Economy of Greece in 2015 and post referendum problems

Greece wants to build its economy on its own!

Greek Referandum 2015

Greece wants to be on its own, fine. But what is the problem of Greece? Greece borrowed money for toxic ventures. Money is invested in ventures which did not generate wealth or job opportunity. It has no money to pay to Banks. In past five years, Greece on the advice of IMF and Euro Union etc imposed major changes by cutting salaries, pension, welfare programs etc. collectively called austerity measures. The result is 50% unemployment and about 10,000 suicide. The bailout package which it received every year went into repayment of debt or interest. No job or wealth creation was made. Greece is demanding a few years moratorium which Bankers are not willing to give. Now whole nation has made a resounding message of ‘NO’ to terms imposed by banks and accepted bankruptcy. Now what?

I received an interesting forwarded message explaining Greek problem. Here is the extract:

Greek economic crisis in a nut shell for the laymen:

“The endeavour is to explain a very complicated circular trading (round tripping algorithm) nonsense that became a crisis, in a simple way.

MARY is the proprietor of a bar in Athens. She realises that virtually all her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar – she will go broke. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now and pay later.She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). 

Word gets around about Mary’s ‘drink now, pay later’ marketing strategy and, as a result, increasing numbers of customers flood into Mary’s bar. Soon she has the largest sales volume for any bar in Athens. All is starting to look rosy. By providing her customers freedom from immediate payment demands Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Mary’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral. At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into Drinkbonds and Alkibonds. These securities are then bundled and traded on international security markets.

The new investors don’t really understand that the securities being sold to them as ‘AAA’ secured bonds are really the debts of unemployed alcoholics. They have had a ‘rating house’ that certified bonds to be of good quality. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Mary’s bar. He so informs Mary. Mary then demands payment from her alcoholic patrons, but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Mary cannot fulfil her loan obligations she is forced into bankruptcy. So she now is broke. The bar closes and the 11 employees lose their jobs.

Overnight, Drinkbonds and Alkibonds drop in price by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Mary’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various Bond securities. They find they are now faced with having to write-off her bad debt and with losing over 90% of the presumed value of the bonds.

Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations. Her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion euro, no-strings attached cash infusion from their cronies in government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Mary’s bar.

Now, that’s Greece economics in 2015 .”

Solution is in Pakistan model:

Pakistan had similar problem but it had China and USA as God Father. It insisted on moratorium on payment 5-10 and fresh infusion of funds to created jobs and raise taxes. It was granted. Greece is demanding similar benefit and because it is not being granted it has called Euro Union and Bankers as terrorists.

Why Greece not given moratorium?

Greece is denied moratorium not because it is not entitled to it but because there are similar other nations holding similar Drinkbonds & Alkibonds, who have been paying the Banks regularly. If they came to know the beneficial terms, they will also stop payment and whole economy of Euro Zone would collapse.

Get your coke and popcorn, the show is still unfolding!

Greece has a poker face and called European Union bluff to throw it out. Let us see what happens next. Time for Euro Union throw in a new card with new bluff or pack.

 

About Sandeep Bhalla

A lawyer, thinker, author, Linux/Ubuntu power user and sometime an economist or gardener or philosopher or cook or photographer depending upon the current thought and environment. View all posts by Sandeep Bhalla

4 responses to “Economy of Greece in 2015 and post referendum problems

  • David Bennett

    The major economies in the EU turned a blind eye to numbers that did not stack up in order to let Greece (and other countries) into the Eurozone so they could export to them and lend to them. Of course Greece is not an innocent child in this – but the major economies have made a fortune out of the problem and now they want Greece to pick up the tab.

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    • Sandeep Bhalla

      I entirely agree. Whenever loan get sticky, lender is also responsible for not carrying out due diligence properly. Can you guess it’s impact on England? Here it is just psychological.

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      • David Bennett

        My wife and I argue about who is ‘more responsible’ the spendthrift borrower or the lender who knows the borrower is not a good bet.

        I argue that the promise of easy money and the new ‘European’ lifestyle was a huge carrot dangled in front of Greece. My wife argues that this is too easy a get-out for the Greeks who knew that sooner or later they would run out of money to pay their debts.

        So we are all agreed it is a responsibility of both parties.

        Good question about what the impact will be on England. We still have the pound, not the euro. When Britain was forced out of the Exchange Rate Mechanism in 2002 because it couldn’t support the value of the pound, the pound to euro was around 1:1.60 and over the next ten years it fell to around 1:1.11 at its lowest.

        It is been climbing for the past few months and it is now around 1:1.40. So the swings historically have been very large. I suspect that in the short term, Britain’s currency will rise because Britain has a more spread set of trading partners outside of the EU than most other European countries, but in the longer terms it depends on how the Eurozone is able to protect the euro.

        Of interest to me is what is happening in the Chinese stock market. Why has it fallen so dramatically? I don’t buy the story of it being a bit frothy and overvalued and is just settling down. I wonder what else is behind it?

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      • Sandeep Bhalla

        That argument about spenthrift is in every household. One of the two has keep reins of other in check.
        So the Greece will have positive impact on England.
        As regard China I think, there are two factors:
        1. Economy is slowing down.
        2. It is not a consumption based economy like India but exports based economy.
        There may be a third factor, China’s exposure to european Union or Greece itself.
        Greece problem also explains why Markel was all over Modi (Our PM) and took a public commitment to ‘make in India’ program. That way it appears, Greece spill out may have positive impact on India, as well. But cant be sure. Markets here are also falling.
        But look at Gold. It is not rising. In times of serious trouble, gold is first to crash roof.
        BTW what and how You define European Life style?

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