How do these financial crises normally end? Many people are asking when this Greek episode will end and how it will affect us.
There’s good and bad news on this score. The good news is that, if the state does the right thing, a financial crisis can usually be managed.
The bad news is that, if our government remains in denial, trying to avoid the hard decisions, there will be a run on our banks. Ordinary people will take their money out and put their savings somewhere safe.
At the centre of all this is that most precious of commodities -trust. Financial trust has been destroyed. No one trusts banks any more, and no one trusts our government’s ability to make us financially secure. Thus, we are in a precarious position. All it takes is a small shock to tip the whole thing over.
Let’s paint the bad picture before we examine the way out, which would ensure that we avoid this.
Think about what is happening in Europe at the moment. The simple story – one that is being peddled constantly, and shamefully hyped by our own government -is that the Greeks are a race who can’t be trusted.
The mainstream view is that Greece is a country that has run up huge deficits and is paying the price -and that it is, in some way, uniquely delinquent. This is only half the story. This is the lender’s story, which points the finger at the borrower.
Greece is the symptom of this crisis, but Germany is the cause. This is a crucial thing to understand and one that gets forgotten in the constant spin coming out of Brussels. It is only right that Germany pays for the Greek problem, because Germany is the reason for the crisis.
German banks and the German populace are no angels in this narrative and, despite their protests, they need to be reminded of this. For every loan for which there is a borrower, there is a lender.
This European crisis was created more by lenders than borrowers because, taken in the aggregate, Europe has more savers than borrowers. This fact is manifested by a large current account surplus with the rest of the world.
At the core of Europe and the euro is Germany -a country that prefers to save than spend or invest. So the German banks are stuffed with money that not enough Germans want to borrow. If the German banks don’t find a home for this cash, the banks start to make a loss, paying out interest on deposits without enough corresponding lending on the far side of the balance sheet.
So the German banks had to find someone to lend to. They found Greece and Ireland and others, Spain included.
They did little or no research on Greece or Ireland. They could get a margin over what they had to pay German savers, so they stuffed the periphery of Europe with money. The Germans bet on the notion that, because of the euro, there was no currency risk. Then they made the fatal mistake of confusing no currency risk with no risk. But of course there was risk. There is always risk.
The German bet was that the rest of Europe would never let Greece go under (or Ireland for that matter) so they were actually getting risk-free margin in Greece. So what did the German banks care if Greece’s borrowing was going through the roof? There was an EU backstop, so they could give the bill to someone else if things went pear-shaped.
Well, things have now gone pear-shaped and the German banks, the EU and the IMF have decided that the solution is austerity in Greece.
But many in Greece believe that the solution is an orderly default. After all, it takes two to tango, and why should the borrowers be uniquely culpable, when the lenders were greedy and did no proper due diligence?
The Greek position is understandable.
An orderly default is the only obvious way out. Greece can’t pay all these debts. We know that, the markets know that, and the German creditors know it too. So why the IMF/EU charade?
My view is that the charade is a failure of conventional wisdom. Conventional wisdom is always out of touch in a crisis.
The conventional wisdom is that countries don’t default. But this has never been true.
Dozens of countries do, particularly if they have been stuffed to the gills with money by reckless lenders who were in it for a fast buck.
If the world demands that Greece forces austerity through, the Greeks won’t be able to deliver, and there will be another crisis, even with the new €100 billion-plus deal expected to be announced today.
In this next phase of the crisis, Greek corporates will take their money out of their own banks, because they are not being paid for the risk of keeping their money in Greece when they could keep it in Germany. This is why there was a run on Anglo in January 2009 -corporates took their cash out.
This run by corporates will be followed by individuals who don’t want to be last at the ATM machine and find that there is no cash left. Panic will follow. When the bank fails, the crisis is over. The money comes back home from abroad into a new bank, and the country starts again. This is likely to happen in Greece.
The alternative to this, of course, is that The Greek government gets the creditors in a room and says: ‘‘Sorry, your gamble didn’t work, there is no money, let’s do a deal.” This would solve the crisis before a run on the banks and leave the small saver reasonably unscathed.
So what does all this mean for Ireland?
Contrary to popular belief, which says that if Greece defaults it would be a disaster, my contention is that, if Greece doesn’t default, there will be eventual and very serious panic in Ireland.
The real risk is that a bailout of Greece will fail, and the Greek people will be the first to abandon trust in their government.
The IMF and EU will continue to mouth platitudes about solidarity and the like.
Meanwhile, your average Greek will put his cash under the mattress. A Greek bank will fail and the contagion will no longer be limited to bond markets (that frankly means nothing to anyone on the street), but the panic will spread to depositors. We are in the same boat here and, unless something is done, will head in the same direction.
Our debt is unsustainable, just like that in Greece and other peripheral countries, such as Portugal. Thus, the great Irish financial/banking crisis will see us come under similar pressures to Greece -and head us in the same direction, with confidence evaporating, the state struggling to raise cash from reluctant lenders and our banks at risk of big outflows of cash.
This is the upshot, not just of the great Irish borrowing binge, but also the great German lending splurge. So now we have to hope that the Greeks put their hands up -and give us permission to do likewise.
Salad Oil Scandal what does it mean- One of the worst corporate scandals of its time. It occurred when Allied Crude Vegetable Oil Company discovered that banks would make loans secured by its salad oil inventory. When the ships full of salad oil would arrive in the docks, inspectors would test it and confirm that the ship was full of salad oil. However, the company didn’t remind anyone that oil floats on water. They had filled salad oil tanks with water and put a few feet of oil on top, fooling everyone. The company would even transfer oil to different… Read more »
The article like most of D Macs just makes sense.
If you dont put your money under an Irish mattress – try an australian one….appreciation and interest until the yuan takes over – and no bed-bugs.
I am not in agreement with the general premise of this article. I think that those that live beyond their means must make their reckoning. And if that includes us, then we must live within our means. A gradually increasing proportion of us have been living like a nation of CJHs for almost two decades. Secondly, I point to this graphic, which shows that the most exposed country is France – not Germany. This is from the New York Times. http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=global However, the question must be asked about the lenders – as to why they never did any homework. Basically… Read more »
—- EUROPA?—- Good Morning, The sixth moon of Jupiter was discovered by Galileo around 1610. It took the catholic church 382 years to admit that they were wrong, and it took them another 16 years until 2000 to completely rehabilitate his reputation, and well, now there is a statue of Galileo in the Vatican. However, the now reasonably controversial leader of the catholic church, Ratzinger, wrote as late 1990, at this time holding the position as Cardinal in which he seems to have performed some more than questionable actions of hiding informations, that in his understanding ’The Church at the… Read more »
I studied German and Greek culture and literature at University. S’funny how ‘useless’ it seemed to the finance and business cliques in the Union Bar. In whatever hedge fund cubicle hell they are today: They’re about to learn just how important cultural and literary history are to ‘economics’. ‘Lenders must share the blame’ says DMcW. Absolutely true. Caveat Emptor. Every German regional bank’ pension fund and indeterminate financial intermediary who bought the debt of other nations needs to ‘get real’. ‘The Great Repression In Germany’ by Niall Ferguson http://www.niallferguson.com/site/FERG/Templates/ArticleItem.aspx?pageid=212 Along with China, Germany is the incubus/succubus of the world economy,… Read more »
The German (tabloid) newspaper Bild, did a series of articles on Greece. Those of you who work in the public sector will point to this as evidence that private sector misbehaviour as the source of the problem. http://www.bild.de/BILD/news/bild-english/world-news/2010/04/26/bild-with-the-broke-greeks/what-crisis-business-as-usual-in-greece.html There are insightful episodes where the journalist asks for a receipt for small items and is told “No”. Basically there is money in Greece, but the tax system is completely ineffective. It is the type of place that one would expect North Dublin FF TDs to relocate the contents of their brown envelopes. And here is the main beneficiary. Kind of like… Read more »
Savers are the big losers in this fractional (or maybe no reserves) central bank controlled fiat money system. Savers have had their money diluted by 8%pa since 1999. “This European crisis was created more by lenders than borrowers” but this has very little to do with people living within their means. See links to ECB monthly reports and summary of the monetary and credit expansion here. http://vimtrading.blogspot.com/2010/04/when-credit-is-flowing.html David I know you may be a fan of this monetary system but at least be clear when writing about it. Are you saying that for every loan there has to be savings… Read more »
Ignore this post…. I am just trying to find out whether I can have bold, italic and stuff here….
David writes “German banks and the German populace are no angels in this narrative“. I don’t think it’s fair to put the ordinary German savers in the same category as the German banks. The savers may have deposited their money with the banks but they did not do so with the intention of making a huge profit from reckless lending. Most Germans are risk-averse.
Traditional protestant logic would say that simply, debts are the responsibilkity of the borrower in the end and in general I agree with this logic. Having said that in the case of Greece and all the peripheral countries deeply indebted to mthe likes of Germany, the countries , like our own youngsters in Ireland were suckered into making stupid borrowing decesions and we all know the result. The problem I see at the moment is that the syatem is broken because it was abused by both borrowers and lenders throughout the world, so we have two choices, the first is… Read more »
My one life on this earth, dictated by those who lived hundreds of years before and by those who will live in hundreds of years to come.
David, you say ordinary citizens will take their money out of Irish banks and their savings in a safe place. Where is that safe place?
—- PROPAGANDA INCREASING —- I might be stating the obvious here to the alert observer of the media landscape, but I find it important to point this out. Notice the language used, it is all over Europe, they speak of Greek Bailout, Greek Rescue Plan etc. It nearly looks like The PR departments of Finance Ministers and state leaders seem to collaborate on common style messages to be hammered down the publics brains. Such statements are deliberately used and they will increase in the short term, drumming up patriotism. This is not a Greek bailout, this is a bailout of… Read more »
Hi David, > the Greeks are a race who can’t be trusted. I dont think anyone is peddling this idea as the fault or cause of Greece’s debt mountain and the credit crisis. The Greeks have cultural differences with other areas, thats true, but all countries and regions have its nuances, evolving nuances at that. I dont think anyone here in Ireland can be proud of our current cultural and average moral’s, do you? > The mainstream view is that Greece is a country that has run up huge deficits and is paying the price. Greece is the symptom of… Read more »
This Greek bailout is extraordinary to say the least! We in Ireland have to borrow this money to bail out a Friend? Everybody knows what a chance one takes to borrow money to help someone else! In the best of times it’s questionable but when one is on the bread line it’s downright foolish We have gone in the space of 3 weeks from giving 250 million (according to Brian Lenihan) to now having to pay 1,300.000.000 Billion This Gob**** cannot count and is high on something! (Headshops!!!!) This is sheer madness! When you have it, then it’s not a… Read more »
http://colmbrazel.wordpress.com/2010/05/03/ecb-the-new-anglo/ Totally agree with D, the spotlight has to be turned on the bondholders. The solution is not TED, increase taxes, reduce expenditure(public services), Debt enlargement. Moral Hazard, serfdom for life to the vampire money lenders for each of the PIIGS is not the way to go, that’s the way of Transylvanian economics built on the premise that an economy can repay unlimited debt obligations and still have money left over to invest in its future, pay for public services etc. It can’t when its sucked dry! If the bondholders were acting without due diligence and not hosing money to… Read more »
An excellent film that explores the heart of German society is Michael Haneke’s ‘White Ribbon’, what a beautifully shot film which gracefully touches on some of their ‘issues’.
2010 Golden Globe Winner for Best Foreign Film.
Palme D’Or Cannes 2009.
The White Ribbon
http://www.youtube.com/watch?v=g4iwMY7RxLw
George Friedman of Stratfor says: The financial institutions in Europe were fully complicit in the global financial crisis. They bought and sold derivatives whose value they knew to be other than stated, the same as Americans. Though the European financial institutions have asserted they were the hapless victims of unscrupulous American firms, the Europeans were as sophisticated as their American counterparts. Their elites knew what they were doing. Complicating the European position was the creation of the economic union and the euro by the economic and political elite. There has always been a great deal of ambiguity concerning the powers… Read more »
econarchist (9)
I agree with you, the ordinary German citizen has no more to do with the foolish investments of the top bankers in Germany than the ordinary account holders of AIB or BOI
David,
I currently have debts of €6,000.00, a legacy of funding myself through college where I had to pay full fees. The qualification I received allowed me to find work. An economic downturn has taken my job and income away from me. I now received €196.00 a week, which after bills (food, rent, heating and other essentials), typically gives me €40 a week to dispose of, €2,000.00 annual income.
Should I contact my bank and tell them I’m planning on defaulting since they were not obliged to award me a loan?
Atlantic Eye : We dont need to proffer the histories of Greece and Germany to be our own or their greatness to succumb to .They have their Mediterranean and we have our Atlantic .Ours are tidal and theirs are not .We have resources that they dont . The lender be a lender and let his risks be his own too .The dice was thrown in and the numbers turned up .Its a casino you lose and you win.Let the lender take it on the chin.Its life so whats new? Laws are made by people for people to make a better… Read more »
Sovereign Debt –
Lets get closer to the meaning of this in a local mindset .Sovereignty exudes the power of supremacy over others .Have we seen recently that the Emperors in RTE have no clothes and owe their lives to threaturous Irish banks.Will this be a new volcano in our midst?
Hi David, A good article, but I have a couple of points. It is not the German people who are to blame for lending to Greece — it is their banks. However, it is the German people who are going to be stuffed with shelling out over €22 billion of tax money through KfW, which may never be paid back. Greece’s overall debt is €300 billion (soon to be €420 billion). The Economist recently stated that German and French banks have between them lent approx. €100 billion to Greece. The question is who lent the rest (€200 billion) to them?… Read more »
Nobody seems to get it. According to the New York Times Germany is not the country with the highest level of PIGS exposure. Have a look.
http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=global
It is fairly clear and should surprise some people.
I find it amazing also that the Irish Banks (somebody mentioned Rich Butcher) managed to lend to other PIGS when they were not throwing money at developers building apartments in fields in Laois). Should we offer a straight swap of debt between the other PIGS ?
Its worth pointing out the difference between the savers in Germany and the banks who were lending out their money in a fractional reserve system. Take it from me, the German people are starting to wake up to the fact that precious metals are the only form of money worth saving their money into. Don’t believe me? Well look at how much the spot price of those metals have risen recently against the Euro. Hitting record times constantly. David is a well meaning guy, but he’s a Keynesian and thinks its okay to steal from savers by diluting the money… Read more »
—- GREECE HIRED LAZARD —-
Greece hired Lazard for financial advice though the bank said a restructuring of debt “has never been an option to be considered.”
LAZARD!
Right!
Good article. I hope Greece does default by legitimate means and not receive a bailout but this isn’t looking very likely. If they default legitimately, it will be incredibly positive for the Euro and the EU as a whole despite the burden of other countries that are also bankrupt. Not bailing out Greece will show investors that the Euro will be a strong currency in the future and will restore strength because the EU powers won’t tolerate weak government balance sheets. Bailing out Greece on the other hand indicates that they will also bailout the rest of the PIGS and… Read more »
Ouch!…. Looks like the markets take another heavy beating today.
@Deco.The figures in the NYT you quote total as follows:France $911 billion.Germany $702 billion.Britain $481 billion. But the important figure is the combined Franco-Prussian alliance sum of $1613 billion. It’s the PIIGs who hold all the ammo, not Germany and France. Creditor and debtors are inseperably linked by the Euro and thus share a common fate. Britain is an entirely different kettle of queer QE fish altoghether and is probably plotting with the US to shaft Core-Euro good and proper. Can someone clever explain what’s going on with the latest figures on US Treasury holdings by foreign governments? http://www.ustreas.gov/tic/mfh.txt The… Read more »
I don’t think it’s a question of ‘if’ Greece defaults, I think it is inevitable given the structures in their economy and the sheer mountain of problems they have racked up, defining moment for them, could well tear the society apart given what I am hearing from Greeks in Athens, they people don’t want it.
By coincidence (I hadn’t read the article until this morning) I was at my German conversation class last night, my third week, I’ll see how long it lasts. The economy was mentioned and she said that it wasn’t fair that Germany was having to bail out the likes of Greece. I pointed out that they shouldn’t have lent to the likes of us in the first place. Coincidence or what? Our teacher does a bit of tour guiding among other things in trying to make an honest living. She had been reading up on Irish history and gave a summary… Read more »
FoI Act requests too expensive? (Deco) Here is another route, from Gavin Sheridan of thestory.ie and Storyful.ie “A powerful new weapon in the journalist’s armoury, the AIE, is similar to the Freedom of Information act but is largely unknown to Irish journalists. Gavin Sheridan examines this cost-effective way to get at the truth. Seek and ye shall find There are two main methods of getting information from public authorities in Ireland. The first is the Freedom of Information Act, as amended in 2003. This is the best known and most utilised by journalists. The second is less known — the… Read more »
Apologies for posting this link yet again but it seems to be highly relevant here. Global trade imbalances, danger of trade war.
http://www.guardian.co.uk/commentisfree/2010/mar/28/will-hutton-china-germany
I think MK1 has indiretcly nailed it 100% “But are we saying that countries with similar levels of debt also cant make their debts back, the US, the UK, Japan, Italy, Belgium, etc???? Why pick on Greece?” I think China is starting to implode. See P 41 of Business in today’s Indo. Financial Information (in the form of credit exchange information) has reached the equivalent of a broadcast storm in telecoms parlance. In trying to keep margins maximised in the business of money for money, the whole system is lending to itself in an ever increasing frenzy as debt payment… Read more »
—- CHINA, BRAZIL, INDIA AND SOUTH-AFRICA SABOTAGED CLIMATE TALKS —- There was a interesting o-tone document on DER SPIEGEL on the last world climate change conference in Kopenhagen 18th december 2009. This was apparently a stealth recording that was played into the press hands. Global Leaders came together in a small conference room to make steps forward, as talks were not followed up with concrete numbers on CO2 reduction responsibilities of the participating countries. When it came to the point of committing to concrete reduction figures, China blocked and stated that it is not willing to make these contributions. It… Read more »
Hi David, The Germans and French are loaning to the Greeks so they can pay interest on previous loans. In your local community you would call it loansharking; when done on an international level – it’s a stability pact. Like the old saying goes:- “if I owe the bank a dollar and I can’t pay then it’s my problem; But if I owe the bank a million and I can’t pay then it’s their problem.” As you outlined, the real issue with this whole ‘bailout group-think’ is not just rewarding failure; it is propagating the idea that the lender cannot… Read more »
—- THIS IS GERMANY IN MAY 2010—- I am disgusted, really! This gentleman here in the green jacket: http://images.zeit.de/politik/deutschland/2010-05/thierse-mai-demo/thierse-mai-demo-540×304.jpg He is the Vicepresident of the german Bundestag! Wolfgang Thierse (SPD social democrats), who you see here when he joined a sit in blockade on the first of May to demonstrate and protest against a phalanx of Nazis who announced to come to Berlin. IMHO, this is a courageous and a good example of civil courage, and for once I thought well, here is a reason to be proud, they are not putting up with the new emerging fascism that goes… Read more »
Intersesting Article, but can I put it a bit simpler. The German Banks wanted to lend to get interest in return. The Greek upper bussiness class wanted to borrow to build their investment projects so as to collect rent and proffit from their ordinary workers. Both the German Banks and the Greek upper bussiness class had already done a dirty deal behind close doors before the loans were drawn down. That dirty deal was that the Greek banks and their frients in the government and the media would cry “Financial Crisis, all the money has disappeared” and the ordinary Greek… Read more »
Nouriel Roubini: forget sub-prime mortgages. It’s the sub-prime financial system we need to fix.
http://tinyurl.com/35ztf64
You can pre-order on Amazon.com my new book – Crisis Economics – to be published by Penguin on May 11th http://tiny.cc/dctjq
David. Another angle on this Greece debt debacle is that Goldman Sachs assisted Greece government back in the day, using the ‘ol CDO weapon of mass destruction to hide the level of debt already kerchinged up by the greek insiders before they joined the euro. And all the fuss going on concerning the Greek debt spiraling out of control is the direct consequence of the goldman sachs cdo book keeping gimmick the greek insiders employed to join euro and its all come home to roost. There is no way could this greek sovereign debt lunacy come out of nowhere supposedly… Read more »
Well I find this fascinating. The paper that told us that property was great value in 2005, that the economy would go up forever, and that companies on the ISEQ were run by geniuses….has dropped a bombshell. It certainly is a bombshell, because the Old Lady of D’Olier Street was telling us that Spain was …to use one of the favourite terms used in recent years….As safe as houses. And sure enough….that is how it has turned out. Folks this is the elephant in the room. Espana. This is the mess that will undo the Euro if it is not… Read more »
Posters. I reckon Goldman Sachs helped other countries alongside Greece to meet the requirements set by the EU to switch their currency for the Euro. Alorra debt taking of the books and stashed away into the future which when it arrived would be some one else’s problem to fix. The future has arrived. The CDO gimmicks used to keep the debts off balance sheets of different euroland countries are now reaching the deadlines on the can. The Euro as a project was rushed through it’s now looking like to me anyways. Now, one must look to the euro printing presses… Read more »
I have just realised something. The idea that we should not pay for the share of the fun that each of us had spending money that we had not earned is the type of concept that is increasing catching on here. Everybody has decided that it was somebody else’s fault. You voted for Ahern three times, but it was the fault of the other people that he got elected. You went for 1000km troundtrip pissups (stag weekends) but it was peer pressure that forced you to conform. You spent money on clothes even though you had enough already but you… Read more »
Folks, via Paul O’Mahony:
EU warns credit rating agencies; http://bit.ly/a8q5GY
Is America Just an Oversized Ireland? – By Kevin Drum | Tue May. 4, 2010 10:14 AM PDT In a review of Fintan O’Toole’s Ship of Fools, a book about the boom and bust of the Irish economy, Henry Farrell summarizes the pathologies of Irish political culture and then concludes: Yet is American politics so very different? Irish politics is profoundly shaped by perceptions regarding the difference between those who have influence within the system and those who are relegated to the periphery….This is as plausible a description of the United States as of Ireland. In the U.S. system, too,… Read more »
Greek deal may collapse as crisis tests euro says BoE policy maker
http://www.independent.ie/business/european/greek-deal-may-collapse-as-crisis-tests-euro-says-boe-policy-maker-2164100.html
As of May 2003, space probes have identified 61 Jovian moons comprising 57 small moolets and captured asteroids. The brilliant Italian astronomer and mathematician Galileo Galilei first observed the remaining four (not six) large Jovian moons – Io, Europa, Ganymede and Callisto, all visible from Earth and now collectively called the Galilean moons – all are similar in size to our own moon. This discourse highlights the central problem surrounding Economic Science and theory and its application in a modern context (i) we generally know only half truths and our knowledge is based on prejudice and misinformation for the 4th… Read more »
—- THE MYTHOS OF THE GREEK FRAUD—- The Press in Europe, in particular in Germany was painting a picture of the Greeks as Fraudsters who deceived the Euro. You know, this is only half the truth and the other half is deliberately kept low key. To understand that, one needs to look at the process involved in Europe. All european countries report their financial and budgetary data to a central agency located in Luxemburg, EUROSTAT. http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ Brussels now has received numerous documents from within greece, from honest people, who are somewhat disgusted at the ways greek officials as reporting false… Read more »
Oh. BTW.
Desperate Dan was back on TV tonight commeting about the price of petrol.
A sure sign we’ll be driving donkeys next year.
@LaughingBear… Sure aren’t we are the same auld shite ourselves, hiding mountains of debt in “Special Purpose Vehicles”, for the purposes of keeping it off the national balance sheet. At the end of the day it has to be repaid in full and for as long as that’s the case, a situation should not be allowed where we can dress it up as something other than part of the national debt that will fall due to the taxpayer. Part of the problem here is that we have over complicated the whole concept of what debt actually is, with SPV’s, and… Read more »