Why the Greek Tragedy is Just the Opening Act

Sajai Jose

Alexis Tsipras, the first Left Greek Prime Minister. Credit: SpaceShoe/Flickr, CC 2.0. Cover image of old woman in Athens is also by Spaceshoe

Greece has become the first developed country to default on an International Monetary Fund loan, itself a fraction of a €323 billion national debt – equivalent to more than 175% of the country’s GDP.

Responsibility for the crisis has been pinned on, among others, the “Gucci-wearing thieves” of Goldman Sachs, one of the world’s largest investment banks. Whereas, Greece’s creditors, together known as the “troika”- the European Central Bank, the International Monetary Fund and other European countries (represented by the EU commission) – blames it on Greek profligacy.

In a way, both sides are right, but the question worth asking is why a default by tiny Greece, with a mere 2% of the EU’s population and 1.2% of its GDP, gives the impression of such high stakes riding on it. And if Greece is such a small player in the EU, it’s still smaller in global terms. So what explains the world’s overwhelming interest in Greece?

But first, consider these facts, all from the Eurozone:

Cyprus: Accepted €10 billion bailout from EU in March 2013. A 2012 IMF estimate showed that Cypriot banks have €152 billion in outstanding loans or other money at risk, eight times the country’s GDP.

Ireland: Accepted €67.5 billion bailout from EU in November 2010. Will continue to pay off emergency loans into the 2030s.

Portugal: Accepted a €78 billion bailout from the EU and the IMF in May 2011, but later walks out following public protests, only to follow up with deeply unpopular austerity measures.

Spain: Asks the EU for up to $125 billion as capital buffer for troubled banks in June 2012, but later walks out due to public protests against the terms imposed.

Italy: Approved $40 billion austerity package in December 2011. Italy’s debt is €1,900 billion, three times the debt of Greece, Portugal, and Ireland combined, and 120% of its GDP.

That’s not all; less well known is the dire economic straits of France, one of the financial pillars of the EU. Recently, Wikileaks released a US National Security Agency intercept from July 2012 which quoted the then finance minister Pierre Moscovici describing the state of the French economy as “far worse than anyone could imagine”. In his communication, Moscovici called for drastic measures to be taken to rectify the situation, but there is no evidence of that having happened.

The news from the rest of the world isn’t all that better. The same combination of bad practices and worse policies that has brought the Greeks to the cliff’s edge – unrestrained spending and cheap lending, exacerbated by the shenanigans of big private players – are today rampant elsewhere too.

The Chinese bubble bath
China, the world’s number two economy and the engine of global economic growth for decades, saw domestic stock markets climbing to near-historic heights this year, creating $6.5 trillion in “value” for investors in just a year’s time. Many factors have been cited as to why this phenomenal growth, never achieved before by any other stock market in a similar timeframe, is a bubble: the extreme volatility of the Chinese markets, the fact that the boom has been fuelled by borrowing, and above all, its disconnect with the real economy (China’s GDP growth rates are at their lowest point in 24 years).

The bubble may have already popped, since Chinese markets fell by almost 25 percent over the last two weeks, although latest reports indicate that a crash may have been temporarily averted by the People’s Bank of China, which has cut interest rates to a record low.

China’s housing bubble, which many observers have warned about, is no less scary. In 2014, prices in China’s overbuilt real estate sector dropped by 4.5%, the first such drop in nearly two decades. But, this hardly had any effect on markets, and over 60 million empty apartments still lie vacant in expectation of buyers. Once you include related industries like steel, cement, furniture etc, the sector accounts for a nearly 25% and 30% of China’s GDP, which makes it critical for China, and in turn, the world.

China is also notorious for meddling with stats and promoting ‘positive’ economic news through state media, which means the world has no clear picture of the actual state of its second largest economy.

The American casino
But what about the United States, the world’s largest economy, and home to the default global currency, the dollar? Signs are that a stock market bubble is building up there too. To take just one startling fact, the price to earnings ratio – the valuation of share prices vis-à-vis per-share earnings – of US stocks is now 27.22. It has reached such heights only twice before – on Black Tuesday before the Great Depression of 1929, and before the dot com bust around 2000.

Alternative analyses show that official U.S. statistics present a rosier picture of the key facts on every count – from GDP to inflation to unemployment. Like China, the U.S. too is covering up the actual state of its economy to artificially boost investor confidence. That may now be unraveling, with reports indicating that key financial insiders – “the smartest money” – is liquidating stocks at a record pace, selling “everything that’s not nailed down”.

QE: the financial system on life support
It’s not puffed up stats alone that’s holding U.S. markets up; much of it can be traced to the controversial practice known as Quantitative Easing (QE).

Described by one commentator as ‘the most important thing on the planet‘, QE was originally deployed by the U.S. Federal Reserve to enable markets to recover from the 2008 recession, but has since spread worldwide.

Officially, it involves a central bank pumping capital into key financial institutions so as to boost liquidity and spending. What this translates to in practice is the digital creation of money, disconnected from, and as a substitute for actual economic activity.

Looked at another way: if money’s is nothing but a measure of value for goods and services, then QE ‘frees’ money from its real world moorings and turns it into a ‘good’ that can be freely produced whenever a central bank chooses.

QE, then, is that improbable thing, a force that corrupts money itself. No wonder then that it has been described variously as the greatest subsidy ever invented for the super rich and the ‘greatest con ever sold’. It is a concept so fundamentally unsound that in any other planet it would have been considered racketeering, plain and simple.

Governments have always printed money as a quick fix for emergencies, but QE takes this to a dangerous new level. Assets flowing from QE now form a sizeable chunk of GDP in many major economies: U.S. (20%), U.K. (25%) and Japan (40%). Against considerable opposition from Germany, the European Central Bank recently committed to a QE programme worth $1.3 trillion, which it says will counter deflation and revive a near-stagnant economy.  China too has followed suit, revealing the extent of the world economy’s dependence on QE.

Originally a life-saving drug for markets in crisis, QE is today used as a steroid. It is not surprising that markets have become addicted to it; because, in effect, QE is a reward for bad behaviour, perpetuating financial crises that wreck whole nations but from which a few private players emerge richer every time.

An Indian exception?
RBI Governor Raghuram Rajan, indirectly targeted QE recently when he remarked that nations were trying to “create growth out of nowhere”, pointing out how this was reminiscent of period before the Great Depression. Curiously, Rajan’s former employer, the International Monetary Fund, lost no time in countering his claim, while his present employer, the RBI, too  attempted to ‘clarify’ them. Clearly, the former IMF chief economist and present RBI boss was on to something!

It’s well known that Rajan has always favoured an economy driven by domestic demand, which was why he earlier questioned the Modi government’s Make in India campaign. He had warned that the initiative, which seeks to make India an export-based manufacturing economy like China, would also make India more vulnerable to the ups and downs of an increasingly unstable global economy.

India is one of the few major economies that have not embraced QE, even if it has flirted with similar measures in the past. But, the fact is that India too has adopted the same unsustainable economic model that has brought major economies to this pass. It remains to be seen how long Rajan’s prudent financial approach can counterbalance the government’s ill-advised economic policies.

House of cards
Economics factors only partially explain the ongoing global slowdown. In fact, they mostly reflect underlying processes which are rarely ever discussed – in this case, the physical limits to economic growth – chiefly resource depletion (shrinking pie), resource competition (shrinking slice of the pie).

And if the world’s economic foundations are shaky, even establishment figures have taken note that the financial system it supports is practically out of control, and endangering the very notion of democracy. It’s a far cry from the rosy picture of the future painted during the early days of economic globalization.

The very fact that economies today need to be propped up by such deeply unpopular – and for the most part ineffective – methods as QE, is the clearest indication we have of a financial system teetering on the edge of another crash, and the desperation of its masters to prevent it. They may once again be able to avert disaster – but only thanks to policies like QE. The trillion-dollar question is; for how long?

To get back to the original point about the panic over Greece: the answer must be found in the increasingly fragile – and sometimes plainly fraudulent – methods the global financial system now depends on. It is plagued by so much uncertainty that even a relatively minor event – such as a Greek default – could trigger a chain reaction that could bring the entire house of cards down.

Indeed, the world is right to worry about Greece.

(This article was originally published by TheWire.in)