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"The crisis is, in classic Greek fashion, ripe with ironies. Papandreou came to office in October determined to clean up his country's longstanding fiscal recklessness and widespread corruption. It was he who first exposed the scope of the dilemma immediately after discovering that this year's deficit would be double what his conservative predecessors had promised. Moreover, Papandreou has consistently insisted that his government will keep the promises it has made to Greek voters and to EU auditors to bring the deficit, now almost 13 percent of GDP, down to less than 9 percent this coming year and to the EU-mandated ceiling of just 3 percent within two more. But traders and speculators, sensing the size of the task the government faces, have forced interest rates on Greek bonds to record highs, betting that the country is close to default. (The traders' role is itself ripe with ironies because Goldman Sachs and other top Wall Street firms had earlier in the decade helped Greek governments move liabilities off state budgets by constructing the same sort of offshore entities and complex derivative swaps that were at the heart of the US banking system's collapse a year and a half ago. Revelations of the deals by the New York Times generated new attacks on the Papandreou government, despite the fact that it was his government that had exposed the dealings.)
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What makes this crisis especially painful is not just that we've seen it happen before but that its solution is far less complicated. What Athens needs are the funds to service the gap between its revenue and its obligations, a net deficit that gets smaller each week as it carries out the painful cuts needed to bring its budget back to the EU's mandated standards. Public sector salaries, from the prime minister's on down, have been slashed; hiring has in effect been frozen; civil service retirement ages pushed up and benefits reduced; and social services and the military budget are being curtailed across the board. For Greeks it is an excruciating moment. Despite a nationwide strike called for later in February, opinion polls show the majority still favor Papandreou's painful choices.
Moreover, unlike Wall Street bankers, Papandreou isn't asking for a bailout (let alone a bonus for himself or senior ministers); what he wants is help stabilizing the market for Greece's bonds. And unlike Wall Street in the fall of 2008, Athens isn't being frozen out of the credit markets; in fact, it is still able to borrow. Its most recent 5 billion euro bond offering was actually oversubscribed by 20 billion, which allowed the government to increase the offering by a healthy 3 billion euros. Moreover, with unprecedentedly low global interest rates, Athens is paying 5 to 6.5 percent on medium-term bonds. That's not cheap, but it's far below what other small countries have paid in similar circumstances.
But Wall Street speculators have swarmed in, playing Greece, as the Financial Times put it, "like a piñata." The country's tiny bond market--barely a billion euros a day were trading in Athens in January--makes an easy and tempting target for traders with big bats; by attacking Greek bonds, the traders get to play on an increasingly pan-European volatility in bond and currency rates, thereby leveraging a little nation's problems into gigantic trading-floor gains. And thanks to the Obama administration's repeated refusal to limit such activities--despite pleas from our European allies since 2008 to jointly reregulate global financial markets--what the traders are doing is legal. In fact, massive immediate trading profits are the means by which banks like Goldman, Citi, JPMorgan, Barclays, UBS and Deutsche Bank are rebuilding their balance sheets without providing the lending the real economies of America and Europe need to begin their recovery."
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Thanks for the thread, marmar.
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