Nov 4, 2011 12:31pm

An Idiots Guide to the Greek Debt Crisis

ABC news

Amid expectations that Greek Prime Minister George Papandreou will resign soon, Greek
politicians today worked to negotiate a power-sharing deal between rival parties that would
secure a $179 billion (130 billion euros) rescue package for the countrys economy and the
promise of a savage new round of austerity.
But fears of widespread bank failures remain despite the likely deal, which has been
championed by the Franco-German Merkozy alliance. Large firms in those countries stand to
lose the most if Greece rejects the bailout and elects to default.
At the heart of the crisis, though, is the European Union, an economic and political institution
forged over decades, sealed with a treaty in 1993, but only, truly made real in 2002, when most
of the current member states dropped their currency in favor of the common euro. For centuries
a breeding ground for war and imperialism, Western Europe had bound itself together in peace
and apparent prosperity, with a supranational government all its own to be quartered in
Brussels.
Its anthem: Ode to Joy.
Things have changed. While most major banks remain multinational (with interests around the
world) their errors some would say crimes have brought renewed focus on the sovereign
state. Today, with Greece on the edge of default, the euro zone nations have a new
catchphrase: Exposure. As in, how much exposure do our banks have to the bad debt held
by yours.
Its enough to make ones head take an Exorcist-style lap around the neck. But here, below, is
a simple guide to this latest and most important chapter in the crisis. The results in Greece will
likely determine, and certainly predict, the fate of the European Union. This is the least you
should know.
Why is Greece in debt?
Like any state (or person, for that matter), it spent more money than it took in. After the switch to
the euro, the traditionally strong Greek public sector saw wages rise to ultimately unsustainable
levels. To compound this, the retirement age in the country is low (by Western standards) and
benefits are generous.
But that alone is not enough to sink an economy.
Mass tax evasion, on the other hand, can certainly do the trick. And it did in Greece. When
people and businesses dont pay their taxes, it limits revenue. So when the money inevitably ran
out, Athens turned to European banks for loans. Soon, the government was borrowing billions
and those debts, like subprime mortgages in the United States, were often repackaged as

c0mplex commodites and sold off around the continent. Everyone, especially banks in France
and Germany, wanted a piece. Now they have it.
Why does Europe indeed, the world care so much about Greeces debts?
One of the perceived perks when Europe got together on a single currency (Greeks, for
instance, gave up the drachma for the euro) was that a strong Europe could prop up an
individual state in a time of need. But whats happened is that Europe itself has become too
weak, in the aftermath of the global financial meltdown, to bite the bullet on a country like
Greece. A default would shatter otherwise monetarily strong countries like Germany. The
Germans, like the Americans, would be left with a host of too big to fail banks ready to do just
that.
What kind of deal has the EU offered the Greeks?
There have been a few already, and certainly a handful more are in the works, but it boils down
to this: European banks will take 50 cents for every dollar owed to them by the Greek
government. In exchange, Greece must impose what many have described as a crushing
austerity. That means no more early retirement, reduced pay for public workers (the ones who
manage to keep their jobs), large-scale cuts to social programs, and a staggered repayment of
the reduced debt.
Why did Prime Minister Papandreou originally call for a referendum?
As you might imagine, austerity is a dirty word in large parts of Greece. Many people there
believe the country is being unfairly routed by reckless spending, predatory bankers, and
subsequent cutbacks by the government.
Papandreou, one assumes, didnt want to be the guy everyone* blamed for taking the EU deal.
So he proposed a vote. A referendum. This seriously worried the rest of Europe, as stock
markets cratered on fears that Greek voters would spike the bailout. The PMs decision was
scrapped after foreign leaders (and some influential Greek politicians) put pressure on his
governing coalition, which might still break any minute now.
*There have been riots in Athens and across the country. Anti-austerity protesters were further
radicalized when three of their own were killed during a clash with police last year.
Why are the Greeks so reluctant to take the bailout?
Pete Morici, a professor at the Smith School of Business at the University of Maryland and
former chief economist at the U.S. International Trade Commission, explained it rather well in
his latest column:
[In exchange for] aid from richer EU governments, Greeks must accept draconian austerity
measures, he wrote.
These would further drive up unemployment, and shrink Greeces economy and tax base at an
alarming pace, placing in jeopardy eventual repayment of Athens remaining debt.
As currently constituted, a single currency may serve the One Europe designs of France and
Germany, but make Greece and the other Mediterranean states nothing more than the victims
of a northern conquest.
Greeks who oppose the deal and even many who support it only as a means of staying a
member of the EU dont want to end up like an American post-grad, forever in debt to the
banks that provided college loans.
What would happen if Greece defaulted on its foreign debt?
The first thing you would notice is a massive drop in stock markets from the U.S. to Japan, and

all across Europe. It is extremely important to understand that what happens in Greece will be
seen as the way forward for a number of other countries Spain, Portugal and Ireland, to
name a few. Some believe Italy could follow suit. Default by the Greeks would likely mean other
sovereign states to follow.
Strictly within Greece, it wouldnt be as bad. Relatively speaking. They would drop the euro and
return to the drachma, which would, in turn, be severely devalued. Not great news for Greek
tourists planning on a trip abroad anytime soon, but very good news for exports, which would
become extremely cheap, like those coming out of China or other, smaller developing markets.
Outside of Greece, it would be a big mess. German banks, and maybe French too, would need
massive bailouts. The prospect of those defaults in other debt-ridden countries (see above)
could cause a run on the banks. Even more money would leave the market. And when money
leaves the market, demand drops. When demand drops, economies crater.
What would happens if Greece accepts the EU deal?
Now that Greek PM George Papandreou has called off the referendum on the deal a vote
would have been very close as polls indicate the Greeks are very closely split on the EU
proposal this is the most likely outcome. Greece would see its debt cut in half and be made
to enforce the tough austerity discussed before. Expect riots. Banks around Europe would take
a haircut but remain, for the moment at least, solvent.
Greece would pay over time, but most of the money right now would come out of a fund
sponsored by the stronger state economies from Europe and the IMF. In short, everyone would
relax, safe in the knowledge that the global financial system weve all come to know and, well
the system weve come to know would keep on spinning for at least another day.