So, who gets to play Lehmans in this comedic repeat…?
ISN’T GREECE marvellous?
Paying income tax, or any kind of tax it would seem, has been entirely optional. Which should have powered its economy like 1960s’ Hong Kong.
But public spending, however, accounts for 40% of GDP. So who financed that spending if so few people paid?
Last year, only 15,000 of Greece’s 11-million population declared an income above €100,000. The government only got round to making shop receipts mandatory this week. Tax evasion is thought to cost the Greek purse €15 billion per year ($20.5bn). The untaxed “shadow economy” accounts for some 25% of annual output.
“The Greek issue is a Eurozone issue,” wrote Athen’s finance minister in a letter to the Financial Times this week. Which is true, and not just with regard to taxation – and not just with regard to the 16-state currency zone.
Yes, untaxed business accounts for one Euro in five generated in Spain, Portugal and Italy, or so reckons one Austrian economist. But what the PIIGS lose to their shadows (say it like John Cleese would to get the real City joke) is nothing next to the gap between income and spending now looming for pretty much the entire Western world.
Greece, in short, is but Northern Rock in this farce. The first bank to collapse – and thus the first to get rescued – it now looks a mere footnote to the historic crisis which followed. Neither the cause nor a “domino”, the Rock was more than a warning. It announced the crisis was on.
The scramble for tin hats began…
On Weds 12 Sept. 2007, Northern Rock – the biggest employer in Newcastle-Upon-Tyne…sponsor of the city’s football team…and the fastest-growing of the UK’s fast-growing mortgage banks – ran a banner advertisement across the front-page of the national press.
It offered 6.30% interest on new deposits, then more than 250 basis points above the average return offered by High Street savings accounts. Clearly, the bank needed cash in a hurry! And come Thursday it had to arrange an emergency loan from the Bank of England. By 9am Friday, queues were forming at its branches across the country, and Northern Rock’s stock promptly dumped 20%.
On the following Monday, the government effectively rescued the bank’s savers, guaranteeing their deposits in full. And from then until Feb. 2008, when it finally came, nationalization was only a matter of time.
The Rock’s demise wasn’t the first sign of trouble. August ’07 saw inter-bank interest rates jumped to a near-nine-year high. Both Bear Stearns and BNP Paribas had already closed certain mortgage-investment funds to withdrawals. A handful of smart-arses pointed to the 40-to-1 leverage at leviathan banks such as Lehmans.
Fast forward to early 2010, and the US and UK are running record peacetime public-purse deficits. Dubai last month suspended (and then restructured) repayments on a chunk of its debts. The cost of insuring government bonds against default has risen sharply for more than a month.
So…who gets to play Lehmans in this comedic repeat?
For all London’s dithering and dawdling, saving the Rock was never in doubt. No politics or ideology stood in the way. But making German savers pay the wages of Greek civil servants is another thing altogether. Either the Greeks take a wage cut, or somebody stumps up, or the central bank simply prints money, or Greece will default on its debts as bond-buyers vanish.
Writ large across the developed world’s spending, we’ll thus need the Martians to help…or perhaps we’ll ask God for a loan…if the ever-greater cradle-to-grave promises made after WWII aren’t wound back before they come due. Alternatively, we could just keep printing more money.
After all, it worked to stem the crisis in banking.
“A sovereign debt crisis in the West is coming sooner or later though it is probably not right now,” says Christopher Wood in his closely-followed Greed & Fear analysis for CLSA.
“This is why the recent correction in gold is an opportunity to buy more bullion and more gold mining shares” – a defense, says Wood, against the “almost inevitable Western currency debasement which will be the consequence of the increasingly untenable welfare states and related social security systems.”
It wouldn’t be the first time a sense of impending doom sparked a fresh move worldwide into physical gold. And until the next crisis in debt is resolved, it might not be the last either.
Adrian Ash
for Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com
{ 2 comments… read them below or add one }
greece – wat a ponzi-joke
1. When Germany joined the euro it joined with 1Euro=1 DeutchMark, whn Greece joined the Euro it had to devaluate Drahma by 100% down to 340 drahmas/euro
2. Portugal with more deficit and weaker economy than Greece borrows money with 125 points spread, whereas Greece borrows these days with 350-400 points spread!!!Is this really normal?
3. If Greece and Portugal and Germany are “equal members” in the EU and the Eurozone, then why they should borrow money from the same bank with different interest rates? If they are afraid that maybe Greece will default why they lend Greece money after all? If not why then borrow on different rates? Where is European solidarity? Or maybe solidarity is only when we want it and when we make loads of money (by lending Greece with 7% rate on 10 year bond) then we are not “equal members”?
4. Greece pays 4,3% of its annual GDP (about 250 billion Euros) in Defence!!!! That is more than 12 billion Euros per year in guns!!!! And of course Greece buys guns from its Allies (USA, UK, France, Germany, Holland, Italy etc). How much do these countries spend for their defence industry? Who is the main threat of Greece, ,so that it has to pay that much for Defence? Is it Turkey? What does EU to help Greece to solve political problems with Turkey in order to cut defence spending and of course its public deficit? Or do they want to keep up these problems so that they continue sell guns to Greece? What is Greece’s political gain from EU,NATO membership as far as problems with Turkey in Aegean and Cyprus are concerned?
5. Is Greece the only EU member that does not comply with EU stability pact? Is Greece only the EU member that has public deficit over 3%?
It is common sense in Greece that previous governements did not do enough to cut spending and improve public finances and also reforms are very late.
But these things should be left to Greek people to deal with. Common feeling in Greece is that patience is exhausted by its citizens to its politicians. There is no more time to be lost, and there is no government that can delay reforms.
It is also common sense that Greece is attacked by hedge funds who want to profit from Euro/Dollar flunctuation and we also know some of them (Polson,Soros etc)
Since EU does not really care about political problems of its members and only cares about widening its market, then Greeks sohould really makes a choice right now:
A. If EU wants to help Greece borrow with less interest and provides bailout plan, then continue as it is with scepticism and of course pay the money back to its lendors
B. If EU does not want to help Greece then be it!!! Possible consequences? Well….
1. Greece DEFAULTS and decides to exit EU (not only euro zone) and domino effect comes to other EU countries (to avoid domino effect then the bailout Germans and French will pay will be 10 times bigger).
2. Greek companies take all their money from balkans (Greece is the main FDInvestor in Balkans having spent billions of euros supporting these economies so far). This will destabilise the whole region again and new conflict is most probable.
3. Greece will borrow money from China (as US does until now with no consequences whatsoever), and why not give the Chinese some more investment opportunities in Greece (by establishing strategic alliance with China).
4. Stop buying guns from allies but only from Russia and China
5. Stop buying European Union products, and give space to other products from Asia (cheaper for the Greek default nation)