Monday, July 6, 2015


A couple of points have been ignored or lost when analysts discuss the unfolding drama in Greece

First, we need to remember that Greece's entry into the Euro was built on fraud and deception. Specifically, with the help of Goldman Sachs Greece was able to cover up its true debt burden with complex derivative products. This allowed Greece to enter the Euro. Goldman Sachs made a killing in the process. 

Second, the so-called "vulture funds" - made up of market players who purchase discounted debt contracts - have made a ton of money by purchasing distressed Greek debt. They prosper with every debt restructuring by playing hardball whenever anyone suggests debt forgiveness. So, for example, when market players pay €75 million for discounted distressed debt that may have originally been worth €150 million, they gum up the works when they demand to be paid €150 million. 

Another issue that's been pretty much ignored is that Greece isn't the only country to have high debt loads. Greece has plenty of company when it come to countries where debt as a percentage of GDP (what a country produces in a year) surpasses 100 percent.

Worse, these debt loads have actually been growing, especially over the past 10 years. This means that the debt crisis we see in Greece may be little more than the financial canary in the mine. 

Put another way, what's happening today in Greece could be a trial run.

So, this is what we have when it comes to Greece. Financial deception coupled with growing debt loads - and circling vulture funds - which does not bode well for Greece, or the future of the global financial community. 

History tells us what happens when nation-states are driven into a blind alley of debt, with little or no relief. And it's not good. Debt becomes especially troublesome when it's acquired and rolled over for the sole purpose of paying obligations, with little or no concern for stimulating future economic growth. 

This is precisely what we're seeing in Greece at this time. The biggest financial players and speculators around the world, who are waiting for the bailout(s), are feeding off of Greek debt. They are not wealth creators. They are extractors of wealth, and fear that if they don't hold the line on Greece they will find themselves with smaller profits when it comes to dealing with distressed debt in Italy and Portugal (among others).

This helps explain why simply calling for higher taxes or cutting back on pensions in Greece (i.e. simple transfer payments) is a hopeless strategy. 

For now, two things need to happen when it comes to begin fixing the mess in Greece. 

First, market players who purchased Greek debt need to acknowledge that Greece's entrance into the Euro was always a forced issue. Forcing these market players to take losses on Greek debt would help them learn a valuable lesson. It might even help encourage the industry to police itself better. 

As well, without long-term plans to stimulate the economy - which a "Grexit" would help do by forcing the Greeks to embrace a devalued drachma as their currency (which helps Greek exports and tourism) - simple credits, swaps, and transfers only delay the inevitable for Greece, and the market players who feed off of this kind of crisis. 

There's more, but one thing's clear. Greece is one of many acts in a larger debt-laden play. The real goal for the largest financial players is to let Greece serve as a lesson to other debtor nations who might be thinking of negotiating or trying to establish new debtor terms. In my view Greece leaving the Euro (the "Grexit") is a good idea, especially since their entrance was always a bit of farce to begin with. 

Throw in the fact that previous governments undermined the Greek economy with their neoliberal policies and sweetheart tax deals for corporations and Greece's richest citizens and its clear that there's much more to this story than debt. 

Stay tuned.

- Mark

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