How Greece is Like a Spoiled Teenager with a Drinking Problem
This post has 2009 words. Reading it will take approximately 10 minutes.
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I was having a discussion about Greece and why I think the Greek prime minister, Alexis Tsipras, is a very evil man. I wrote this comparison of Greece’s current situation with a spoiled teenager with a drinking problem:
Greece is like a teenager living off of support from its parents. It is spending all its money on parties and movies (early retirement in the 50s, a tradition of tax-evasion, and support for 10-years-dead people) while not saving for necessities like rent (taking care of actually poor and sick people).
Greece was let into the Euro by forging its accounts, which was essentially like giving a teenager a credit card secured by its parents. Normally, Greece could not get a loan but guaranteed by the EU it suddenly could. Still at credit-card rates, but at least not at loan-shark rates.
It spent the money living the good life. Then the bills started ticking in. They were paid by new loans.
Greece has been loaning money and spending it by leaving beyond means with a public sector that is not backed by payments from the productive private sector. It faked its accounts to enter the European monetary union; most countries didn’t initially satisfy the requirements, but Greece had to cheat to get even close.
At the same time, Greece’s bigger brothers and sisters, Italy, France, and Spain were running small companies with 5-50 employees. Business was very tight, especially twins Italy and Spain, who also had quite expansive habits. They loaned money from their parents; most of it was put into the companies and some was spent on luxuries, but a weaning amount.
Meanwhile, Greece was unable to pay the credit card debt and also got money from its parents. It was spent equally paying credit card debt, rent, and on parties. Greece’s parents told Greece to lay off the partying. As a show of good faith, Greece stopped partying till 4 every Monday, and only partied till 3. The other days it partied all night long as before. It also switched from Cristal to Dom Perignon.
The fiscal crisis hit many countries. Economies like those of Italy and Spain were traditionally poor, but cut back during the crisis. Greece only make superficial cuts, and until recently had a crazy low retirement age.
Italy, Spain and France’s businesses were struggling, but they spent their loans trying to improve profitability. At the same time, Greece spent the money partying. Greece’s government knew that laying off the partying would kill its career. Because that somehow makes sense in this analogy.
Whenever Greece’s parents tried to make Greece focus on it’s abandoned paper route, spending the loans on rent and credit card debt instead of taking on new loan obligations, Greece would just point to it’s rent and say that without new loans it would not be able to pay rent and would be evicted.
The troika with the EU has been supporting struggling economies. In part to help them and in part to protect the euro. The support comes with a lifted finger and requires that the economies are cleaned up. Greece has not been willing to satisfyingly do this. They continue spending even as they have no money. They point to the old and poor and say they need help, yet don’t clean up the system for fraud. They’ve made superficial concessions, but their changing governments have not had the courage to cut as needed. Problems just kept piling up.
Greece would also ask for its debt to be erased. Greece’s parents would be able to financially do this, but didn’t for two reasons: it would allow Greece to get off unscathed, teaching it exactly no lesson at all about the value of money, and it would make Greece’s siblings also ask to be let off the hook. They were also struggling. Were the siblings to fall not only would much larger loaned amounts have to be written off, also the investments in their businesses would be lost. The businesses were by and large healthy and would be able to sustain themselves if given a bit of time.
During the middle of the crisis, if Greece fell, it would likely lead to larger economies failing as well. The crisis was large based on trust and chain reactions, so Greece failing would lead to Italy and/or Spain failing and potentially even France. Greece would in itself be no problem. Ireland and Iceland had already failed with devastating but relatively isolated impact. Greece would be worse but manageable. Italy or Spain failing might be manageable, but very risky. At a point, even France was at the verge of failing, and if one or more of the more disposable economies fell, it might fall as well. France falling would leave the European economies in ruins.
Time passed. Italy, Spain and France’s businesses were running better using the loans from their parents. They could pay back some of the loans, and were leaving more within means. Meanwhile, Greece was continuing as before. Greece kept promising to change “tomorrow,” and saying it needed to pay rent.
Greece got a government cutting down on parties: no more party on Tuesday morning and Dom Perignon replaced by Moët & Chandon. Greece started making a bit of progress. It even got a paper route on Tuesday morning.
Things improved. The PIGS (Portugal, Italy, Greece and Spain) mostly did better. The loans were providing some relief and the reforms improvements. The Greek governments were replaced by a non-democratically chosen technocracy. That’s a government of smart people. Instead of politicians catering to the whim of the 51% dumbest in the population, they got economists trying to fix the Greek economy.
Then Greece decided to throw a tantrum. If Italy can have nice things and Greece’s parents, Germany, could have nice things, surely it could go back to partying. It stopped the boring paper route and jumped back in with the Dom Perignon bottles. It claimed it was being economically responsible since it was not having the even more expensive Cristal. It claimed it would change tomorrow. It kept taking on more loans, claiming to need the money for rent. It insisted it couldn’t pay back the loans and insisted all debt being stricken. It knew that its parent couldn’t stop lending it money, because doing so would mean that it had no means to pay rent or credit card debt, and if Greece could stop paying those, why couldn’t Italy, France and Spain do the same? If they stopped, it would take down their businesses and ruin the entire family.
Greece did not like having a non-democratic government. Being the source of modern civilization, as they like to portray themselves, with democracy for everybody (that is, only middle-aged men that were not foreigners or poor – basically male rich white middle-aged bankers). That’s understandable, but instead they chose the ideology that has successfully run down more countries than any other: communism. The Greek communist party combined with the Greek nationalist party (because why settle for one fucked-up ideology if you can have two?) to form a government based purely on “we don’t want to live according to means anymore.” A government that would lie to its people to further their own agenda.
Except that Italy, France and Spain were doing better. They were not doing well, but they were making enough to pay their loans. Surely, they would like to spend money on parties instead than rent and debt repayments, but they mostly did the sane thing (though Spain was toying with the idea of dropping school as it was cutting severely into partying time).
Greece kept moving the goal post, promising to change tomorrow. Then Greece’s parents said “You have a fucking drinking problem. We’re cutting you off.” and Greece decided to ask its partying buddies whether it had a drinking problem.
And that’s where we are today: a spoiled teenager threatening to ruin the entire family if it doesn’t get more money to fund its drinking problem. It is holding the necessities, like rent (salary payments and pensions t people who didn’t die a decade ago), hostage to fund it’s drinking problem (way too early retirement and generous social benefits).
The eurozone has already and is suggesting writing off some of the debt, but requires that Greece starts spending according to means in return. Greece has no right and no credence to negotiate this point. It has suggested funding this by taxes that 1) would stifle growth and 2) wouldn’t be collected because Greece. It is still using the total mutual destruction as an argument, without realizing that EU is no longer assured destruction. In fact, EU has already taken most of the hit.
If Greece defaults and have to go back to drachmas, it will have to first prove it can handle their economy before anybody will loan them money. Russia might do it out of spite of EU, but have no money themselves.
Tsipras did not cause this, but he made it so much worse by rolling back reforms that were helping. Sure, they were unpopular, but they were necessary. It is 100% his fault what happened in the past week. Now, he’s begging for extending the austerity packaged until after the election on Sunday, but June 30 as a deadline has been known for a month. What he didn’t expect was the EU finally said enough is enough.
They have taken all of EU hostage by threatening to harm all of EU economy if they could not go on on their unsustainable path. They got help to not harm the struggling but fundamentally healthy economies.
They have taken their own people hostage by claiming they need the loans for essentials, yet spending it on things they do not need.
I have nothing but disdain for Tsipras. He is doing what is best for himself and his government, but hurting Greece and the EU in the process. He cannot really do much other – if he gives in, he’ll have broken the promises that got him elected and becomes unpopular by making necessary cuts. If he ruins the country, he can claim it was the governments before him and the EU.
A thing in my analogy that elicits the wrong picture is using credit cards as simili for the German and French banks. People have the view of credit card companies as big faceless corporations, whereas the banks in questions are owned by regular people, especially thru pension funds. Were Greece to default, otherwise healthy businesses would be pulled down.
Thanks to a financial instrument called a “credit default swap,” which has a bad name as they were a big part of the 2007 crisis, but is really just an insurance against bankruptcy, this would expand like rings in the water and impact healthy businesses.
Yes it sucks that the debt has been swapped for public debt, but the governments are sufficiently big that they can stomach the fall without setting off a devastating chain reaction. It does not mean that the debt has been transferred from “somewhere” (big corporations?) to the tax payers entirely, as the biggest loser would be pension funds, which is also the tax-payer.
It sucks for the regular Greek that they have a series of shitty governments. But they elected Tsipras themselves. Iceland and Ireland had problems and adjusted their spending accordingly. They also inherited a lot of debt they were not responsible for (though benefiting from during its heyday), but after 5-10 years of shitty time are now doing better than many others.
So, that was long. TL;DR: Tsipras is basically a terrorist strapping babies to buildings (he says that cutting pensions will hurt the poor) while threatening with dirty nuclear bombs (taking down the entire EU economy).
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Seems fair – as I read it, I wanted to add Ireland, but they turned up towards the end.
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Yeah, they’re so much back on track I’ve mostly forgotten about them. Same with Cyprus and Portugal.
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Interesting analogy, although your format confused me a bit at first, because of what I saw as repetitions. I guess that it is a testament to the analogy that I feel it as repetition to translate into the teenager analogy 🙂
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Yeah, the format was a bit lazy. It was originally a comment on a FB post (well 7 comments because FB apparently has a limit on comment length), but I cleaned it a bit and added explicit references to the Greek situation for every point of the analogy. Part for posterity and part for filling in the blanks where the brilliance of my analogy does not shiny thru clearly for everybody 😉
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Probably your analogy is not far from truth. It just misses a few causes and effects.
1) Tsipras didn’t ruin the country. 30 years of conservatives and social democrats did the job.
2) It was known in the mid 1990ies that Greece was faking it’s sheets. The very political conservative and liberal parties who now shun Greece for contaminating the Euro with its debt WANTED to have Greece in the currency. The problem is partially caused and inflicted by the EU which now acts as if Greece alone caused the problem. They knew it would happen and they acted against better knowledge.
3) Only 10% of the billions sent to Greece were used within Greece. 90% directly went back outside the countries. So, the entire volume of actual support for growth is much lower.
4) Money doesn’t disappear (there is no black hole within Greece eating euros). The money is being spent on something – most likely to buy stuff for the euro zone because that’s where all the expensive goods come from and what they need euros for. So all the extra spending on Greece is economic stimulation for the eurozone. (At least to some degree)
5) The loans and rates discussed now are not to be spent in Greece put entirely to pay back the IMF. Greece is forced to pick loans to pay loans. For 6 years now. How is rotating loans going to make the economy grow?
6) Even if Greece did everything wrong (probably), who do you get rid of the problem? You cannot send the country away into prison or youth correction program. If the EU is not going to support Greece to become better (for real, by writing off the debt), then the country will become a failed state (no money, no proper political class, corruption everywhere). A failed state within reach of North-African boat people, next to the hottest geo-political regions the world currently has. If anything else, this is the least smart move the EU would want.
But everybody acts as if Greece just needs to work hard (now for real) and all problems vanish, problems at least willfully admitted into existence by the EU.
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1) Definitely, and I think I mention that as well (though only in passing). My point is that Tsipras is either knowingly making it worse or either so arrogant or ignorant he should be forcibly removed from power.
It’s one thing if he was acting on a mandata from the Greek people, but the people has been for making a deal for months now. It’s rare to see a people be more sensible than the government when it comes to cutting costs (in part because it’s easier to make hard decisions if you’re removed from them and in part because collective intelligence of a group is inversely proportional to group size).
In addition, somebody must have told him that what he is doing is insane. The media has been able to see that for weeks if not months now, and if a journalist gets it, pretty damn close to everybody does.
The only responsible thing would have been to have an election for manadate to make a deal or put somebody else in charge 2-3 months ago.
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2) Yes, that’s collectively dumb. It’s a heck of a lot easier to see now, and people genuinely thought that this was the new economy where things would only go up. Over-spending and loaning is possible when economy is inflating.
As an example, I used to be a member of Danske Ølentusiaster, Danish Beer Enthusiasts. The number of members was growing exponentially for quite a while. We paid DKK 300/year/member and each member was invited to the general assembly, where more was spent per participant. On top of this, we got a very expensive magazine sent every two months. Much more than DKK 300 was spent per member. This was sustainable with the growth, because for each member, one new would join only incurring the full cost the year after. At some point this leveled, and they had to make rather difficult and unpopular cuts together with rate increases to get back to a sustainable level.
So yes, something should have been done, but nobody knew at the time. It is mathematically easy to predict that we are in a bubble, but it is impossible to predict when it bursts. It is financially better to ride the bubble than to ignore it.
So, you’re 100% right: something should have been done. I’m just not so sure it was possible to see at the time, and definitely not what. Getting Greece on board was sensible for many reasons (to boost their economy by cheap loans, easier access to the Single European Market, form a border against Turkey, etc).
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3-5) Sure, but the money is not there to boost Greek economy by spending the way to growth (which is a socialist fantasy that doesn’t work, even if the opposite of cutting spending entirely doesn’t either). It is there to buy time.
Time to improve the Greek foundation by paying off (some of the) debt and make sure that income and expenses are better balanced. That worked for Ireland and Iceland. Two countries one might argue were hit even less fairly (Iceland had to back out private banks investing for loaned money in over-valued foreign assets; sure Iceland had its own blame by encouraging such behavior and also gained from it indirectly).
Time to ensure that the rest of the PIIGS gets back on track so they don’t risk falling as well.
Time to move the debt to a lower-interest one owned by one creditor, so the creditor can aim for the Nash-equilibrium rather than a locally optimal one. The situation before was quite literally like the prisoner’s dilemma: if one creditor refused to forgive debt, they would stand to gain personally, if all did it would crash Greece.
Time to push inflation in Europe and weaken the Euro against already struggling currencies like the USD to reduce the entire debt of the euro-zone.
Much of the Greek debt was taken on since 2010; when the crisis hit other countries started cutting cost and now see the benefits even though it sucked for a while. Greece didn’t and were already at record deficits. They had further to go and went shorter. Of course they fell behind.
They need to be taught a lesson. They need to be dissuaded from doing this again, and they need to be punished to dissuade others from doing the same.
With that said, they also need help with the debt – heck, they’re already getting it – but the rest of Europe is not going to help as long as they have an earlier retirement age than the rest of Europe, as long as they have corruption that makes Italian government under Berlusconi look sane.
They could also choose to default, but that would mean leaving the euro and all EU guarantees. That would mean no or only ridiculously expensive loans for 50 years. No foreign investment.
Tsipras pretend that the last is not true, that defaulting would just mean being rid of the debt. The strict sanctions put on the Greek was just being told to stop robbing the nursery by over-spending loaned money. The debt would have come in time. That’s why the packages are so short.
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Many of the things that you say are very true.
Besides a few falsity about Italy, probably pushed by stereotypes (sorry I am very touchy on this).
I am wondering about supporting of evidence for the following statements:
1) Italy received loans from the “parents” (quote: using the loans from their parents”). Could you be specific? As far as I know, Italy received no loans from EU/Troika, differently from Spain, Ireland, Greece. The only thing that has been done is that the EU bank bought Italian bonds to keep their interest low. And, now, it is gaining a lot of money, in the same way as I did when I bought new releases of Italian bonds in the worst moment and sold recently.
2) Italy has traditionally been a poor economic. Indeed! That’s the reason why Italy belongs and has always belonged to G7… The GDP growth has been very high since the end of the 2-world war until early 2000s.
These are the typical stereotypes that north European governments want to keep on to cover the inadequacy of their economy choices in face of the public opinion. It is always easy to blame the others.
Btw, Angela Merkel is very able to – as we say in Italy – “put each foot in two shoes”. On the one hand, she keeps the public opinion happy by looking very strict with, e.g., Greece. On the other hand, she keeps giving loans to Greece to save the consequences for the German banks (and, in turn, the German population, who actually does not understand this). If the Greek banks collapse, which banks are going to lose more money? I let you guess.
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1) Well, when you sell bonds, you are loaning money, and when the EU buys Italian bonds, it is lending Italy money. You should never judge an investment in hindsight, because when you make it you have less information. Bonds always come with the risk of the loaner defaulting og loans being restructured. Greece’s debt got a haircut a couple years ago, so people buying Greek bonds only got a smaller percentage of the invested money. That’s a risk you take, and it is priced into the price.
Italy had a real chance of having to default a couple years ago. The crisis is not so much one of having values but having liquidity. Greek banks are not close to being bankrupt, they are close to the limit of liquidity. People are withdrawing more money than the banks have. They have valuables in house loans and Greek bonds, but that is not the same as euros. A bank can run out of euros and still own other valuables, but if nobody wants to accept those valuables as payment, they cannot pay their debts, which means that people owning their debt can claim their debt and force the bank to declare itself bankrupt.
Things are much better today, but if Greece had failed 2-3 years ago, the international money market would have frozen even more. It was already bad. Italy had and still has a huge debt, which needs to be paid. Italy also had a huge deficit. It does not matter that the GDP is large if the deficit also is (and the Italian GDP per citizen is a lot less impressive): the debt still needs to be paid. If the Italian government runs out of euros, it cannot pay its debts, and if the money market froze there was a real chance that might happen.
That’s the reason Italian debt (and Spanish and Portuguese) got so high interest: you needed a high premium to pay for the risk. You did not buy the bonds solely based on your mind, but also because you believed in Italy. Which is fair, but a dangerous investment strategy. At the time of purchase, it was also possible that Italy might go bankrupt and your bonds would be worth nothing. Same with the ECB: they bought bonds not just as an object of investment but also to stabilize Italy. If they didn’t, italian bonds would conceivably achieve higher interest, which would mean a higher debt today and in 10 years. ECB took the risk, because banks wouldn’t and to a large part wasn’t allowed to anymore.
2) As already mentioned, the Italian GDP per capita is a lot less impressive (around number 20 in Europe), and the Italian debt is the third highest as percentage of GDP in Europe. China’s GDP is around 5 times that of Italy, yet the average Chinese salary is around €360/month. What I am saying is that GDP is a good measurement of how much an economy matters internationally, it is far from everything. In a crisis of liquidity and debt, foreign debt matters much more. Measured by the amount of debt and the GDP per capita, Italy is a fairly poor country.
Of course Merkel has to sell a deal to both Europe and her own backing. It is not correct, though, that she needs to anymore. The Greek debt owned by German banks is rather negligible these days (see http://www.bloombergbriefs.com/content/uploads/sites/2/2015/01/MS_Greece_WhoHurts.pdf). German banks could afford that. What they couldn’t afford is that after Greece, Pootugal would likely fall. Their economy is down the drain as well, and a frozen money market would kill them. Italy is also likely to at least hurt very badly. In fact, Italy stand to lose more money as a percentage of GDP than Germany. As does Spain and small countries like Slovenia, Estonia, Malta and Slovakia. Were Greece to fall, Spain and Portugal would be very likely follow (frozen market, having to write down assets in Greek bonds). It is possible that Italy would follow and maybe even France (which also stands to lose more money than Germany).
And that’s the problem. Germany and Europe can live with Greece failing today. It would have been a problem 3 years ago, though, as Greece or Portugal failing would cause the other and Spain to fail as well. Spain is probably too big to save, but Italy definitely is.
It was definitely a bad idea to loan that much money to Greece in the first place. The Greek governments in the past 50 years or so are definitely to blame, and the population partly by voting for idiots over-spending loaned money. But who are you going to vote for: the guy promising free ice cream for loaned money you don’t have to worry about for 5 years or the one who promises no ice cream but you have to pay for the ice cream you ate 5 years ago? Same with Italy: why not vote for Berlusconi: he’s corrupt and short-sighted, but might be the comfortable choice right now. Same with Putin. It’s not hard to get 51% of the voters to back you if you steal money from the remaining 49% to give to them; no matter whether the 51% are the rich stealing from the poor, the unemployed stealing from the employed (with too high unemployment benefits like in Denmark 5 years ago – you could go unemployed for 4 years with state money, work for 1 year and be back to the free money), or the old stealing form the young (as in Greece where the retirement age was way too low and the state taking out debt having to be paid by the children). That’s why smart people typically are against such governments.
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Oh, and nothing wrong with Spain, Portugal, and Italy getting loans from ECB, by the way. Lots of countries did – it was a liquidity crisis after all. The loans were basically a way of printing more money, which increases inflation and lowers debt.
It’s a classic crisis technique, that basically acts as a tax on people owning money and an incentive to go out and spend the money. Because of the euro, the euro-countries no longer had that power, and the ECB then did it instead, though it had to use another construction as the ECB is only allowed to print money to control inflation.
Denmark received fewer loans, but instead had to rely on its foreign currency reserves to stabilize the krone – first to go and spend a sizable part of the foreign currency reserve to support it while at the same time printing money to support Danish banks, and recently printing money and purchasing foreign currency to weaken it. While not a loan from the EU the effect is basically the same (what’s really the difference between a bond and a bank note when you’re a state after all?)