Global Crisis/Innovation Blog

Greece, The Movie:  If You Liked Lehman Bros., You’ll LOVE This One!

By Shlomo Maital

  If you enjoyed the dramatic movie featuring Lehman Bros.’ failed rescue and bankruptcy, starring Barclay’s, Treasury Secretary Paulson, Fed expert Geitner, and a cast of thousands, you must not miss the latest version. It’s called Greece – the Latest Bailout.   Here are the details, according to the New York Times ‘systemic risk’ reviewer Liz Alderman (June 5/2011):

   “A year after providing an aid package of 110 billion euros, or $161 billion at current exchange rates, officials are considering whether to lend Greece an additional 50 billion or 60 billion euros as the country struggles with a deep economic downturn.  Even if Greece is pulled from immediate danger again, economists say, European leaders face the prospect of providing still more aid over the next several years if Greece cannot revive its economy.  “I don’t see how Greece can eventually avoid some kind of default,” said Martin N. Baily, a senior fellow at the Brookings Institution, who served as chairman of Council of Economic Advisers under the Clinton administration. “It’s hard to see how you can avoid the need to finance this over the next five to 10 years.”  ”  (NYT

   Greece can’t redeem its bonds without new borrowing and without extra tax revenues. Taxes are down, because the economy is down, because there is deep distrust of the government’s ability to manage the country.  New borrowing is tough, because markets are becoming increasingly fearful.  And interest rates are rising, increasing the debt burden even more.  Greece is heading toward a debt burden of 160 per cent of its GDP, which is unsustainable.

   But here is what nobody is saying openly.  If Greece falls, like Lehman Bros. it will take down many other players far away from Greek shores.  American and Chinese banks apparently have very large exposure to Greek debt and will lose heavily in the event of a Greek debt default, even a partial one. (The word used is “restructuring”, which in simple language means, wiping out a major part of the debt).  This is partly why there is heavy external pressure on Europe to bail Greece out again..and again, and again.  There is serious systemic risk here, because a Greek default would shake the system and cause severe shock waves, just like Lehman Bros.

    The rescue of Greece depends on Germany’s OK, and for the moment Germany is not cooperating.  Germany is fed up with bailing out those incompetent Greeks, as they see it. 

   I’m certain Greece will eventually leave the euro and restore its currency, the drachma. There will be a major short-term crisis, because Greece’s euro debt will largely be in default. There will be inflation, a serious devaluation – and a new beginning for Greece.  This may be the model for Portugal and Ireland as well.  The question is, how long will it take before serious leaders bite the bullet and do the inevitable?  How much systemic risk will we have to endure, until someone steps up to the plate and takes charge and tells the truth?  And how many more times will American banks have to be bailed out, at the expense of ordinary working people?  The people of Greece deserve better.