Olympic Games: Greece's Gold Medal For Debt

Although I cannot imagine that it will have much appeal in the ratings beyond C-Span 2, a terrific new reality program, Euro Bomb, could be produced around the survival of the Greek economy.

The founder of both the ancient and modern Olympic games is in the midst of a debt crisis that threatens not just to send a few bondholders off the island, but has the potential to blow up the European Union’s currency zone.

The first indication of a problem with Greeks bearing debts was when the yield on the country’s sovereign debt soared past seven percent; in Germany, similar paper pays only three percent, although, in theory, both countries are members in good standing of the Euro zone, and thus have an implicit guarantee from the community.

Greece joined the European Union in 1981, embraced the Euro in 2002, and staged the summer Olympics in 2004, steps that were intended to lead the country out of its Balkan past. Alas the only Greek medal was for the cost overrun, leaving Athens with garlands of high-priced debts.

Then it turned out that the Greek government had cooked the books that report the country’s budget deficit. It was actually 13 percent of Gross Domestic Product (GDP), as opposed to the 3 percent that Athens had been reporting to Brussels. As late as 2009, Greek Prime Minister George Papandreou was assuring voters (some of whom were in the streets) that there was no need for austerity programs or budget cutbacks.

Issuing phony financial statements has been a Greek sport of Olympian dimension since the time of Socrates. But the consequence of the latest illusion has been that the European Union is now confronted with the invoice for its continuing unity.

For Greece, the choices are stark, but clear. It can default on its debts and get bounced from the European Union; it can cut public expenditures and watch the streets fill up with unemployed public sector workers; or it can throw itself on the mercy of the European Union or the International Monetary Fund (IMF), which would put in place a stabilization fund to keep the country afloat.

The hard decisions are for the European Union, which, if it bails out Greece, could be forced to do the same, at a later date, for Portugal, Spain, Italy, Ireland, and possibly the United Kingdom, all of which took to borrowing as if it were pitchers of sangria.

To be sure, the European Union could deliver Greece to the IMF, the vulture that normally descends on the roadkill of bankrupt countries. In recent years, the IMF has picked through the ruins of Argentina, Turkey, South Korea, and Mexico, and then returned them to the investment community, minus a few state assets and plus a lot of unhappy voters.

But what does it say about the financial stability of the European Union — remember all the press releases about the United States of Europe and its standing as a global economic zone? — if Brussels cannot clean up the Greek mess, which only represents two percent of the European economy.

Further, in weighing options for Greece, there is the specter of the political rivalry between the French president, Nicholas Sarkozy, and the IMF President, Dominique Strauss-Kahn, who is thinking of running for the French presidency in 2012 as the Socialist candidate.

President Sarkozy has an Olympian-sized ego, and the last thing he wants is to run against someone who could claim that he, not Sarko, had saved the European Union.

Without the full faith and credit of the international financial community, the European Union (read the taxpayers of Germany) might not want to bail out the Greeks, who are perceived as lounging at the beach on the dole while the bail-posters trudge off to a factory in Dortmund.

Plus, the numbers in the great Greek unraveling are substantial: $20 billion is needed by April. National debt is approaching 100 percent of GDP ($380 billion), while the country has a budget, trade, and current account deficit, and a contracting economy. And these numbers are nothing when compared with the debts in Portugal, Spain, and Italy.

The central weakness of the Euro zone is that it has a common currency and a European Central Bank, but none of the political control that normally comes with monetary responsibility.

Decisions on the issuance of debt, on budget deficits, and public spending are made in each EU country, not Brussels, which thus finds itself as a lender of last resort in an economic zone over which it has only moral suasion (and very little cash).

Normally when a country tanks, its currency depreciates, which stimulates exports and promotes recovery. (This explains some of the American recovery.) But Greece is tied to the Euro, which remains overvalued in relation to the dollar, so things like tourism and exports are expensive.

For the moment, the United States feels itself to be above the Greek crisis. Even the dollar has rallied in the wake of Greek illiquidity. But writing in the Financial Times, the historian Niall Ferguson makes the point that “a Greek crisis is coming to America.”

His argument is that the projected budget deficits and international borrowings of the Obama administration give the United States Greek-like financial qualities, such as debt equal to GDP, and that it is only a matter of time before vulture capitalists come to roost in Washington, concluding, “Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase ‘safe haven.’ US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.”

While waiting for an international rescue, the Greek government can rail against hedge-fund speculators (who went short the country), international banks (who sold them all this expensive, junk-grade paper), and world capitalism (which is treating Greece as if it were the beach house of the Lehman brothers).

Or, in the spirit of reality television, it can invoke the economic philosophy of Alexis Zorba, aka Zorba the Greek, whose idea of a bailout package involved a lot of grilled lamb and ouzo. “No more fooling around, not in this place,” he said. “We'll pull our pants up and make a pile of money.”

Matthew Stevenson is author of the recently published Remembering the Twentieth Century Limited. He lives in Europe.