Greece: A History of Financial Disaster

Dionysius the Elder, a ruler in ancient Greece, ran up massive debts to pay for his multiple military campaigns. His solution? Change every drachma into two drachmas. Pulling money from nowhere to cover massive debts has seemed to be a monetary policy throughout Greek’s history.

First, let us observe the 1800s. Greek defaulted in 1843 (thirteen years after becoming a modern state), 1860, and 1893. Starting in 1800, based on economic studies, Greece has delayed payments in fifty percent of the years to the present. Moving into the 1900’s, history depicts the global economy becoming industrially driven, while Greece falls increasingly behind. Occupation by the Nazis which was immediately followed by an intense civil war made economic progress essentially stagnate. Furthermore, the prominent political parties of 1960s and 1970s alienated cultural and industrial assimilation into mainstream Europe. Greece was still essentially owned by a few wealthy dynasties, and was the opposite of a growing and thriving economy. So this begs the question why Greece was allowed into the Eurozone in the first place?

Countries that were far richer than Greece, such as Germany and France, were sensible options for a successful monetary European union under a single currency. However, turning away Greece from this effort to unite Europe was politically ignorant and the population yearned for a modernized economy. Thus, in 2001 Greece officially adopted the Euro. From 2001 to 2007 capital flooded the country and Greece was fastest growing country in the Eurozone. However, by 2012 Greece was already in its fifth straight year of a recession. The country had taken 142 Billion dollars in loans from the ECB and Greek Central Bank due to losing a quarter of total bank deposits. The Athex Composite Index consistently declined from 2007 to 2012.

Moreover, The ECB has to buy Greek Government bonds to keep differing debt markets afloat. Needing an international bailout in 2012, Greece made intense labor market reforms. Violent protests soon followed and Greek looked like a country in complete Chaos. Where are they as of today? Greece has become the first developed country to default on an IMF loan. They are now planned to receive a 7 billion euro bridge loan backed by the EU. Another bailout and more unhappy citizens in Greece. Looking at this Greek monetary policy throughout history one can just point to the simple phrase, history repeats itself.

 

Here is a one sentence synopsis:

Alpal:
Pulling money from nowhere to cover massive debts has seemed to be a monetary policy throughout Greek's history.

Their motto should really be: Greece, attempting to cheat the system since the 19th century.

 

Nice recap. It actually puts a lot of things into perspective and makes me feel less sympathy for Greece's creditors since Greece has a long history of sovereign debt defaults. A prospective creditor must take past performance into consideration before lending its money.

I don't recall who said it, but someone pointed out that Greece will be the first nation to go from a first world nation to a developing nation. There's literally no precedent for a nation to fall back to the "developing" status. Congrats to Greece for being the first of its kind, I guess.

Array
 

I believe Argentina holds that title. In 1914 "The country ranked among the ten richest in the world, after the likes of Australia, Britain and the United States, but ahead of France, Germany and Italy. Its income per head was 92% of the average of 16 rich economies" Economist. After the Great Depression Argentina never fully recovered and has stagnated ever since. A truly one of a kind economic case study that has puzzeled economists for years.

 
Best Response

I believe Spain has defaulted the most out of any Euro Union country, though.

A lot of Greeks went to the university where I did my master's. They are so defensive about the situation; it's unreal. I remember a Bulgarian classmate posted a Greek debt political cartoon on FB, and the Greeks swarmed in on defense. I (from the US) commented that it was just a joke and that no country is perfect (it's okay to have some faults here and there - how we learn, etc.), and then they swarmed me with the "Well, it's the US' fault that Europe hit the economic crisis!" "......Reeeheeeeeheeeeaallllyyy?"

It seemed like they'd do anything to not admit fault. Too much pride. I only know a few who are quiet and can acknowledge shit isn't right there. Then, yes, they want the free bailout because they forgave Germany's debt after WW2. My thought is that they've been given chances through loans for the past 3+ years now. Chances. They haven't fixed anything and no one wants austerity there (understandable, but impracticable). You know if they were on the other side, they'd be just as stringent on any deal terms.

 

How exactly is anything that has happened in the past 15 years reflective of "Greek monetary policy?"

It seems to me you guys are missing the bigger point that without a debt restructuring, that debt is never, ever going to be paid back in full. So you can either restructure the debt and keep Greece in the euro, or let Greece take matters in its own hands and do it outside the euro.

If the second option is chosen, anti-euro parties will be majorly emboldened and it's only a matter of time before the whole thing unravels. Italy's situation isn't all that dissimilar to Greece and some sort of default on their part is not something the European financial system can absorb.

Germany played this whole thing incredibly poorly and unless some kind of restructuring comes soon (like what the IMF is proposing), they'll be kicking themselves in 30 years time when the Deutsche Mark will have obliterated their surplus and they're sitting on one of the worst demographic profiles in the world.

 
GoodBread:

If the second option is chosen, anti-euro parties will be majorly emboldened and it's only a matter of time before the whole thing unravels.

Exactly. The underlying political dynamics of this are arguably more significant (given that Brussels is fighting to hold the whole European project together at the moment).

The traction that populist / extremist parties from Golden Dawn / Syrazia to Jobbik to the Five Star Movement have gained is a worry. These parties typically have two things in common, they support preposterous economic policies and tend to spout nationalist anti-EU rhetoric – until crunch time, at least (3 if you count good relations with good ol' Vlad). Eventual adoption of the Euro is a core principle of accession for new member states as its seen, at least by many in Brussels, as a vehicle for fuller integration.

Greece needs structural reforms, yes. They have failed to satisfactorily implement these since negotiations began. There is a bloated public sector and tourists and olives aint gonna cut it. But do you do it ex-Euro whilst they syphon EU funds, or ex-EU where you create regional instability. I know my preference.

 

Greece was experiencing excellent growth rates from the 1950s till 1970s. In 1981 (when it joined the then EEC) it had 2ish% unemployment and only 20ish% government debt. More to it, Greece is the top power in shipping and has an important geopolitical role. Greece was with the Allies in both World Wars and never became communist - very few countries tick these three boxes. Furthermore, Greece is a historical ("founding mother") component of Europe and given its stellar economic performance was happily admitted in the EEC.

Regarding the previous defaults it was only natural. The country was in a war zone throughout the 19th century up to mid 20th century. The conditions were so different back then that you're essentially comparing two different economies.

Regarding the current situation; I'm more with Guy Verhofstadt's camp both ideologically and pragmatically. Reforms, liberalisations, smaller public sector and some debt restructuring (it's time for the creditors to suck up some write-offs, too). What grinds my gears is not only Syriza's stance, but also Schaeuble's, Dissjelbloem's and others' whole rhetoric straight from the beginning. Syriza being in gov't is the very realization of the creditors' monumental mistakes along with previous, easier to deal with, Greek gov'ts.

Colourful TV, colourless Life.
 
Bonus:

I'm more with Guy Verhofstadt's camp both ideologically and pragmatically.

Agree.

Bonus:

Reforms, liberalisations, smaller public sector and some debt restructuring (it's time for the creditors to suck up some write-offs, too). What grinds my gears is not only Syriza's stance, but also Schaeuble's

Would have loved to be a fly on the wall between the exchanges of career politician Schauble (Bachelors, Law) and think-tank / academic Varoufakis (Bachelors, Economics; Masters, Mathematical Statistics; PhD, Economics). The internal Greek / German discourse is clearly not conducive to a bottom up push for meaningful resolution. Hopefully, the EU can prove itself as a meaningful forum rather than a German decision making juggernaut... though Syrazia behaving as a slightly less petulant child would be beneficial.

 

Greece was allowed into the monetary union because it lied about its financial conditions. Literally. It engaged in fraud; it cooked the books.

“Elections are a futures market for stolen property”
 
GoodBread:

And everyone turned a blind eye to it. It's not like the EU was unaware of this.

Source? Or were you there when they decided to admit the crooks, I mean Greeks.

“Elections are a futures market for stolen property”
 

It is unclear if the swap agreements with Goldman Sachs were conducted to portray a better debt picture, as they were used to cover FX risk on JPY denominated Greek Government bonds. Even if that was the case, the "cover up" wasn't so massive so as to warrant a guaranteed failure in the next years. If anything, from 2003 onwards, unemployment was dropping, corporations had record profits, and public debt was decreasing, too (on a relative basis). Greece had circa 120% public debt to GDP in 2010. Now it's further up to 185% . That's insane. How do you expect this package, which looks a lot like a private equity transaction, to work out? I personally don't care anymore. Creditors are going to suck up write offs, whether Greece is in the eurozone or not. The math doesn't work. Simple as that. The below article I consider sheds some good light on the situation http://www.chathamhouse.org/publication/lot-pain-so-little-gain

Colourful TV, colourless Life.
 

Most countries have had disastrous financial problems in the past, and the USA is no exception... starting with the Continental dollar.

"I am that I am"
 

Greece is a master of playing both sides of the fence. They have the confidence to do so because they know they are so strategic for NATO since the next war will probably be in Central Asia and Greece and Turkey will play pivotal roles.

 

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