Greece and its perilous financial state is a prime example of how the EU in general and the Euro in particular doesn’t work. If you share a currency with another sovereign state you have to be sure that state has reasonably similar financial safeguards to your own, that it is not institutionally corrupt and that there isn’t a widespread culture of tax evasion. OK so corruption and tax evasion exist in every country, but the Greeks seem to be in the Olympic class.
The latest bail out is of course a short term fix for a problem that will re-emerge sooner rather than later. Imagine Europe as a family living under the same rules and codes more or less. Greece is the inconvenient son who keeps gatecrashing the family gatherings. Turning up drunk with no money, promising to change his ways. “Just help me out this once. I’ll stop the drinking if you just give me some money to get back on my feet – honest!”
Check out the following graph and gulp!
I don’t know how much of the UK bank debt to Greece is borne by the ‘nationalised’ banks but it could be the government debt is higher than depicted here. But jeez! look at France and Germany’s exposure.
The calls now seem to be that Greece needs to privatise huge chunks of their government owned companies in the way that the Germans did with East German government owned assets at reunification.
However,the Treuhand agency, used by Germany to sell off 14,000 former East German firms between 1990 and 1994 failed to deliver any profit, oversaw huge job losses and eventually closed its books with a deficit.
Then there’s the fact that the bail out has striking similarities with what happened in Argentina in 2001. As Friday’s Financial Times reported:
“It was June 2001 when Argentina, struggling with a sovereign debt burden, doubled down on a losing bet by executing a giant voluntary bond swap to push off repayment to the future. Six months later, it crashed into the biggest sovereign default in history.
Ten years later to the month, Greece is threatening a new record for government bankruptcy. A plan has emerged, originally from Paris, to buy time by persuading the owners of Greek bonds to roll over their holdings. The plan’s viability – and final details – remain to be seen. But one thing is clear: addressing a solvency crisis with a series of short-term liquidity fixes neither solves the problem nor invites confidence in those tackling it.”
Worries over Greece seem to have eased over the weekend with the Euro rising in value, but I can’t help thinking that the next panic isn’t far away.
As a simple soul all I see is that at each turn and each bail out, the countries above are exposing themselves to greater and greater risk. One of the first rules in business is not to throw good money after bad. It looks as if that is precisely what is being done here.