Uneasy money [By Jiao Haiyang/China.org.cn]

During the first half of February, the economic and political news concerning the Greek Sovereign Debt Crisis sounded like the same old song of on again, off again "deals" that we have been hearing for many months. However, if we listened carefully, there were some recent verses that are ominous and could have dramatic outcomes very soon. These outcomes (whatever they are) will have significant impacts on the world economy.

In a nutshell, the Greek Debt Crisis is the result of a most unfortunate set of circumstances that can be summarized as: 1) many decades of liberal governments that garnered votes by promising citizens magnanimous social programs, 2) unforeseen changes in demographics that have resulted in a significantly larger percentage of elderly people and, conversely, a significantly lower percentage of young people; and 3) many financial institutions around the world which have unquestioningly accepted Greek sovereign debt to finance shortfall after shortfall when tax revenues have fallen woefully short of Greek expenditures.

To the European Union's (EU) credit, financial markets have been more composed after the December infusion of 489 billion euros worth of cheap credit by the European Central Bank (ECB) to 523 European banks. But, that was then and this is now. On March 20, Greece must make a 14.5 billion euro bond repayment in order to avoid default – and Greece does not have the money.

Make no mistake about it; Greece will have to default on its debt at some point soon, even if it can miraculously avoid default on March 20, because many such repayment deadlines follow. The real question is: "Will the Greek default be orderly or disorderly?" Therefore, we should think about the consequences of both scenarios.

An orderly default would be a situation where all stakeholders share in the pain of taking less than what is owed them. The list of stakeholders includes the Greek people, European banks, European taxpayers, the International Monetary Fund (IMF) and countless other indirect, but nevertheless adversely affected parties.

For example, in order for Greece to receive the second round (130 billion euros) of bailout money, the latest austerity measures demanded by the EU, ECB and the IMF require Greek banks to take a 70 percent write-down on the Greek sovereign debt they own. In addition, Greek workers are to take a 22 percent reduction in the minimum wage. Furthermore, Greek pensions must be further reduced on top of cuts made for the first round of the proposed bailout. Greek government payrolls will have to shed another 15,000 employees, even after earlier 40 percent pay reductions for such workers. Sales tax will be boosted to over 20 percent. Due to increased taxes and other fees, gasoline will cost Greeks the equivalent of US$10 a gallon. These requirements are severe! And there are many more imposed austerity measures.

Unsurprisingly, these requirements have been met with strong (and sometimes violent) resistance by the Greek public. Near unbearable pressure is being put on the three political parties of the current ruling coalition that supports interim Prime Minister Lucas Papademos. Greek unions have been strong since the end of World War II, and they have significant influence in many Greek political parties. The news on February 10 was that several cabinet members (from both right and left wing coalition parties) had resigned in protest at EU, ECB and IMF demands. Furthermore, EU members are demanding a written guarantee that Greek political parties will honor the promised austerity measures, including those currently being rushed through the Greek parliament, even after elections scheduled for April. European leaders have to be tough with Greece, if for no other reason than to keep the pressure on Spain and Italy. Both of these countries have much larger economies than Greece and they have issues which are similar, if perhaps less serious, to Greece's.

Bottom Line: I do not think the Greeks have the political will to satisfy the EU, ECB and IMF in order to get the full bailout, which would avoid a disorderly default. One Greek political party leader has already said: "We do not want to be outside the EU, but we can get by without being under the German jackboot. I would rather starve."

So, what about a disorderly default? Such a scenario could be rapidly triggered by Greece failing to secure the second round of bailout money (130 billion euros) in time to make its obligatory repayments due on March 20.

First, Greek (and other European) banks may find their Greek sovereign debt absolutely worthless. Then, the 70 percent agreed upon haircut in an orderly default would not look so bad. Without meeting its obligations, Greece would most assuredly be kicked out of both the eurozone and European Union. The Greeks would have to reinstate a Greek currency that would be very weak relative to other currencies – including the Euro. Anything imported would become extremely expensive. Greek standards of living would tumble further – to very low levels – as the current unemployment rate of over 20 percent would rise sharply. And, there would be no ability to ease the socioeconomic crisis with foreign or domestic borrowing because Greek paper would be "persona non grata" everywhere.

Greek suffering would include the further degradation of all basic services, such as electrical generation and distribution, the water supply, police and fire protection, health care and even food supplies. For example, Greece imports virtually 100 percent of its primary fuels, such as oil and LNG. These would become extremely expensive, if available at all. Thus, Greek electrical generation would be all but impossible. As people became more and more disparate and, if Greek society breaks down, one could easily visualize a radical government taking power, a civil war or a failed state; any of which would not be in the best interests of Greece or the rest of the world. Such chaos makes me think maybe the Greeks (and the rest of us) should be very careful what the Greeks wish for.

The author is a columnist with China.org.cn. For more information please visit: http://www.h5a3.com/opinion/tylorclaggett.htm

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