The Greek Crisis: Economic Meltdown or Mental One?

Lot’s of folks have been talking about this weekend’s New York Time’s article, Wall St. Helped to Mask Debt Fueling Europe’s Crisis, in which the Times contends that “Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.”

Let’s begin with the caveat that financial innovation, including the products discussed in the Times article can serve many purposes (some nefarious), including masking risk and leverage.  We all know that.  Nonetheless, this article might be one of the least persuasive pieces of financial reporting I’ve seen since the start of the financial crisis, and that’s saying a lot.

To start, though the Times piece only vaguely describes most of the transactions at issue, at least some appear designed to rollover Greece’s debt to a later date, thus avoiding an earlier default.  Sure, that may have simply postponed the day of reckoning, but is this really Wall Street’s fault, rather than that of Greek leaders?  Deferment of this sort is only irresponsible if no action is taken to right the country’s wayward economic course – a decision firmly in Greece’s hands’, rather than Goldman Sachs’.

Second, Greece has spent more than half the years since 1800 in default – presumably, for much of that time, without the aid of financial derivatives.  (R&R, p. 98).  So who does the Times believe was fooled through Wall Street financial shenanigans?  Germany? The U.K.?  The rest of the Eurozone?  That seems unlikely.  Almost certainly the relevant powers have been aware of Greece’s precarious financial situation for some time.  Such awareness, after all, appears to be what quickly caused the loss of confidence in Greece’s ability to repay its debt after the Dubai World collapse.

Which brings me to my final point: the Times contends, no doubt correctly, that Greece entered into transactions designed primarily or solely to remove debt from the balance sheet.  But apparently, Greece didn’t need the help of sophisticated swaps to paint a rosier economic outlook than reality warranted, as it just “cooked the books” the old fashioned way.  In fact, such maneuvers are one explanation for the market’s loss of confidence.  Says Charlemagne’s Notebook in the Economist:

As a top priority, conditions would have to include a complete change in the way that economic statistics are collected in Greece, ending years of political manipulation and book-cooking so that data from Greece can be relied upon (indeed, the distrust is so deep that nobody would be astonished if even the latest Greek deficit number of almost 13% underestimates the full horror of the situation).

Did financial derivatives and U.S. investment banks play a role in the current Greek financial crisis?  Probably.  Would we still be in the same boat in the absence of financial innovation?  Almost certainly.

Related Posts:
The Modern Greek Drama: Comedy, Tragedy, or Both?  

The Modern Greek Drama, Part 2 
Verge of the Unböring (The Modern Greek Drama, Part 3)
Is 2010 The Year of Odious Sovereign Defaults?

Comments

[Eleftherios Venizelos]

Most of these criticisms of Greece come down to a neoconservative preference for military spending and corporate bailouts that benefit large companies, along with animosity towards health and pension programs that benefit the majority of a country's population. The United States had debt to GDP ratios that exceed Greece's ratio today in 1789 and 1942 (US debt to GDP ratio of 120% in 1942). Why is debt and deficit spending OK for war but not human needs? The US had a deficit of at least 12.3% of GDP in 2009 but this author and The Economist do not call that "horror" because most of it is due to excessive military spending, including large Medicaid costs due to traumatic brain injury that are never discussed. More importantly, this blogger has no proof that a high debt to GDP ratio causes slow growth or unemployment, because 1950s USA and 1990s and 2000s Japan had virtually full employment with high debt to GDP ratios and high marginal income tax rates. It is simply neoconservative prejudice to claim that Greece is doomed and somehow Brazil, India, Turkey, or China are in good shape with their illiteracy, hunger, lack of health care, exploitation and abuse of workers, slaughter of indigenous peoples, undemocratic social structures, censorship and cultural unfreedom, etc.

[Chicago bankruptcy attorney]

It seems Greece doesn't want to live up to the commitments it made oh so very recently when it got bailed out by the EU.