This chapter covers how Greece fell into debtors prison from 2008 - 2012. There are a lot of financial figures in the chapter.
Exposure to Greek debt
- The Greek state was bankrupt in 2010 and required €110bn bailout loan.
- He mentions that in order for Germany to run a surplus (export more goods as a country than they import), other countries need to run a deficit. Before the € Eurozone deficit countries would deal with this by devaluing their currency, making their exports more attractive to foreigners.
- Varoufakis asserts that the bailout was actually to protect the French and German banks which were largely exposed to Greek debt (they lent Greece a lot of money).
- The top 3 French banks were highly leveraged in 2010. For every €1 they had, they had lent €30, which means that if 3% of their loans went bad, they wouldn't be insolvent. 3% was €106bn.
- The same top 3 banks had lent €627bn to Portugal, Spain and Italian governments. This is 1/3 of the total French economy. They had lent €102bn to the Greek government.
- The fear was that if Greece defaulted on its loan, Portugal, Spain, and Italy would follow and the 3 French banks would become insolvent and require a lot of money from the French government.
- In a country that has a central bank, banks going insolvent is bad, but can be dealt with by moving their bad debts onto the central bank, which can print money, and taking the banks into public ownership. Unfortunately France dismantled its central bank when it joined the Eurozone in 2000 and the ECB is not allowed to take bad bank debt from individual states.
- In 2008 Chancellor Merkle promoted herself the "tight-fisted, fiscally prudent Iron Chancellor", unfortunately in 2009 she found out that her major banks needed €406bn to keep running. She had to ask her parliament to bail out their banks.
- This first bailout for the German banks only covered the bad debts they had from the US derivatives. Less than a year later they potentially needed another similar sized bailout to cover their loans to Greece, Portugal, Spain, and Italy.
- So both the French and Germany banks and therefore states could not allow Greece to default as that would lead to other nations in the Eurozones defaulting and their banks would be insolvent.
- States never pay off their debt. They only pay the interest and roll over the debt.
- This strategy works as long as the state's income is much larger than the debt interest, or it growing faster than the debt interest, which it usually does when not in a recession.
- During a recession the state's income decreases, but the debt interest keeps growing
- In 2008 Greece had the largest debt in the EU, but it's income was growing faster than its debt so everything was in check
"It is difficult to get a man to understand something when his salary depends upon his not understanding it"
- Varoufakis tries to convince the Greek establishment that it is better to declare themselves bankrupt and restructure the debt, rather than take the €110bn bail out loan during 2009 - 2010.
- The common argument for austerity is: if my debt as a person is too large. I need to stop spending so I can pay off my debt. The analogy doesn't work for governments. Personal income isn't linked to personal spending. I.e. if you stop going out to dinner and the cinema, your income doesn't decrease. With the economy of country, if the government reduces its spending, the income (tax revenues) actually go down. Particularly during a recession, when private individuals and companies are also trying to reduce their spending.
- Maybe an analogy that works would be if you are self employed, and a lot of your business comes from networking and taking out potential clients for lunch/drinks etc. And in order to pay back your debt, you stop taking potential clients out, as this is unnecessary spending. So while your spending goes down, your income will also go down. (this analogy invented by me, not in the book).
- Proof(?) of the link between spending and income of a country between 2010 - 2012:
- Spain reduced government spending by 3.5%. Income dropped 6.4%
- Greece reduced government spending by 15%. Income dropped by 16%.
- Another way to put it. In 2010 for every €100 a Greek person made, the state owed €146 to foreign lenders. By 2011 the €100 had shrunk to €91 earnings and the debt had increased €157.
- Varoufakis is black listed by the media in Greece because he keeps talking about debt restructuring, which the government/establishment do not want to hear about. He is branded a traitor.
"There are times in politics when you must be on the right side and lose"
John Kenneth Galbraith
- Greece takes the €110bn bailout in 2010.
- In 2012 they need another bailout, €130bn.
- The 2012 bailout comes with debt restructuring, the thing the EU and Greek government had argued vociferously against, now needed to happen.
- The €100bn debt restructuring would focus on debt holders like Greek pension funds and small bond holders, i.e. the ordinary people who'd invested in Greek bonds would be told their money was gone, but the troika and banks, particularly French & German banks, would not have their debt 'restructured' away, as that debt must be re-payed, as part of the new bailout deal.
- These loans were called extend and pretend loans.