This Was Sparta

Wednesday, July 29, 2015 Politics

An exposition on the many failings of modern day Greece

Suzy’s family owns a large supermarket and she’s been asked to manage it. She’s a nice gal but one highly prone to flattery. After she takes charge of the business, some of her employees discover this weakness and begin cosying up to her. Feeling happy at the level of support she’s receiving from them, she decides to reward these faithful ones. She creates a lot of administrative posts and puts some of them there. Others were moved up to supervisory and similar supplementary positions. This goes on for a while. Eventually, she realizes that there are too many of these posts. But she doesn’t want to cut down. After all, they are her ‘valuable’ employees. So she hits upon another ingenious idea. She instead bumps up their perks. She raises their salaries and provides them with extra benefits. But because she’s spending so much, her company isn’t turning over a profit. In fact, it’s slowly accumulating losses. Her employees aren’t very honest either. Sometimes, they pocket a little and at other times a lot. But she knows she can get loans. Her city has strict financial policies and as long as she shows that her company’s deficit (difference between income and expenditure) does not exceed 3 percent of its total output, she can borrow all the money she wants. But to show that in her current condition, she’d have to do something drastic, something she hopes will never see the light of day……..

Life’s going well for Suzy now. She can borrow all she wants and her backers aren’t asking a lot of questions. Her finances seem hunky-dory with the lenders. She’s now well able to maintain her subordinates’ lifestyle. In fact, she now pays all her employees well and not just her ‘faithful’ ones. Her financial policy has changed slightly but it’s still something simple: Repay borrowed money with more borrowed money. As the years pass by, as she continues to think all’s well, she’s suddenly beset with alarming news. Her city’s most trusted trading partner has suffered a devastating financial meltdown and it has all her lenders spooked. They begin tightening their borrowing rules and suddenly Suzy finds herself unable to obtain cheap credit. Oh, what to do? What indeed shall she do? How will she pay off her debts? Now, seeing her weak, ineffective and unable to pay them properly, her employees write to her family demanding a new manager. Suzy is soon replaced by her brother Bob and what Bob discovers rattles him to the core. It seems Suzy has been fudging figures and lying through her teeth for a very long time. In fact, she exceeded her deficit cut-off by 12 percent which was four times above the limit!! Bob is now forced to go into damage control. He needs cash and he needs it fast.

Bob ponders his options. If he fires his employees he’ll have to spend time finding and training new ones and that’ll cost money he doesn’t have. So no, he can’t terminate them. If he reduces their pay checks, he’ll have a revolt on his hands and the company will sink further. Finally, he decides to take out a new loan, use it to get his business back into shape and hopefully pay it back in a few years. The lenders he approach agree to give him the money but on one condition. He has to cut his employees’ salaries, benefits and even dilute their perks. In short he has to impose austerity on them. Bob knows this’ll make him unpopular but bereft of any other choice he agrees. Back at the supermarket, his employees scream at him. But he tells them it’s either this or they all go down. So, as agreed upon he starts cutting costs everywhere but as he does so, he finds his company becoming sluggish. It’s slowly losing productivity and he suddenly realises why. It made sense actually. If initially you were paid a hundred bucks a month which was then cut down to twenty but without a proportionate decrease in work, then of course you’d lose motivation. Since the employees were unhappy, there was no customer satisfaction and without customers his business was falling apart. Ironically, the very same measures he has adopted to save his business will now probably sink it. So, he scrambles for money again.

Now, his creditors are also worried. They can’t stop giving Bob money. If he goes bankrupt, then they’ll lose their money for good. They have to save him, no matter what. So, they provide him with another enormous loan and tells him to get his affairs in order. Of course, they still want the austerity measures enforced, since they believe that’s the best way for Bob to get out of this mess. He goes back to the company and starts the same process all over again. Eventually, his employees get fed up and start clamouring for someone else to take over at the helm, someone who can put an end to all of these cuts. They find their wish soon fulfilled. Bob’s successor is a radical. A man who promises to get them out of this mess and who vows not to accept any more austerity. However his time is short. His company has to start paying back the loans but it’s too financially weak to do so. He sits down with his creditors and asks for more money and time. But he says he can’t take on any more austerity. The lenders find his stance unacceptable. They’re now getting desperate. This man’s company is pulling them all down a hellish pit and they just want to get out. But they can’t. Their fates are now tied to his, if he goes down, they all go down. Wound together inextricably with the cords of cold cruel cash, it feels like they are all sitting atop a ticking time bomb, one that could go off any second now…..

That, my friends, is the pith of the Greek crisis that’s unfurling in Europe. Suzy represents the governments that ruled Greece till 2008. Her ‘faithful’ employees were party loyalists who were awarded plum government jobs in return for their support. They drew huge salaries and enjoyed a plethora of benefits. Many public sector employees could even retire at the age of 50 with full state pension. In short, Greece had become a welfare state and pension was its biggest drain. Eventually, because of excess public spending, unwise social schemes and poor tax collection policies, its expenditure soon exceeded its income. Greece then started borrowing from its European neighbours (the lenders) which consisted of other European countries (chiefly Germany and France), the European Central Bank (ECB) and the International Monetary Fund (IMF). Being a member of the Eurozone permitted Greece to obtain money at low interest rates (5 percent as opposed to 20 percent if Greece hadn’t adopted the Euro). However, in order to keep the money flowing from these entities, Greece had to show that it was abiding by their rules. Since it wasn’t, it cooked up numbers and hid its real debt (which was truly a mountainous figure!!). Things were going alright for Greece until the 2008 sub-prime mortgage crisis in America (the trusted trading partner). This dried up credit everywhere and suddenly Greece found itself in a fix. It wasn’t until a new government (Bob) came in that its lies were uncovered.

Then came the bailouts. The first bailout of €110 billion was sanctioned by the European Commission (EC), the ECB and the IMF (these three entities are collectively called the troika) in 2010. But they also insisted on austerity and other structural reforms. However, this proved insufficient to pull Greece out of its woes. Therefore, in 2012 another aid package was finalised (Bob’s second visit to the lenders). This would inject Greece with another €130 billion. Now, Greece’s dues to its creditors may be outlined as follows: Germany - €57 billion, France - €43 billion, Italy - €38 billion, Spain - €25 billion, other Eurozone countries - €32 billion, ECB - €27 billion, IMF - €24 billion, other loans - €11 billion, private lenders - €63 billion. In short, though Greece had received a total bailout package of €240 billion, yet its total debt was a mind boggling €320 billion.

However, because of the stringent spending cuts and scale backs, the Greeks had enough of the whole thing. In a legislative election in 2015, they voted a new government into power – the left wing Syriza party headed by Alexis Tsipras (Bob’s radical successor) who promised to end the austerity programme and bring Greece out of its debt. One of its first acts was to renege on the terms of the current bailout programme. In response, the creditors suspended all remaining aid packages to Greece until the government came to their terms. Soon, with an impending financial crisis on their hands, the Syriza government had to come to the negotiating table. However, now the government was in a dilemma. If they did not accept lenders’ terms of austerity, they would have to default and exit the Eurozone (an event called Grexit). This would have devastating consequences on the world economy and was something everyone wanted to avoid. However, to avert this fate, they’d have to agree to the lender’s terms. But this went against their election pledge wherein they had promised the people to take off the yoke of austerity from their shoulders. So, to wriggle out of this quandary they instead held a referendum where they asked the people what to do. Should or should not the government accede to the lenders’ terms? The people had always been against these cuts which had made their lives difficult. They voted with a resounding no. This let the government off the hook. But most Greek Parliamentarians realized that austerity was indeed the only way out. Greece needed money and running away would only cause more harm in the long run. So on July 22 2015, the Greek Parliament consented to the austerity measures. This would give them an additional €86 billion from the European Union. However negotiations are still going on and Greece’s problems are far from over because it’s going to need more money and this will require the consent of parliaments of several EU members.

What’ll really happen if Greek exits? For one thing, it’ll have to abandon the Euro and go back to printing its old currency, the drachma, a process that’s likely to take several months. If Greek reinstates the drachma, then it can reduce its unemployment, slash debt and shake off austerity. But it comes at a price. Doing this would reduce the value of the drachma and holders of Greek debt in foreign countries would suddenly find themselves with money that’s just lost a lot of value. This could destroy many of them and send shock waves throughout the stock market. Also, this would trigger inflation in Greece and prices of imports would drastically increase. Foreign direct investment would suffer and would severely dent the country’s image. Apart from all this, if Greek can’t pay back its loans, the banks of the countries that lent Greece money would find themselves bankrupt. Consequently, they’d be unable to repay loans they had taken out from banks in other countries. As is evident, there’ll be a domino effect that can soon bring the global economy to its knees. Furthermore, market analysts would then look for the second weakest link in the chain, for instance Spain. Suddenly Spain finds its borrowing costs higher. It’ll end up not being able to service its debts. Then countries that have loaned to Spain would find themselves short on cash and unable to pay back their loans – thus causing a ripple effect that’ll soon result in another worldwide financial meltdown.

As things stand now, the European Union is dangerously close to a precipice. All it’ll take is a small push and things can go veering out of control. Economic downturns often lead to political crisis, civil unrests and possibly even war. The Second World War was born out of such maladies. We certainly cannot afford another war, not here, not now and not ever. The ball is in Greece’s court now. Let’s hope they can smash.