The Greek Tragedy of Debt
Published: Wednesday, 22 Jun 2011 | 11:49 AM ET
By: Ivory Johnson
Scarborough Capital Management, Inc
Greek mythology holds that Icarus was warned by his father Daedalus not to fly too close to the sun. Instead, the precarious young man ignored his father’s advice, became quite the aeronautic enthusiast and plunged to the sea after the wax on his wings melted during a reckless day of flying.
The Greeks have certainly embraced the classics as their economy discovers the painful virtues of a free fall.
This tragedy began in 2001 when Greece adopted the euro, despite being in violation of a Maastricht Treaty requirement that a country’s annual deficit be less than 3 percent of GDP before it used the euro.
Greece had a deficit well above the limit and never should have been allowed to use the euro as its currency in the first place, but nobody solves problems like large investment banks, who lent U.S. dollars to Greece and agreed to be repaid in euros so it could be classified as a currency trade, as opposed to debt.
They intentionally disguised the debt so the European Union would think Greece was below the 3 percent threshold, essentially making it possible for a debt-ridden country to legally circumvent safeguards against the instability of the EU with sophisticated financing techniques. Much like Icarus, Athens became intoxicated with its new-found ability to borrow lots of money at low interest rates and used the windfall to expand the size of government and bolster its uncanny indifference to tax collection.
When Greece couldn’t refinance €11 billion in May 2011 that it owed to other European nations, the dominoes began to fall, and the entire European system was on the verge of breaking down. It’s eerily similar to the sub-prime borrowers of 2008 whose mortgages were slapped sardonically into economic insults by the mad scientists of Wall Street to provide liquidity for improvident consumer spending.
While America responded to its own crisis with TARP, the stimulus package and two cycles of quantitative easing, the European Central Bank created even more debt to finance the bad decisions of broke countries and printed money to stimulate their economies. It appears that one year later, the ECB is reluctant to make a quarterly installment of bailout money, concerned that Greece will have a new and improved cash-flow dilemma as early as 2012.
Greece may have a 140 percent debt-to-GDP ratio, but America’s is more than 100 percent once you include the IOU’s that represent the entitlement trust funds that don’t exist. Moody’s [MCO 29.50 0.53 (+1.83%) ] has threatened the credit rating of England, Japan’s debt is 200 percent of its GDP, the French banks are said to have €1 of capital for every €26 of Greek debt, and Congress is negotiating the debt ceiling in hopes of preventing a technical default. Portugal, Ireland and Spain are just icing on the cake.
How ironic that so many wealthy countries rely on debt as a remedy for too much debt. One could make the case that these economic superpowers financed their prosperity with central banks unconcerned with the fine reputation of great nations billowing throughout the global economy like smoke. That fiscal gimmicks mass produced safety nets made of concrete, and, like Icarus, we all got carried away with the ability to spend resources we don’t have on things we don’t need and fall closer and closer to the sea.
The Domino Theory once defined a prevailing fear that communism would spread from country to country and destabilize the global balance of power, but those were the good old days. Sovereign debt is today’s nuclear bomb and some believe the arms race is crowded. My own father taught me that you never know how sick the dog is until it bites you. Fiat currency was good while it lasted, but even the grandest of parties must be paid for with real money.
Ivory Johnson is the director of financial planning at Scarborough Capital Management, Inc. He is a Certified Financial Planner, a Chartered Financial Consultant and a frequent guest on CNBC. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance.