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Tuesday
Feb212012

The Greek Tragedy and Great Depression lessons not learned  

Greece has been the most pillaged country in Europe this Depression, among other reasons, because no one in any leadership position seems to have learned lessons from the 1930s. Plus, banks have more power now than they did then to call the shots.

Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds.

Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just  want to protect their bets and not wait around for Greece to really stabilize for repayment.

Prior to the Great Depression, the Greek economy experienced years of growth, a healthy commercial activity spree, and like today, a stark increase in (less-leveraged) bank loans to finance it. When the Depression struck, banks and local businesses faced unpayable loans and declining asset values.  (Stop me when this sounds familiar).

Credit constricted immediately, choking internal economic activity.  In 1928, the Greek Drachma was tied to the gold standard, but pegged to the British pound. When Britain devalued its pound in 1931, the Greek government responded by raising public investments and pegging the Drachma to the US dollar.

But by early 1932, central bank reserves had fallen so much that they only backed 40% of Greek bonds. Even without the slow drip of rating agency downgrades to highlight this leveraged debt situation (which is nothing compared to say, today’s US reserves vs. debt leverage), the lack of reserves caused foreign speculators to fleece the Drachma/dollar exchange rate. Bond yields blew out. Borrowing costs shot up.  

So in March 1932, the League of Nation’s (the precursor bank bailout entity to the ECB/IMF) agreed to provide a loan to service Greece’s debt in return for – wait for it - austerity measures. Unlike today, the government said ‘hell no.’ Instead, in April, 1932, it floated the Drachma - which devalued quickly. It also declared a public debt moratorium, and increased infrastructure spending to strengthen its economy. It negotiated repayment terms with creditors for overdue interest.  By 1934, agriculture and industrial production rose, the currency was more stable, employment increased, and the budget balanced.

The situation is different now. Though national Greek banks registered relatively few domestic loan losses in 2009 ( a fact unrecognized by the bailout supporters), they did begin taking losses in their trading books due to various international bets. Their borrowing and margin costs rose sharply and quickly with each rating downgrade which increased their trade losses, and kept them from extending or renegotiating loans locally, which caused more economic pain for the population.

Greece would have been better off, had it not suffered a rapid series of downgrades and been pulverized by subsequent hot-money flight and pressure. Despite a clear warning from the Central Bank of Greece in late 2009 (when Greece was critical, but breathing) that it could sustain its costs if they didn’t rise egregiously, Moody’s (and later others) cut Greece’s sovereign debt rating from A1 to A2 in December, 2009.  From that point on, the international banking community went into ravage mode, fast.

Moody's cut Greece’s debt again, to A3 in April, 2010, to Ba1 (junk) in June, 2010, and to B1 in March, 2011. Three months later, Greece’s rating was cut to Caa1. By September, 2011 the six biggest Greek banks were downgraded to Caa2, a smidge above default levels, crushing national credit flow to the population.

When any country is downgraded from single A to junk within 18 months, it has to issue more expensive debt to stay even, which by definition, makes the credit-worthiness of its bonds decline.  As in any country, Greece's banks are big buyers of its government bonds. They also use those bonds as collateral for other borrowing  and trades - with each other – and with  international banks.

As Greek banks weakened and borrowing costs soared, their ability to buy Greek bonds from their own government diminished, which weakened the value of government debt. Circularly, Greek banks took further hits for holding the devalued Greek bonds and thus become weaker - further reducing their ability to sustain local needs.

That is why the Greek government wants to bolster its now junk-rated banks (in addition to the money that banks are getting directly from bailout-for-austerity loans) and foreign ones, at the cost of hurting the population.  But since the economy (even at its healthiest level ever) can’t sustain its bailout borrowing costs (as opposed to its operating costs which would have been payable without the increased rates and bailout principle mixed in), this is an unstoppable downward spiral.

Greece’s GDP has contracted 13% (by 7% in the last quarter of 2011) from a late 2008 record high. (By comparison, the United Kingdom’s GDP has fallen by 20% in the same period, and though its unemployment rate has risen, its borrowing costs remain manageably low, making it cheaper to sustain its banks.) Greece’s savings rate at 7.5% is at three decade lows (but still higher than that of the US).

Meanwhile, Greece’s debt to GDP ratio is 160%. (It hovered around 100% from 1994 through 2008.) The unemployment rate at 20.9%, and the youth unemployment rate at 48%, has doubled since January 2008. There is nothing to indicate it won’t keep rising.

Money continues fleeing Greek banks, bonds, and stocks, as citizens try to preserve what they can, and foreign speculators play a game of chicken with bailout providers. The Greek stock market stands at just one-fifth of its January 2008 level. Ten year government bond yields are at 33%, compared to 5% just two years ago.

The speed and intensity of Greece’s decline reflects nothing short of an international mafia-style hit.

The majority of Greek workers didn’t break the government’s back, even if a very small subset strained it. Further, the more bailout measures forced on Greece, the more its economy will be ravaged to repay them.  After four rounds of austerity, nationwide protests, $110 billion Euros in IMF and ECB bailouts, escalating interest rates driving borrowing costs higher and choking credit, a downgrade to junk, a Prime Minister replacement, and now another big bailout, Greece’s tragedy is just beginning.

Yet lessons from the Great Depression exist. By floating the Drachma (the equivalent of leaving the Euro), negotiating individually with creditors (telling banks to back off), and increasing internal public focus (the opposite of what's going on now) Greece was able to stabilize more quickly than larger European countries. It’s not entirely too late to try again: but it requires the currently unimaginable: a political will that is population – rather than bank – oriented.

 

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Reader Comments (11)

Hi Nomi .ope all is well.Ill make this quick.Goldman sachs premeditated this farce and new the end game.The ISDA is protecting the BIG derivitive playing banks and will not call this a credit event .All the rest is just noise and diverting attention from the REAL ELEPHANTS in the room...England,Japan and Amerika.Note, the UK and Japan are the LARGEST bond pyrchasers of US debt outside of the fed of course.Can you say PONZI scheme.This gig may go on but the longer it does the greater the BLOWBACK. Good night.

February 21, 2012 | Unregistered Commenterdavid casciano

"Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population..."

But of course. None of this is about Greece or its people. In typical pirate fashion, the EU banks are simply looting Greece for all it is worth. Like a spider with a fly in its clutches, it will simply suck Greece dry, toss the empty husk aside, and look around for something else to devour. Before this is over, Greece will collapse into civil war and go up in flames. It will become a non-country; merely an area. A few city-states may well endure but the countryside will become a no-mans' land of continuous warfare and deprivation. That anyone could not only allow this but orchestrate it is absolutely nauseating. If Dante were alive and writing today, he would, of necessity, have to add a 10th level to the bowels of Hell for these bankster cretins to inhabit.

February 21, 2012 | Unregistered CommenterEd_B

This really appears to this reality-based paranoid to be the first step in a long series of sovereign takedowns, which was why the US Treasury was so ardently against altering the existence of naked swaps for such financial manipulation (hmmm....and a majority of all management in Treasury is either Goldman Sachs or JPMorgan Chase, with a similar alumnus bunch populating those outside committees they are ostensibly advised by).

It seems to this most humble of observers that as along as the majority of Americans are still ignorant of the ability of those corporations and the super-wealthy to avoid taxation by utilizing unregulated credit derivatives (and credit default swaps, equity swaps, currency swaps, total return swaps, and so on, are in that category of thousands) in conjunction with such off-balance-sheet practises (Hint: unregulated and off-balance-sheet equals off-the-books, as in not taxed, etc.), everyone will continue to be flummoxed by such entertaining political theater as the raising and lowering of taxation on those who never pay any taxes (i.e., the super-rich and the top tier corporations).

But the passage of the Securities Act of 1933 REGULATED the securities market, and by extension, that securitization of stocks' constructs, and they still remain unregulated (and outside of Section 1256 thanks to that Dodd-Frank monstrosity, brought to us by Mr. Dodd and his wife at the CME, and Mr. Frank and his buddy, former staffer and now chief Goldman Sachs gov't lobbyist).

But I may be a little critical.....

February 22, 2012 | Unregistered Commentersgt_doom

i have been wondering how the unmarked-to-market zombie banks function to enrich the banksters

entire continents of wealth are now going to them for no reason except they "need the liquidity"

everything is so opaque and "arranged" and there is little understanding or insight except to "accept" that these corporations just "need help"

are we using enuf lube?
assuming you know who jimWille is, his most recent piece on goldSeek.com calls for mucho bankster liquidations which makes my heart leap with joy!

remember "economics as if people mattered"? zombie (insolvent) banks have obviously given us tons of losses to nationalize/socialize. they certainly have political handmaidens. what do you see? what are your thoughts? (might make a good article~~hint, hint)

and here's a penny, too!

February 23, 2012 | Unregistered Commenterslewie

It is very clear that the western banking model (as casino for the rich and idiotic) is broken and that none of these so-called "liquidity injections" is actually fixing anything. No, they are only putting off the Day of Reckoning for a short while. My thought is that if extra liquidity is truly needed, then let the banking sector provide it via the liquidation of the weakest of them. If more liquidity is needed, we move up the food chain, dissolving more banks, and distributing their assets to their customers first, their shareholders second, and to their creditors third. Anything left over can then be distributed among the banks needing liquidity.

Speaking of banking models... I was doing some on-line research the other night and discovered that no bank in Singapore has ever needed a bail out or a liquidity injection. Hmmm... so, what is it that they know about banking that we do not? Could it be that banking is an inherently conservative enterprise that cannot function successfully in any other mode of operation? Why, yes, it could. Unfortunately for the rest of us, neither the western governments nor the banksters can figure this out. Or have they already figured it out and all this financial activity doesn't have a damned thing to do with "banking"? No, I am afraid that it does not. It has a great deal to do with looting and pillaging on a world class scale, though. Attila would be SO proud that his legacy is alive and well after all these years.

My final thought on this for the evening is, "Can we actually afford to have BIG banks?". We keep propping them up (but not fixing the real problem) and they keep doing stupid things that lose our money, seemingly without end. Just who is it who says that we need these cretins? I do believe that if we had local and perhaps regional banks, we would have all of the banking services that the citizens actually require. But wait! Who then would buy all of that worthless government paper and thus keep the Fedzilla Debt Machine running? Who indeed?

February 23, 2012 | Unregistered CommenterEd_B

Ed - thanks for your thoughtful post. Yes, the more prudent action - in terms of short and long term stabilizing of the global economy, is to let banks suffer the consequences of their own leverage and over-extension - to the extent that customer deposits and loans are protected - which requires a global Glass-Steagall segmentation. This is not on the cards of the US / European political or bank (same difference) leadership. SIngapore has had less issues because their books were simply less levered. In other words, they partook in less of the 'casino-style' financial maneuvers that other banks did. They were protected from the speculation leading into this Depression, thus - and more shielded during it.

February 24, 2012 | Registered CommenterNomi Prins

A lot of public infrastructure is being privatized, the equivalent of selling the country's assets. It's where the Russian oligarchs got their wealth-- by buying public infrastructure from corrupt officials for pennies on the dollar. More of these profiteers await. Greek citizens, after having their credit choked off and their wages reduced are also seeing their public sector sold off. These are serious times!

February 24, 2012 | Unregistered CommenterJay Davis

Ed_B says:

"We keep propping them up (but not fixing the real problem) and they keep doing stupid things that lose our money..."

A common perception, and yet "we" didn't bail them out, the Goldman Sachs CEO who temporarily became the Treasury Secretary, along with the Usual Suspects, appeared to be behind the bailout; the majority of the citizenry were against it.

Also, they aren't doing "stupid things" as they profit greatly from their ultra-leveraged bank runs; and use credit derivative structured deals to avoid paying corporate taxes, as they use those equity swaps (and other types of swaps) to avoid paying capital gains taxes.

Then they use those credit derivatives to do ultra-leveraged speculation to drive up -- then down -- the energy prices and commodity prices for their own market manipulation profit and selfish gain.

Until the power structure is changed, the same thing will always occur....

February 27, 2012 | Unregistered Commentersgt_doom

Thank you Nomi... for that and for all that you do to expose and explain what is really going on in this crazy world. It is very much appreciated by those of us who really are awake and watching.

sgt_doom says:

"A common perception, and yet "we" didn't bail them out, the Goldman Sachs CEO who temporarily became the Treasury Secretary, along with the Usual Suspects, appeared to be behind the bailout; the majority of the citizenry were against it."

Indeed... and a correct one. Whether done by us or in our name is probably not relevant in terms of what happened and the results thereof. No, I did not get to vote on this either. None of us did. We are still responsible for the additional debt that this creates, however. :-(

"Also, they aren't doing "stupid things" as they profit greatly from their ultra-leveraged bank runs..."

I am aware of their activities and describe them from MY point of view. You describe them from their point of view. While both sides of the issue are clearly visible, I prefer to speak for myself and not for them.

"Until the power structure is changed, the same thing will always occur...."

Agreed. The current power structure clearly supports their activities, no matter the result in the economy or on the citizens. It is well and truly time for the 2nd American Revolution. Hopefully, that can be done peacefully, unlikely as that may seem, but it definitely needs to be done... and sooner rather than later.

February 27, 2012 | Unregistered CommenterEd_B

To Ed_B,

I stand corrected, sir! Forgive me for misconstrueing your remarks, but it is easy to do given the amount of misinformation and disinformation out their to confuse and bewilder the American populace.

Take, for instance, the past eight months when Harvard's Niall Ferguson, and Laurence Lessig, are going around the country acting as apologists for Wall Street and the "it just happened" crowd.

In the same manner, in the last few talks from Noam Chomsky, he is doing the exact same thing, claiming that the banksters of Wall Street are really "good, decent fellows" -- and that it was "the system" which was at fault.

So either Chomsky is a complete and total idiot who doesn't know anything nor comprehends that they bought and paid for that legislation and predatory jurisprudence (SCOTUS decisions) which created their system, or he's being completely disingenuous.

Over the years, I've had an iffy feleling about Chomsky; he gives these mealy-mouthed, rambling talks, where he NEVER names names! How very heroic, which is why he kept his tenure for so very long.

Some years back, when he was talking about a KAL flight which was shot down over the Soviet Union, he mentioned an incorrect fact about a US military installation, and being a long-time fan and of like mindset, I called him to tactfully suggest a correction.

He told me he was right, and I elaborated that I had been at that US military installation, and he was mistaken --- he wouldn't budge at all, claiming I was a liar, etc.

Such behavior leads one to conclude that Chomsky, like Ferguson, Lessig, Unger at the NY Times, and so very many others who appear one thing on the surface, are really in that group known as misdirection specialists or redirection specialists (quite a large population given the network of "think tanks" and foundations and trusts doing the same exact thing today).

February 29, 2012 | Unregistered Commentersgt_doom

Sorry, forget to qualify that remark about think tanks --- excepting the real ones, of course, such as Demos and EPI.

February 29, 2012 | Unregistered Commentersgt_doom

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