Greece, the Euro, and US

OK, we all know in our heads that we live in an integrated One World community. 

But this financial stuff is getting ridiculous. 

I mean, are YOU worrying about the inability (or the refusal) of the Greeks to pay their taxes and live responsibly, just like the vast majority of us do? Well, we had all better start worrying, because it is hitting us in the pocketbook from Everett, Washington to Chicago’s O’Hare Airport to New York City’s schools. But more about that in a bit. 

I was in France and the Netherlands this April, and I can guarantee you THEY are worried. And the Germans, they are infuriated. But then they’re all in the Euro (currency) market like the Greeks, and supposed to pay for Greek financial imbecility.

Yes, I used word “imbecility.” And if you think that’s too strong, take a read (or a reread) of Michael Lewis’ classic report in the October, 2010 Vanity Fair on how Greece got itself into this world class mess, Beware of Greeks Bearing Bonds.

As the Vanity Fair headline writers captured in a brutal “sub head”:

“As Wall Street hangs on the question “Will Greece default?,” the author heads for riot-stricken Athens, and for the mysterious Vatopaidi monastery, which brought down the last government, laying bare the country’s economic insanity. But beyond a $1.2 trillion debt (roughly a quarter-million dollars for each working adult), there is a more frightening deficit. After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can’t trust their fellow Greeks.”

You really have to read Lewis’ description of the unbelievable financial chicanery of the Greek monks in Vatopaidi. And it’s here on the web. But let me quote just one Michael Lewis excerpt if you’re too lazy to click.

“Our people went in and couldn’t believe what they found,” a senior I.M.F. official told me, not long after he’d returned from the I.M.F.’s first Greek mission. “The way they were keeping track of their finances—they knew how much they had agreed to spend, but no one was keeping track of what he had actually spent. It wasn’t even what you would call an emerging economy. It was a Third World country.

As it turned out, what the Greeks wanted to do, once the lights went out and they were alone in the dark with a pile of borrowed money, was turn their government into a piñata stuffed with fantastic sums and give as many citizens as possible a whack at it. In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn’t take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs: it’s still true. “We have a railroad company which is bankrupt beyond comprehension,” Manos put it to me. “And yet there isn’t a single private company in Greece with that kind of average pay.” The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland’s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something. There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses. The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on. The Greek public health-care system spends far more on supplies than the European average—and it is not uncommon, several Greeks tell me, to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.” 

Yes, the Greeks make the public unions in this country look like a bunch of pikers, but what institution in its right mind was lending them money? Well, a lot of banks from Europe it turns out, and one of them, a Belgian-French bank called Dexia, was very very active in the field. And why should we care? Because Dexia, according to a distressing Wall Street Journal article published Saturday, June 18, gave local U.S. governments easy access to the same kind of credit they gave the Greeks. And, guess what? Now that Dexia is in trouble with its Greek loans, U.S. municipalities and their taxpayers are paying dearly for it. How?

According to Journal reporter Michael Corkery: 

“Dozens of U.S. cities and towns are being bruised by the deepening Greek debt crisis even though they are thousands of miles away and don't own any of the country's bonds.

From a skating rink in Everett, Wash., to New York City's schools to Chicago's O'Hare International Airport, interest rates on some bonds have soared since late May and could rise even further because money-market investors are less willing to buy some of the $17 billion in municipal bond deals backed by Dexia SA, a Belgian-French bank shaken by its exposure to government debts in Greece.

We are far from Wall Street or Greece, but the impact is being absorbed to the core in small-town America,'' said Kate Reardon, a spokeswoman for Everett, Wash., a city of 104,000 people, where interest costs are rising on a local rink and concert arena.

In the Perris Union High School District in Perris, Calif., which already was furloughing workers and considering pay cuts, borrowing costs have risen by $30,000 a month, or about two-thirds of the cost of a first-year teacher, who earns about $46,700.

When times were good, Dexia gave governments across the U.S. easy access to the same cheap financing tapped by homeowners and companies by agreeing to backstop their municipal bonds. In turn, the interest rates on more than 100 municipal bonds fluctuate through daily or weekly sales called remarketings, in which big investors can either roll over their holdings at market rates or opt out.

Few public officials knew about the lender's vulnerability to Greece; Dexia has €4.3 billion ($6.11 billion) in direct exposure to the country's debt, according to ratings firm Standard & Poor's Corp.

After S&P warned last month of a possible downgrade of Dexia's investment-grade credit ratings, wary money-market funds dumped bond deals tied to Dexia, analysts and traders say. Such mutual funds typically are among the most cautious of large investors and are owned by tens of millions of Americans.

While other investors are stepping in to buy those bonds, they are demanding sharply higher yields. As a result, borrowing costs for some municipalities are now the steepest since the financial crisis.”

"If your cost of borrowing is tripling and quadrupling in a matter of weeks, that can be pretty painful depending on who you are,'' said James Ahn, a municipal-bond portfolio manager at J.P. Morgan Asset Management."There may be some issuers that can't tolerate the strain for a prolonged period."

If you read Michael Lewis'  (the author of the classic Liar’s Poker) Vanity Fair account carefully, you will never ever have an ounce of sympathy for a rioting Greek civil servant again. You may even be outraged enough to cancel your Greek vacation and let the Germans, who will probably have to prop up the Greek economy whether they want to or not (for fear of destroying the Euro) , have the run of the beaches and taverns and ancient ruins.

In the meantime, as the outrage builds in this country over our own civil servants (including teachers) with outrageous budget-busting property-tax killing pensions, and those responsible for giving home loans to anyone with a pulse (including vast numbers  who could never afford to pay them off - hello Fannie & Freddie and Countrywide etc. etc. etc.), watch what happens in Greece. If they ever default on their debt, even the Chinese won’t be there to bail them out and take ownership of the country. 

As the New York Times’ Liz Alderman notes from Athens in the June 19th edition,

"China has taken note of the flood of withdrawals from Greek banks, evidence of uncertainty that Greeks have about their own country.

“What’s happened here in the last few days is Looney Tunes,” said Demetri Politopoulos, chief executive of the Macedonian Thrace Brewery, who himself ran into thickets of regulatory hurdles when he tried to make new investments in Greece. “We’re trying to attract investors? Good luck.”