Greece Crisis. A Tragedy, A Lesson

Greece Crisis: All markets are going down. Gold prices are rising. Another crisis is imminent. 2 countries have led us here. One an old culprit, second an unlikely offender.

The obvious culprit is Greece. Let’s start with a brief history. Greece was never a star performer, but it trundled along. Then came the ambitions of the leaders of Germany and France to leave a mark, and make an international union such that the world has never seen. They created a common economic zone, and a common currency. Greece lied about how well it was doing to enter it, and enjoy the benefits of a larger market.

Now Greece could borrow at much cheaper rates, because they were buying in a currency that had Germany’s backing. And boy, did they borrow. There were a few years of artificial prosperity. Both public and private debt soared. But it was not much of a problem as banks kept financing, they were flush with money. This was the time of the sub-prime bubble of early 2000s.

In 2007, that bubble burst. Credit stopped flowing freely. Banks not only stopped loading more and more credit, they started asking for their money back. How rude of them! Not even in a position to pay back the interest it owed, the Greek state did what states always do. Started to threaten disruption if payment is demanded.

Greece is a haven for government workers. They are famous for not working, and never being held accountable. On top of that, they retire at the age of 55, and keep 80% of their highest salary as pensions. And the state employs a larger fraction of population than rest of Europe. The international community wanted to curb the expenditure, and wanted them to work longer, and have slightly lower pensions. Unions started agitating for their “right” to earn without working.

Promptly, an even more leftist party was elected. They painted Germans as villains and themselves as victims. There are huge agitations and riots against the people whose money the Greeks have and whom the Greeks refuse to pay back. They in fact are going to hold a referendum to ask the people whether they want to pay or not. Great idea. I wish government asked me whether I want to pay my EMIs.

All this profligacy and the belligerence that has followed has its cost. The financial system sees a high risk in doing business in Greece and thus does little business. Even the most eligible candidates don’t get finance because the banks are jittery. The Greek banks are forced to lend, so they do, and their health has been going down.

And this is where we are. The Greek banks have lost the trust of even Greek citizens, and the government has been forced to declare an extended “holiday” on the banks. Greece seems to be heading out of the euro zone, and euro will have its first defection. The fear is about the what this means for future of Europe, and the future of the sanctity of contracts. If that is not maintained, we are in for another round of slowdown.

The good news is the other “poor relatives” of Europe like Portugal and Spain remain stable so far. And the best news is that the India story remains intact.

Another reason to be positive towards India is that the dragon up north is the other, unlikely, reason for the panic today. More on that later.