Boomerang- “And they invented Math”

I thought the chapter title was exceptionally clever as this section of the book focuses on Greece’s role in the global financial crisis and their many financial miscalculations.

In the 1980’s-1990’s, prior to adopting the euro, Greek interest rates were a full 10% higher than German interest rates. As people felt the Greeks were far less likely to repay, many Greeks were never really able to use credit cards or have mortgages. In a modern world that basically revolves around credit, this system seems archaic, because it was. The Greeks felt they got their “big break” to the modern world when they had the opportunity to adopt the euro.

However, before this could happen they needed to show their deficits were under 3% of GDP and inflation rates that were comparable to German rates (Germany acting as the benchmark of a good Euro economy). As this was definitely not the case, the Greeks got creative and moved a wide range of expenses such as pensions and defense expenditures off their books. To lower inflation they froze prices for electricity and water and cut taxes on gas, alcohol and tobacco. After a bit of rearranging they were able to adopt the euro and could now borrow at a rate around 5%, in comparison to a previous 18%. And borrow and spend they did.

After this is when things get slightly out of hand, and Greece runs up massive amounts of debt. Here are several ways in which they did this:
1. The average government job paid 3 times the private sector
2. Their national railroad had revenues of EUR100 million, while their annual wage bill was EUR400 million, plus EUR300 million in other expenses
3. Their education system employed 4 times as many teacher per pupil as #1 ranked Finland
4. Between 3 government-owned defense companies, they had an aggregate debt of EUR1 billion
5. Retirement age for men was as early as 55, and 50 for women
6. Rarely anyone in Greece pays taxes. (There are laws in place against cheating on taxes however they have a horribly inefficient court system, so in the interest of time, cases are rarely brought against people who evade their tax obligations.) This is not limited to individual taxes, the corporate tax system is even more corrupt. The example Lewis uses is an Athenian construction company that has an actual tax bill of EUR15 million, yet somehow they pay nothing. How? The company fails to declare itself a corporation, and hires an outside party to create fraudulent receipts for expenses the company never incurred and if a problem arises they simply bribe the tax collectors. This is the norm, and nothing was done in response to it.

In October 2009, the Greek government estimated its deficit was 3.7%; two weeks later it was revealed the number was more like 12.5%, and eventually revised estimates turned out to be nearly 14%. They were able to reach the outrageously inaccurate 3.7% by doing things such as leaving a yearly pension debt of $1 billion off the books (they pretended the cost didn’t exist, even though they paid it). They had no Congressional Budget Office and no independent statistics agency, so all the finances were unquestionably what the government said they were.

After a realistic measure of Greece’s debt is calculated, Greece has $400 billion in outstanding government debt and they owe $800 billion in pensions, which equals a total debt of $1.2 trillion. THe main concern is what happens when/if Greece walks away from it’s $400 billion outstanding debt obligation. What happens to the banks that lent the money? And will this set a precedent for other countries in Europe on the brink of default?

To simplify, the crisis of Greek debt occurred because spending grew in excess of what they were able to pay. This went unnoticed because of phony calculations, manipulations and lying. As this information was made public, credit rating agencies started downgrading the credit rating. This caused pension funds, global bond funds, and other institutions who buy Greek bonds to panic. Where Greece differs from Iceland is they have Europe to bail them out. Here’s a brief timeline of Greece after the bailouts start.

April/May 2010- Eurozone countries approve $145 billion rescue package for the country; this was done under the assumption that Greece would adopt austerity measures to repay the debt. Prime Minister at the time, George Papandreou called for the austerity measures, however this resulted in immense rioting from the public

July 2011- EU leaders agree to channel EUR109 billion through the European financial stability facility

October 2011- Eurozone leaders agree to a 50% debt write-off in return for further austerity measures. Rioting ensues.

November 2011- Papandreou resigns

February 2012- Greek parliament approves EUR130 billion bailout

March 2012- Greece reaches a debt swap with private-sector creditors, enabling it to reduce its massive debt load

October 2012- parliament passes EUR13.5 billion plan aimed at securing the next roux of EU and IMF bailouts

Early 2013- Unemployment is 26.8%; young unemployment is almost 60%

Early 2014- Unemployment reaches a high of 28%

April 2014- Eurozone finance ministers says they’ll release more than EUR8 billion to further the Greek bailout
The full timeline is here: