In the past few months, the world has been watching the economic crisis unfolding in Greece. Most of the voices in the global discourse about the crisis foresee far reaching consequences for Europe and the world. I must dissociate myself from those voices and say that such prognostications are not based on Greece's real difficulties. There is no denying that Greece has substantial fiscal problems. However, at the same time one must remember that the European monetary union has political opponents that are now playing their hand and aspiring to its collapse. No less importantly, one must remember that financial speculators are also players, among them the big investment houses and hedge funds. They gain from instability, and if they can manage to direct it, they rake in huge profits.
Greece's macro-economic numbers are bad, but they certainly do not point to inevitable insolvency. To bolster the impression that the crisis is big and unavoidable, the public and media discussion of the crisis in Europe has been spiced by stereotypical characterizations of the Greek people as lazy, corrupt, devious, and indulged. All this supposedly demonstrates that the situation will only deteriorate, and that Greece is incapable of coping with its difficulties.
So what is real in the crisis in Greece, and what is blown out of proportion by interested parties?
The facts
The global crisis has sharpened the political debate between fiscal conservatives and their opponents. The debt-to-GDP ratio together with tax reductions are the sacred duo of conservative economics.
It is not surprising that the rating agencies, which are US companies the problematic nature of whose ties with Wall Street has recently been exposed, use the debt/GDP ratio as the most important figure, almost to the exclusion of all else, in their sovereign rating reports.
Greece's debt/GDP ratio is the highest in the euro block, at about 115%. If a debt/GDP ratio of 115% heralds insolvency, then Japan (190%), Singapore (120%), and Italy (117%), are in similar straits. On the other hand, Portugal (77%) and Spain (50%) are in better shape than Israel.
Furthermore, the debt/GDP ratio does not reflect a country's ability to pay its debts by raising taxes (mainly on the wealthy), and not just through spending cuts that harm growth. In this respect, Greece actually has considerable room for maneuver, because of low tax collection rates in the past.
Even Moody's did not think that Greece could not overcome the difficulties. After it downgraded Greece's debt rating from A1 to A2, Moody's published a report on March 3 (about three months after the crisis began) in which it says that Greece is a wealthy country with a developed and advanced financial system and that it borrows in its local currency, so that any constraint on its ability to raise money is a price constraint and not a quantity constraint. The report goes on to explain in detail why Greece, which up t now has met all its obligations, can reduce its debt at a rate that will restore its fiscal stability. According to Moody's, if Greece needs aid, it is only in order to protect the price of raising money.
But Moody's report had no impact. The ball was in the court of the media and the CDS market (a derivative instrument representing insurance against insolvency), which is known as a market in which it is easy to distort prices. There is already international consensus on the need through regulation to ban it existence in its current format. The rating downgrade ahead of the date when Greece had to rollover existing loans supplied the interested parties and the speculators with the lever to induce panic.
When yields on Greek bonds continued to rise, the rating agencies continued to downgrade their ratings, not on the basis of new information, but on the basis of the fall in the prices of the bonds themselves and on the basis of hysteria in the media. According to them "at such high costs of raising money, Greece will find it even harder to meet its obligations." It makes sense.
The media
If you want to fan the flames of a financial crisis, manipulation of media coverage is the main means. Media coverage of the debt crisis in Greece not only inflated and accelerated the process; it became a central part of it. The coverage swallowed up the crisis, and the basic facts were almost forgotten.
The chief reason is that the main providers of information, of which the most prominent are Bloomberg and Reuters, are called "news agencies", but in fact long ago became a platform for the leading players in the financial markets to promote their point of view. The overwhelming majority of the content provided by these agencies originates with interested parties. It's interesting, newsy, but biased.
When hedge fund managers, big investment houses, and those who work for them directly and indirectly, provide assessments and forecasts, they have an agenda to influence the direction of events. What makes the problem worse is the fact that the news agencies are almost the only sources for investment advisers in all the world's financial systems. They are also the main providers of material for business Internet sites.
Thus the stance of the leading players is disseminated in the Anglo-Saxon communications media as the basis for the experts' opinions. The unanimity that was the outstanding feature of the coverage of the crisis in Greece was an expression of that bias.
Germany
The antagonists of the euro and the speculators found an ally within the euro block: German populism. From the beginning of the European project, Germans accepted it with mixed feelings. Within a united Europe, Germany loses its uniqueness. But that was precisely the declared aim of the union: when Germany is part of a united Europe, there are no European wars.
Although Germany is the greatest beneficiary of the European Union and the euro block, the Germans feel that Europe lives at their expense. As the largest economy in the EU, Germany makes the largest contribution to its budget, but the EU's budget is small, about 1% of the GDP of each member state. This expense pales into insignificance in comparison with advantages from which Germany benefits.
To see how far Germany's populist narrative inverts reality, you only have to remember that the fact that Greece has a trade deficit (for which Greece is guilty) works to the benefit of the other EU countries, and first of foremost to the benefit of Germany, which is the leading exporter to Greece, to the tune of $7.5 billion. Salary costs in Greece (another Greek fault) have financed private consumption in Greece, which has financed German exports.
The accession of Greece and the "weak" countries to the euro block generated a spiral of rising prices, which brought in train wage rises. One of the reasons is that exporters' prices, chiefly of German exporters, became uniform in the euro block despite the gaps in purchasing power between the populations in the different countries. Again, Germany gains.
The aid to Greece will not cost the German taxpayer anything. Germany will lend to Greece at 5% while Germany itself raises money more cheaply. Greek recovery will serve the interests of the EO and its member states beyond the common interest in preserving the stability of the euro. Despite this, German nationalistic populism has broken out again in an ugly way, and Chancellor Merkel did not have the courage to tell the Germans the truth.
Summary
Greece will not go bankrupt. Europe will come to its senses and lead a global move to ban the use of CDS instruments for speculative purposes. Europe will probably act to detach itself from dependency on the ratings agencies that are influenced by US financial interests.
The writer is a former senior banker and was in charge of foreign relations at the Ministry of Finance.
Published by Globes [online], Israel business news - www.globes-online.com - on May 6, 2010
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