-a short story in pictures-

By George ChalkiasFeb 13, 2013

Undressing The Greek Financial Crisis

There is an extraordinary place in the eastern side of the Mediterranean.

It has the most magical light in the world and the most beautiful waters.

There is something special in the air that makes you feel free

It has the richest of histories and for many it is considered the source of western civilization and culture.

It survived empires, world wars, dictatorships and stood immune to the erosion of the human self that was happening elsewhere.

For it is the Free Spirit that this place will protect at any cost.

But in extraordinary places , extraordinary things happen.

Good AND Bad.

This is the story of an extraordinary Bad thing that is happening there today…..

George Chalkias

2007: Greece is in Bliss

For almost 35 years now, the governments in Greece

Run 4 PROMOTIONAL PROGRAMS• Will give you a job for a vote • Will give you a raise for a vote • Will increase your social benefits for a vote • Will turn a blind eye on tax evasion for a vote

…and follow 3 IMPLEMENTATION RULES• Will borrow as much money as we can to finance our key promotions (this boomed when Greece joined the Euro

and could borrow very cheaply)• Will not count and control our annual budget. We have created a monster of a state so counting is so difficult

anyhow. Those who will be counted will get upset and that will mean less votes.• Will use creativity in our accounting to make sure that the E.U financial criteria are met (Debt 3% of GDP, Public

borrowing 60% of GDP) every year. If necessary we will not report them at all. After all they have been breaking the rules also.

…create a Pathogenic System…

• Government is the biggest employer – a gigantic public sector• Government is the biggest investor • Unions and Powerful Individuals control votes• Productivity is not that important (it’s a government guaranteed job)• Public sector wages rise 50% between 2000-2007• This leads to higher prices and lower competitiveness• Many sectors of the economy are government protected (taxis, lawyers, land transportation, etc)• No investment in production of goods to be exported • High consumption with money that has come through government debt• The country lives well but beyond its means .

….which results in deteriorating public finances…

1999 2000 2001 2002 2003 2004 2005 2006 2007

Public Debt (billion €) 119 141 152 159 168 183 195 224 239

Public Debt as % of GDP 94.9 104 105 103 98.3 99.8 101 108 107GDP Growth  (%) 3.4 4.5 4.2 3.4 5.9 4.4 2.3 5.5 3.5Deficit as % of GDP 3.1 3.7 4.5 4.8 5.7 7.6 5.5 5.7 6.5

Expenses Revenues€ bil € bil

Pensions 31 Taxes 53Salaries 18 EU grants 5

Welfare 14Employers Contributions 20

Interest 13 rest 6Operating 11 Investments 8 Rest 5 Total 100 Total 84

…and a certain mentality in quite a few people.

We deserve even more !

When they stop stealing

I will pay taxes!

I must get a public sector

job! You work less

and you get paid better

Hire my son and I will

vote for you

Why should I work more . They can’t

fire me

I have a right to all these benefits (I voted for

them)

It all seems to work fine for quite a while.

The markets keep on lending .

• Because of the Eurozone the markets are very willing to keep on lending the Greek Government.

• Even when the numbers do not make much sense Europe acts as a strong guarantor – We will always get our money back because Germany and the rest will pay– If there was something really wrong with the Greek Economy the Europeans would have

intervened. After All they are part of the same economic system.

In early 2008, as the US financial crisis begins…

Europe begins to voice concerns…..

European Union : must cut your wages by 20%, lower consumption and increase competitiveness

IMF : with your numbers if the Market looses trust you are in for a crisis

…but does not persist.

Nah! This crisis has to do with banks & sub

primes …not sovereigns

Don’t worry . In case of a problem this should be

dealt and contained at a local level, i.e. a Spanish

problem, a Greek problem etc.

Then, in September 2008…

…and Markets develop a neurosis

• Trust is not enough if the numbers are not there. They start looking for weak links. • First they assess Banks. • No one thinks of sovereigns • Until Dubai happens • Then attention shifts to sovereigns• That was really the end of Greece.

• The funny thing is that Banks in Greece are healthy. They carry no Lehman toxics and the real estate sector is fine. They carry government bonds though. And these are highly toxic.

Greece’s finances for 2008 are getting worse

1999 2007 2008

Public Debt (billion €) 119 239 263

Public Debt as % of GDP 94.9 107 113GDP Growth  (%) 3.4 3.5 −0.2Deficit as % of GDP 3.1 6.5 9.8

Europe begins to shout

• Cut salaries • Cut pensions• Increase direct & Indirect

taxes

The IMF reports :

• Greece is like a bankrupt country .

• Greece’s membership in the Eurozone was financed by loans.

The Greek Government does little in fear of losing the elections, keeps on borrowing to finance its “policy” and calls for the oppositions support

• As the government has a small majority , it takes no unpopular measures for fear of losing the coming elections

• Borrows more both to cover an increasing deficit and to pay for past bonds that are expiring.

• Borrows at an increasingly higher rate causing a vicious circle

• Expenses rise abruptly to finance the Euro elections

• Under the pressure of Europe promises to take measures in October

• Calls for the Opposition’s consent to measures that need to be taken on the grounds of High National Importance

The Opposition refuses to help and elections are announced.

• The opposition refuses to consent and asks for elections

– Political Greed– Oblivious to the severity of the situation– A belief that this should be handled not

with cuts but with stimulus packages.

• Cuts will lead to more recession by killing spending . Instead

– Stimulate the economy by pouring more money into it

– Do not cut salaries, do not sell government assets

– Begin a tax reform to handle tax evasion– We can do this in four years

• Where will the money come from ?• What exactly will they stimulate ?

They run on the claim :“We have Money” and in October 2009 win the election

…but soon they are in for a surprise…

• They see that the government registers are short of money to pay their obligations

• They realize that 2009 will end up with a deficit of 12% of GDP, when they were expecting half.

…and make a series of very serious mistakes.

• At first, they decide to tell the truth to Europe and promise that they will make the necessary cuts in expenses • Then, they announce to the people that they will stick to their pre election plan and give the stimulus package • They believe that the EU can be handled politically • They have no idea that the audience that matters at this stage is not the EU but the Markets. • The Markets are not handled with words but with numbers.

2010 : THE YEAR EUROPE STOOD STILL

Greece’s finances for 2009 are horrific

1999 2007 2008 2009

Public Debt (billion €) 119 239 263 300

Public Debt as % of GDP 94.9 107 113 130GDP Growth  (%) 3.4 3.5 −0.2 −3.1Deficit as % of GDP 3.1 6.5 9.8 15.6

The Credit Rating Agencies begin a long streak of downgrading the rating of Greece

Greece asks Europe to get involved and help

– The government announces that it will take some measures– The government tries to borrow money from the markets with increasing difficulties or privately without success– The government asks Europe to get involved

• claiming this is a speculators game • claiming that this will spill over to the rest of the fragile economies of the south (Spain, Portugal, Italy etc.)• warning that it will get the IMF involved.

Europe is totally unprepared to handle a sovereign crisis in its midst .It is about to learn at the expense of Greece.

– Believes that by intervening though general statements of support will do the trick

– Does not know how to keep up with the speed of the Market reactions

– Does not want the IMF to get involved in its matters.

Germany is in denial and wants to punish Greece

– Does not realize the severity of the situation– Does not have any recent experience of such crises– Is very angry with Greece and believes the Greeks should be left alone to handle the situation

and pay for their mistakes. – After all, when the German unions agreed to no wage increases for years, so as to increase

their competitiveness, the Greeks were partying. – Now they should pay!

The IMF tries to help fearing a domino effect in the world economy

– Joins Greece to persuade the Germans to allow Europe to act and apply jointly with Greece for an IMF stabilization program

– Or else the Eurozone Economy will fall.

The U.S. rings the alarm worrying about it’s own fragile economy

• The USA joins Greece and the IMF and pushes Germany and Europe to stop their inactivity for fear of the effect this might have on the fragile US economy.

The unwillingness of Europe to help Greece immediately does an irreversible damage

• It changes the Market perception about risk. • This is no longer a European Risk. • This is a Greek Risk. • The Markets close the doors for Greece. • No more money.

And so in April 2010 things happen…

• Germany looses its denial but not its belief in punishment • Germany takes over the leadership of the EU and brings the IMF in (experience, money) • Europe sets up a series of support mechanisms and funds for handling financial crises amongst member states• Decides that the EU should issue a loan of €110 billion to Greece • Asks the Troika (EC, ECB, IMF) to draw the terms of the loan that Greece must accept by getting it voted by the majority of the parliament. • The terms are the measures that the Greek government must take to correct its finances and repay the loan back to the member states and

the IMF

Paul Tomsen, IMFMattias Mors, European Commission

Klaus Mazuch, E.C.Bank

The terms of a loan that will determine the fate of a country are negotiated under the pressure of time and Germany’s anger

Greece wants less severe austerity measures, a longer adjustment

period , a lower interest rate and some growth stimulus

This is a World first situation because the country cannot devalue its

currency and print money to jump start its economy while taking

austerity measures to decrease expenses

Germany and the northern countries want to punish Greece and push for severe austerity measures, a very

short adjustment period, immediate solutions, a high interest rate and a program that should make Greece

return to the markets in 2013.

The IMF would prefer that a debt haircut should occur, a 10 year period should be

allowed and that the interest rates must be lower. It does not persist.

In May 2 2010 , Memorandum 1 is signed. The country escapes default but Social Unrest begins

• Memorandum 1 is signed for 110 billion euro in installments according to the Germany way. • Now it has to pass though Parliament• The opposition ( the party that brought about the mess originally) refuses to consent .• Social unrest begins. • The money will run out by the end of May • The parliament votes for the Memorandum on May 6 (177 representatives vote in favor out of 300)• The country does not go bankrupt. • The severe austerity measures are implemented immediately but in the absence of any growth stimulus the results will be disastrous.

Greece’s finances for 2010 show no hope

1999 2007 2008 2009 2010

Public Debt (billion €) 119 239 263 300 330

Public Debt as % of GDP 94.9 107 113 130 148GDP Growth  (%) 3.4 3.5 −0.2 −3.1 −4.9Deficit as % of GDP 3.1 6.5 9.8 15.6 10.7

2011: The World mourns

2011: Greeks mourn their jobs as austerity measures galore

• In March 2011 the loan terms are renegotiated. • Interest rate is cut by 1pt. Loan payment is extended to 7,5 years• More austerity measures are demanded (salary & pension cuts, tax increases) to meet the targets or else the loan

installments will not be paid. • The problems begin to spread. EU is worried. • July 21st : a second loan for 158 billion euro (-49 billion euro still pending from the previous loan) is agreed. • More austerity measures are implemented in the same vein. • The results are devastating again.

This time it is not just bad financial results…

1999 2007 2008 2009 2010 2011

Public Debt (billion €) 119 239 263 300 330 356

Public Debt as % of GDP 94.9 107 113 130 148 171GDP Growth  (%) 3.4 3.5 −0.2 −3.1 −4.9 −7.1Deficit as % of GDP 3.1 6.5 9.8 15.6 10.7 9.4

Businesses are destroyed

• Demand falls• Sales drop• Financial objectives are not met• Budgets are cut • Jobs are cut• Labor cost drops but• Utilities rise because of government

taxation • Prices do not decrease• Investment drops ( banks do not

lend)• Small and middle sized businesses –

the spine of the private sector- close down one after the other

• The construction sector freezes• Tourism is hurt by the social unrest

Social Decomposition begins…

• Unemployment @ 15% in 2010 , 25% in 2012• People on the Streets• Strikes all across the country • People refuse to pay their debts• The hospitals are shorting on medical supplies• Schools are malfunctioning in the absence of funds. • Social Movements evolve

– The Movement of Indignation – “I shall not pay”

• Poverty rises.• An increasing number of kids in public schools cannot afford lunches

…at a collective level…

• Unemployment @ 15% in 2010 , 25% in 2012• People on the Streets• Strikes all across the country • People refuse to pay their debts• The hospitals are shorting on medical supplies• Schools are malfunctioning in the absence of funds. • Social Movements evolve

– The Movement of Indignation – “I shall not pay”

• Poverty rises. 1/3 of the population is lives in poverty conditions. • 20% of kids in public schools cannot afford lunch.

“God, I am afraid of hunger!!!”

…and at an individual level.

• Unemployment @ 15% in 2010 , 25% in 2012People on the Streets• Strikes all across the country • People refuse to pay their debts• The hospitals are shorting on medical supplies• Schools are malfunctioning in the absence of funds. • Social Movements evolve

– The Movement of Indignation – “I shall not pay”

• Poverty rises. 1/3 of the population is lives in poverty conditions. • 20% of kids in public schools cannot afford lunch. • A social stigma begins to haunt the Greek collective

The world joins in

• Unemployment @ 15% in 2010 , 25% in 2012• People on the Streets• Strikes all across the country • People refuse to pay their debts• The hospitals are shorting on medical supplies• Schools are malfunctioning in the absence of funds. • Social Movements evolve

– The Movement of Indignation – “I shall not pay”

• Poverty rises. 1/3 of the population is lives in poverty conditions. • 20% of kids in public schools cannot afford lunch. • A social stigma begins to haunt the Greek collective

..and in Oct 2011 a final (?!) solution is proposed : a Haircut + Money

• Europe proposes a new final plan to remedy the situation in Greece. • This time the IMF ideas are included• €130 billion in new money• A haircut of 50% of Government Debt (voluntary)• € 30 billion for the recapitalization of the Greek banks • A target for 120% of Debt by 2020• More austerity measures but also systemic changes • The Greek government under constant inspection by the Troika

While the Money is running out again , a Political Thriller develops

• The Government has a very weak parliamentary majority and is unwilling to put the new terms into parliamentary vote• The PM decides to put the choice directly to the people in a referendum• Europe is outraged. No agreement. No money . • The PM withdraws the referendum , resigns and a cooperation government from all key parties is formed with a non

political PM (much like in Italy) to pass Memorandum 2 through parliament, execute the haircut and get the new money• It succeeds and sets an election date for May 6, 2012.

May 6, 2012 : Elections : No Government

• The people are really angry. • The political campaigns are brutal. • Small radical left and radical right parties campaign on the ground of leaving the Euro, writing off the debt, printing money and giving to people

their lives back. • The elections have no clear winner. • Pro Memorandum parties : 38% of pop vote • Europe understands that this is jeopardizing the whole Eurozone.• New elections are set for a month later

Europe is hanging by a thread : people’s votes

June 17, 2012 : New Elections: A coalition Government of the pro euro parties saves the day

A coalition government 179/300

No 2 with 71/300 reps

No 5 with 18/300 reps

Financial Results 2012

1999 2007 2008 2009 2010 2011 2012 (est)

Public Debt (billion €) 119 239 263 300 330 356 344.6

Public Debt as % of GDP 94.9 107 113 130 148 171 176.7GDP Growth  (%) 3.4 3.5 −0.2 −3.1 −4.9 −7.1 −6.0Deficit as % of GDP 3.1 6.5 9.8 15.6 10.7 9.4 6.8

• The latest loan agreement has been voted in parliament

• The worst of measures are being implemented

• The new government tries to regain the trust of Europe and raise the country’s credibility

• Europe stops beating up Greece and understands that it must publically support the governments efforts and communicate that the country will always be part of the Eurozone.

• The media begin a positive approach

• A whole nation begins to realize how their high standard of living was built on the sand of incompetent governments and corrupt systems and is trying to come to terms with the new reality.

• Soon they will need to understand that blaming others is not a solution.

• But for that they need to feel what in the ancient Greek drama we call Catharsis. (CLOSURE)

• And then the loop will close. And a new dawn will rise.

2013 A.D.

It is still a fragile balance

Some cannot part with their old ways and are seeking a a new government that will promise them the world in exchange for their vote.

Others see no value in government and have nothing to expect from them, but to put the house back in order.

These are the ones who seek new ways to progress.

They know that it is going to be hardThey are at a disadvantage

Their historical pride , their optimistic attitude, their cunning mind and above all the free spirit this land protects will help them rebound.

And for our sake, lets hope that this time they will build something much better than the system of debt we all live in today

After all, they have done it before 2500 thousand years ago.

George Chalkias

…to be continued…

George ChalkiasFeb 13, 2013

End of Season 1