomized  financial imprudence in his wonderful tale of the grasshopper and the ant.   The grasshopper parties all summer while the ant labors to store food. When winter arrives, the imprudent grasshopper starves in the cold. The ant refuses to help him.  

Portugal and Spain still face the risk of a growing financial crisis.  Foreign exchange speculators mercilessly savage currencies of nations showing the slightest signs of weakness.   Bond rating agencies have downgraded Greece and Spain to junk status. 

Last week, the Euro dropped to its lowest level in a decade. 

This decline should boost Europe’s exporters,  particularly its leading one, Germany.  But the Club Med crisis threatens the EU’s financial institutions with another near death financial experience after 2008.

Greek government bonds played a similar role in the EU’s growing crisis that bogus mortgage-based securities did in America’s self-inflicted financial disaster. 

German, French, Dutch and Italian banks hold billions of depreciating Greek and other Club Med bonds. Unless these securities were  shored up, Europe’s banks would have had to sharply cut lending and may themselves begin to wobble.    

All eyes are now on Spain.  Like that other sunny but financially derelict paradise, California, Spain’s economy soared on inflated housing and now is in deep trouble.   Fortunately, Spain’s well-run national banks so far remain solid, though its savings and loans banks are a mess.

Up in the gloomy north, the fretful German ants are furious at the grasshoppers of the south.  As in the US, irate German taxpayers are asking why they should bail out Greeks who pay little taxes and retire around 60 on generous pensions?   Why bail out Spaniards who gambled with their houses, as did so many Sun Belt Americans?

Germans have an admirable tradition of financial rectitude, a product of stern Lutheran teachings and frightful economic suffering after two world wars.   The former German mark used to be one of the world’s most solid currencies.  The euro used to be called `the Deutschmark in disguise.’  But not after it was expanded to the sunny south. 

Germans were painfully torn between telling the Greeks to go jump in the Aegean and trying to hold Europe’s finances and the European Union together.  German Chancellor Angela Merkel faces a key election May 9th  in North-Rhine Westphalia which has more voters than Greece.  

Some German wits proposed Greece make good on its debts by selling its gorgeous islands.

European critics claim the European Union expanded too far, too quickly, and should not have admitted Greece, Portugal, Bulgaria, Romania, and Cyprus because  they were unready for admission to the northern rich men’s club.  Most Germans wanted Greece  evacuated from the euro zone – `schnell!’

These poor but sunny Club Med nations tried to keep up with their rich  northern neighbors by borrowing like crazy and hiding their debts through sleazy, Goldman Sachs-style financial hipper dipper.

The bouzouki music has stopped. Club Med’s credit cards are maxed out. The German repo men are at the door. 




copyright  Eric S. Margolis 2010












This post is in: Euro Zone, Europe, European Union, Greece

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