Financial markets around the world have been raving in the past month. The Greek stock market continued its decline by falling over 41% in the last year! Anxiety related to the Greek default has also spread to all the major markets in the world. Everyone from the NYSE to the FTSE is experiencing a sell-off!
The countdown to the Greek default and the avalanche of financial difficulties it will bring seems to have begun. Many experts believe that the Greek government is now bankrupt and has no means to pay its debt. Creditors, including the International Monetary Fund (IMF), on the other hand, are hopeful that if the Greeks agree to the austerity measures, they might be able to repay the loans. Therefore, there are many opinions and contrary opinions that are flooding the financial world as of now. Does anyone seem to be sure if the default value can be noticed? If it should be warned? Or what are the consequences of such non-compliance?
In this article, we will try to answer some of these questions about the growing crisis situation in Greece.
The Greek extension and simulation game
Any expert looking at the situation from a purely mathematical perspective would have known years ago that the Greek debt is simply not payable. The real mess had been created when loans were made to the Greeks. That was the moment when the debates would have made sense. Around 2009, when the world woke up to the Greek crisis, it was already too late!
Greece, in 2009, was like a college student who had somehow gained access to multiple credit cards and now had such a large balance that bankruptcy seemed like the only option. The revenue generated by the Greek government from taxes was not even enough to pay the interest owed on the debt! So the Greeks simply did not have the means to hold on to this debt for eternity, even if they wanted to. They were going to default even if they simply tried to pay the interest owed on the loans.
Rather than accept the situation and let the inevitable happen, the IMF and others came up with an ingenious plan. They would lend the Greeks more money at an outrageous 14% interest rate. The money they lend to the Greeks will be used to pay the interest on the same loans that were owed to them.
So, in essence, they were lending money and immediately getting it back. However, the huge interest rates of 14% on the new loans made the old Greek debt grow. As a result of playing this extension and simulation game for five years, the Greek loan has now become much larger than it originally was.
dark losses
In hindsight, the attempted bailout of Greece appears to be an attempt to hide the losses in reality. The mathematics simply revealed that the Greeks are forced to pay much more than is mathematically possible. Thus, by extending even more credit and pretending that things will get better with time, the IMF seems to be trying to hide the losses from the investors who have made the investments. The Greek population has been forced to adopt extreme austerity because this game of “extend and pretend” is causing mass unemployment there.
the referendum
The Greeks were recently faced with a situation where the IMF would not extend more credit unless Greece agreed to humiliating terms and without IMF assistance Greece basically did not have the cash to pay its obligations. Therefore, a default was almost inevitable. As a result of this, there was a lot of panic in all the financial markets of the world. If Greece defaulted on its loan, it would also end up exiting the euro.
So most Greeks were trying to grab their euro-denominated deposits and trying to convert them into gold or some other real asset that would hold value even if the euro was worth nothing in Greece. The result was massive bank runs in which already bankrupt Greek banks struggled to repay depositors, sparking fears of a financial collapse.
As a result, the Greek government reacted by closing the banks until the crisis was resolved. They limited the amount of withdrawals to 67 euros per day per account. This was the amount of money a family would need just to get through the day. Regardless of the restrictions imposed, there were people lining up outside banks and waiting for hours to withdraw as much money as possible.
The Greek prime minister was unsure how to deal with the IMF and creditors. Therefore, he left it to the public to decide if he should accept the humiliating terms offered by the IMF or if he should simply stop paying. More than 61% of the Greek population voted in favor of default. Therefore, the Greeks refused to accept the IMF bailout at first, sending markets around the world into a tailspin. However, an agreement was later reached between the creditors and the Greeks and Greece is not defaulting on its debts, at least momentarily.
The latest bailout of Greece simply appears to be an addition to the “extend and pretend” game being played. The fundamentals of the Greek economy have not changed and remain as bankrupt as ever. There does not seem to be a way out of the Greek crisis and the granting of more credit definitely does not.
