Greece has been in more than one ways (all of them unpleasant) a case of the European-and-global system experimenting with what one might term “the debt era of the global economy and efforts to bring about methods of dealing with it, other than /further to “extend and pretend””. Let us have a look at the basics of this experience/experiment from the point of view of the guinea pig.
Setting the stage
There is always a line in time, when one tries to deal with waves in policy-making or public sentiment; especially when the two meet in matters where technical issues lead to policies that radically change lives of the majority in a society. When speaking of debt, one is tempted to use as timeline the publication of “This Time is Different: Eight Centuries of Financial Folly” by Carmen Reinhardt and Kenneth Rogoff (2011) or at least of the paper “Growth in a Time of Debt” (American Economic Review, 2010) of the pair, whereby the hypothesis that public debt once exceeding a threshold of – say – 60% of GDP severely restricts growth and that a 90% threshold brings about “a cut of GDP growth in half” got anchored in public debate and justified austerity politics in most advanced economies.
The IMF jumped on the bandwagon soon afterwards; the Eurozone authorities followed suit. The “debt-intolerance hypothesis” elaborated for emerging economics and used to explain debt crises, debt-service impasses and defaults in Third World situations was extended to underpin fears that sovereign debt risk would prove destabilizing for mature economics, too. More importantly, that the systemic shock dealt to global financial stability after the subprime /Lehman Bros crisis and the Eurozone debt upheaval that ensued should be handled by a systematic effort of debt-reduction, based on steady policies of deficit avoidance/austerity policies, such as enshrined in the Eurozone modus operandi, especially once the (largely misnamed) 1999 Stability and Growth Pact of the EMU (whereby general government deficits/GDP should not exceed 3% and gross government debt/GDP should not exceed 60% – or at least should shrink and approach [that] reference value at a satisfactory pace) was superseded by the 2012 Fiscal Compact mandating balanced if not surplus budgets (with structural deficits not exceeding an – country-specific medium-term budgetary objective not exceeding 0.5% of GDP for countries with a debt of more than 60% of GDP).
Going back to roots
Were one to go little further in time, one would meet one other than Emmanuel Macron – now President of France, but back then (in mid-2015) Economics Minister in the fading-out Hollande Administration in France. Speaking before an academic-diplomatic audience in Berlin, Macron spoke of “a religious war over debt” that was going on in Europe. He pointed out that two different strands of Christianity – Catholicism of St. Thomas Aquinas on one hand, Protestantism of John Calvin on the other – are still opposed in 21rst century Europe. The Protestant/austerity – and – integrity – prone North around Chancellor Merkel – daughter of a pastor – with(then-) Finance Minister Wolfgang Schaeuble facing the Catholic-and-Orthodox South and South-Eastern Europe (to which France felt a special affinity).
Broaching on that same subject, John Milbank – Professor of Theology and Ethnics at Nottingham – talked of how “Protestantism gives precedence to a person’s autonomy, earned through not owing money to others; Catholics and Orthodox always tended to consider debt as some sort of – gratitude bond […]. Traditionally, Christianity knew that excessive debt can be venomous to all concerned; this is why periodically debt relief should be granted. Capitalism, in its formality arising out of contract, finds it difficult to accept the need for generosity”.
Staying for a moment with Aquinas, one sees the Middle Ages position that since money does not no fructify, then impose to interest when money is lent is immoral. At the 16the Century, when some sort of financial intermediation started to fuel commerce, John Calvin supported interest-bearing loans – at least between wealthy individuals, although not in loans to the needy. Later on, Christian – faith – based laws forbidding usury started to bend: interest was still banned, but only when it was deemed excessive. It is in such a way that the term “usurious” survived even in modern use, to denote excessive interest – especially when imposed in conditions of need.
Were one to delve further, into linguistics this time – and all that language discloses about deeper reflexes, – one finds debt or la dette in English or French flowing out of debet in Latin, which refers to owing, having to. In German, though, Schuld/die Schulden refers to debt, but it also close to schuldig, which refers to culpability. [Since Greece is the country where the debt crisis really ravaged the economy as well as society – not to mention the political system – the linguistic analogy is of χρέος, «χρη» closer to the Latin approach].
Meeting a modern Sisyphus
It is useful to have all of this in mind when meeting with the modern Sisyphus – that is Greece. When the US/subprime/Lehman-caused global financial crisis reached the shores of Europe, Greece was initially considered to face a flows problem, that is unsustainable deficits building up over time (due to the easy access that the country had acquired to the markets due to its participation to the Euro area); deficits that had skyrocketed to over 15% of GDP by 2009 and were fast becoming non-financiable by the very same markets that had been accepting Greek paper for some years as almost-at-par with German bunds.
High drama ensued, with the constitutional principle of the EU Treaties that no bail-out of member countries was allowed (art. 125 of the Treaty) being waved aside, and a first Adjustment Programme being agreed upon with financial support, so as to avoid default over current payments coming due. It was not long before that flows problem was seen as what if really was: a stock one, i.e. of a debt unsustainable given its very weight on the fragile, introvert, low-competitivity Greek economy. At that same time Greek debt – mainly owed to the private sector, that is to European banks (in order of exposure: French, German, Dutch, Italian ones) stood at some 320 bn euros. At that time Greek GDP was near 220 bn euros, that is debt represented more than 145% of GDP – while total deposits at Greek banks were of some 195 bn euros.
It was not long before that underlying debt issue was “discovered”, by European politicians and international media alike, at the prompting of the IMF who had contributed as the head architect to the first bail-out/Adjustment Programme for Greece. That first bail-out Programme soon crumbled – as did economic activity in Greece under an approach of cut-cut-cut/tax-tax-tax, of the traditional IMF sort. (To be fair, the Fund had insisted from the very start that a debt haircut would be needed, since there was no way to devalue the currency so as to regain competitivity , with Greece being a member of the Euroclub).
One bail-out Programme further, Greek GDP had been reduced to less some 175bn in 2015 euros, that is an unprecedented for a peace-time situation loss of production (and income…) of more than 20%; capital flight had reduced bank deposits at some 132 bn euros; two successive operations -emphemistically called “private-sector involvement” – the swap of Greek paper in the portfolios of banks (both foreign and local) and other financial institutions by longer-terms/diminished face-value securities funded by fresh public-sector loans – that are shouldered by Greece/Greek taxpayers.
The double result of that situation was that the debt/GDP ratio went up and not down – one step later, that is today, it stands at some 180% – and the capital structure of Greek banks was eroded to the bone. Since the repayment capacity of Greek debtors – both of the business and household sector – was also eroded due to the hatchet on incomes and the loss in business turnover , the fact is that public debt was de facto converted to private debt. More than 106 bn euros worth of loans carried by Greek banks (a sliver above 50% of the total in their books) have turned sour and are classed as NPLs – meaning they are past due for more than 90 days. Efforts by Greek systemic banks to push this burden down under the scrutiny of the SSM mean that both the business sector and households are under severe pressure to restructure or liquidate collateral.
What is the outcome of the Mediterranean guinea pig meeting with the realities of the global financial system and the maturing of the EU procedures for dealing with public debt?
Well, with four successive Governments having buckled under the pressure and with the country’s systemic banks being still a shadow of their own selves (following three successive recapitalization rounds with EU-provided funds that are a burden on the taxpayer when all is told) the proverbial man-in-the-street feels both betrayed and ripped-off. There may be strategic defaulters, but a majority of people feel doubly aggrieved: they have seen their jobs lost, their income slashed, their assets depleted (real estate values have dropped dramatically), their taxes soar – and now, for banks to be kept afloat, they face the spectre of seeing their remaining assets liquidated at garage-sale prices. Some people may have peered to the future and realise that a fourth round of banks’ recapitalization would bring about some version of bail-in: of shareholders, bondholders but possibly also of unprotected depositors. But even that realization does not alleviate the feeling of betrayal; nor limit fears for the future.
Not a healthy situation, altogether.