t was almost a year since Tom Barton had been a guest aboard Sergei Tarasov’s
yacht in the Aegean and a lot of things had happened since. In that short period
of time, the Greek economy had foundered and suddenly the country was facing
default. The interest rate on Greek government debt stood at a staggering eighteen
percent, the kind of rate that credit firms charged bad customers.
Barton followed the drama being acted out each passing day, it was though a
modern version of an Athenian tragedy was serialized live on television,
transformed into a Hollywoodian soap, its actors struggling to come to grips with a
new twist in the scenario each evening. Sadly, the drama was real and the stakes
high. The lives of millions would be affected by the outcome. The leading roles
were played by internationally known stars; George Papandreou, Angela Merkel
and Dominique Strauss Kahn of the IMF, second roles were played by up-andcoming actors performing in their first major performance.
As in many classical Greek tragedies the plot was familiar, a spendthrift whose
money had run out with the moment of truth at hand. The script had undergone a
few changes, in ancient Greece a debt of a few thousand drachma would have
fallen entirely on the shoulders of our spendthrift, but in 2009, when the debt was
counted in billions of euros, it was the problem of his lender.
Politicians scrambled to issue soothing declarations. The European Union and the
International Monetary Fund made vague promises they would stand behind the
Greek government, helping them to resolve the crisis. It was like a re-run of the
Lehman Brothers collapse, this time however the scale was different, Greece was a
member state of the EU and part of the Eurozone, its fate was interlocked with that
its partners, whom it would certainly drag down in its misfortune.
Governments and lending banks trembled; hedge funds and speculators saw the
crisis as an opportunity, they short-sold, placing their bets on a default and a
collapse of the euro.
From the onset of the crisis, the market for Greek government debt encountered
increasing difficulties. In order to raise the money needed for functioning of the
state, the government had been forced to turn towards the bond market, but given
the risk, interest on Greek debt skyrocketed. The only option was a bailout from
Frankfurt and unless that could be quickly agreed, there would be no other
alternative: default.
The origin of Greece’s problems went back to the creation of the single currency
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and the in extremis decision of its government to join the monetary union in 2001,
despite the opinion of many financial experts in Brussels that joining the euro
could only end in disaster.
Overnight Greece’s debt was downgraded to junk status whilst Portugal’s fared
little better. To this was added the fear that Spanish debt would be also
downgraded.
Tom Barton hedged his bets by betting on the Swiss franc and gold, which
seemed like the only possible alternatives given the weakness of sterling and the
dollar.
In retrospective the scenario should have been foreseeable; economists had
warned that a currency union without fiscal union was unviable. Unless a central
bank had the power to tax, disburse funds and penalise member states that did not
respect the rules, a currency could never function as it should.
At the outset the architects of the Eurozone established two basic rules: first any
country that ran excessive deficits would be penalized and second was a no bailout
clause. However, rules are made to be broken and when France and Germany
exceeded the limits, Portugal and Greece followed suit.
Greece had a long track record of banking crises and defaults, thus a special
dispensation was negotiated when it joined the euro, whereby its permissible
national debt level was set at one hundred percent of GDP, over twice the forty
percent fixed for other Eurozone members.
Greece now needed one hundred billion euros if it was to survive a crisis largely
large to its inability to raise taxes from its middle and upper classes. In addition to
this handicap was the power of its trade unions, which whenever demands were not
met threatened crippling strikes.
With important regional elections approaching Germany was reluctant to bailout
Greece. Complicating the matter Portugal, Ireland and Spain were already mired in
the quagmire and it looked like Italy might soon join them. The so called Club Med
members of the Eurozone had little or no room for manoeuvre without the
conventional option of depreciation, a tool available to national currencies. The
only solution was to slash public spending and increase taxes.
The crisis endangered not just Europe, the world’s largest economic zone, but
also that of the entire international economic system, as the head of the OECD,
warned that the contagion was spreading: ‘like Ebola ― when you realise you have
it you have to cut your leg off in order to survive.’