Tuesday, November 1, 2011

The Greek referendum: what's it about?

Cartoon: Steve Bell, the Guardian

The Story So Far
A corrupt Greek government borrowed billions the country could never repay in order to buy votes of hundreds of thousands of public servants who get 14 months pay per year while working only seven months a year and quitting work at 2.30 in the afternoon on days when they are nominally working -- that is until they begin collecting their pensions at 55. The scale of overpayment is illustrated by Greece's state-owned railway which pays four times as much in wages as it collects in fares.

The government concealed the magnitude of the budget deficit, which far exceeded the 3% of GDP to which Greece committed when adopting the Euro, by the simple expedient of never adding up its expenditures.

The new government of George Papandreou, wishing to avoid blame for the inevitable deluge, ordered that an accounting be made. When, as a result, it was announced that Greece was running a deficit equal to 12% of GDP, holders of Greek debt panicked. For the better avoidance of uncertainty, the IMF was called in and determined that the deficit was not 12% of GDP but 14%.

Even more excitement. The Government made spending cuts, which prompted many Greeks to go on the rampage. They blockaded the ports thereby preventing cruise ship passengers with money to spend from landing. They burnt banks, in the process burning alive several bank employees including a pregnant woman, notwithstanding that Greece's very conservative banks had nothing to do with the crisis.

Holders of Greek debt, including mainly rather stupid French, Belgian and German banks, agreed to a 50% "haircut" on Greek debt: the chance of recovering half their money being reluctantly accepted as preferable to the certainty of a 100% loss. Meantime, Greek demonstrators burnt German flags inscribed with the swastika, believing, evidently, that Germans are evil people who should pay Greek pensions even when Greeks retire as early as 50 in the case of occupations designated "stressful" (e.g., hairdressing), which is five years earlier than Germans themselves retire.

Now the Greek Government will ask Greeks if they agree to pay even that much. Hence Steve Bell's cartoon, which makes clear what the referendum result will almost certainly be. The inevitability of a "no" in the referendum means the certainty of a Greek default and Greece's exit from the Euro.

This will leave a large hole in the capital of a number of major European banks. Much if not all of the loss will have been insured by means of derivatives. When payment under these credit default swaps comes due, it will be interesting to see whether the counter parties are able to pay. Almost certainly, there will have to be government bailouts of one party or the other.Which makes one wonder: why don't the French and Germans pay off Greece's debts now and kick the Greeks out of the Euro at once, thus bringing the crisis promptly to  its inevitable conclusion.

Iceland is tiny. Their bonkers banking scandal shocked the financial world. Ireland is tiny, their incompetent greedy bankers left the Irish people shackled with debt for years to come. Greece is small, yet its impending government default is shaking the banking system across Europe and beyond. After that there's Portugal, Spain and Italy still to blow.

What are the odds that the Euro will remain a going concern by the end of 2012? For that matter, what are the odds that the EU will remain a going concern by the end of 2012?

Aangirfan provides an interesting historical perspective on the current financial wrangle. The Germans, so some have calculated, owe the Greeks sixty billion in war reparations. Mugging the German banks is most likely the only chance the Greeks have of getting their money.

But are Germans responsible for the crimes of their ancestors? If so, why not the British, the Americans, the Israelis, the ancient Greeks and Romans, the Medes and Persians? Where does this end?

And here's what the Greeks are being asked to vote on (Source):
  • Income tax threshold would be lowered from €12,000 (£10,300) to €5,000 (£4,300
  • Retirement age would be raised to 65
  • VAT would rise from 19 to 23 per cent
  • Higher property taxes
  • Monthly pensions above €1,000 (£860) would be cut by 20 per cent
  • Excise on fuel, cigarettes and alcohol would rise by a third
  • To qualify for a full pension people would be required to complete 40 years work
  • Retirees aged under 55 would lose 40 per cent of their pensions over €1,000 (£860)
  • Public sector wages would be cut by 20 per cent
  • Employees of state-owned enterprises would have their wages cut by 30 per cent
  • A cap would be introduced on wages and bonuses
  • 30,000 civil servants would be suspended on partial pay
  • All temporary contracts for public sector workers would be terminated
  • Just one in 10 civil servants retiring this year would be replaced
  • New levies on household incomes of between one and five per cent.

So, anyone expecting Greeks to vote for that needs their head examining. Which means the referendum is merely the Greek government's way of telling their creditors to take their bonds and ....

See Also:
Trusting in the wisdom and maturity of the Greek people. LOL CanSpeccy
Time for the Abolition of Greece? CanSpeccy
EFSF Bond Sale Postponed Because of Market Conditions Mish
In Praise of Papandreou's Referendum Decision; Eurocrats Terrified of Democracy; Parade of Cowards Mish
Dutch Government Calls Timeout on Euro Bailout Deal Mish
EU Deal Unravels from Many Sides; Italy, France Bond Spreads Hit Record High vs. Germany; Bund Yield Drops Most on Record; All Out Bond Crisis Mish
Greek Army Threatens Military Coup Sparking Fears of Military Uprisings And Civil Wars Breaking Out Across All Of Europe Alexander Higgins Blog


  1. Hi... I just posted this to WRH.. and added your site to my blog list.. This is a fun article to read.. Thanks..

  2. What a miserable soup of lies and misinformation. Most of the statements in this article are untrue or misleading.
    "Meantime, Greek demonstrators burnt German flags inscribed with the swastika, believing, evidently, that Germans are evil people who should pay Greek pensions even when Greeks retire as early as 50"
    There's hardly anyone in greece that retires prior to 60-65 except politicians. The Bank of Greece used the money of greek pension funds to buy bonds through semi-illegal procedures without informing the administration of the funds and now these bonds will be "haircutted" which means that a lot of pension funds will be left with no money. I didn't see any german flags being burnt at demonstrations; some EU flags might have been burnt however. The 60 billions you refer to is not war reparations its actual money and gold that Germans forced Greece to "borrow" them(you should read more carefully the page you link to). The reparations is an another story.
    "But are Germans responsible for the crimes of their ancestors?" First of all Germany has already paid reparations to every country they invaded except Greece. Secondly does this logic work the other way? Do I have to pay for my ancestors loans?
    And btw greece is already bankrupt. At least 52% of the 2012 budget will go to pay previous loans; thats when you know that a country is bankrupt. But they will keep "rescuing" us as an excuse to pass more austerity, drop wages to China levels, privatise everything and create "special economic zones" to accomodate the (mostly German) "investors". Then the country officialy default on some of its dept(I suspect not on the debt owned by the EU-ECB-IMF troika, just the debt owned by private bondholders, banks and pension funds)
    I apologise if my English is bad but at least bad english is better than lies and media propaganda.

  3. No need to apologize for your English, which is fine. I am not so sure about some of your logic.

    On the reparations question, you seem to agree with the statement that Germany should bail out Greece as a form of war reparations. This seems an extraordinary and lawless approach to resolving a claim among members of a political union.

    Greece entered the Eurozone on condition that it would not run deficits greater than 3% of GDP, but failed to abide by that obligation, running deficits of up to 14% of GDP. How can the EU function when national governments violate their agreements so irresponsibly?

    And why did the Greek government violate its agreements if not, as I suggest, to buy the votes of public service workers?

    You say, "There's hardly anyone in Greece that retires prior to 60-65," but according to the NY Times:

    ...the Greek government has identified at least 580 job categories deemed to be hazardous enough to merit retiring early — at age 50 for women and 55 for men. ...

    Greece’s patchwork system of early retirement has contributed to the out-of-control state spending that has led to Europe’s sovereign debt crisis.

    ... As a consequence of decades of bargains struck between strong unions and weak governments, Greece has promised early retirement to about 700,000 employees, or 14 percent of its work force, giving it an average retirement age of 61, one of the lowest in Europe.

    In contrast, the German retirement age has just been raised from 65 to 67.

    As for the German flags painted with the swastika, this was mentioned by the German Foreign Minister Guido Westerwelle, so there must have been a few.

    But this post is pretty much out of date since the referendum was never held. Had it been, Greece would have defaulted and the debt issue would have been resolved, mainly at the expense of French, Belgian and German banks, who foolishly lent money to a fiscally irresponsible government.

    I was not aware that the Bank of Greece, i.e., the Greek Government had invested public service pension funds in its own dud bonds. But it does not seem entirely unfair that those whose pensions have contributed largely to the government's insolvency should pay part of the cost. Naturally one would not wish to see pensioners robbed of the means of subsistence, but insofar as the problem were a creation of the Greek Government, that government should, and surely would, take steps to make good major pension losses.