Under great pain of debt

The fate of Greece will likely be decided in Athens’s Syntagma square, where thousands of citizens are protesting strict austerity programs being forced on the insolvent nation by its troika of new masters: the International Monetary Fund, European Union and European Central Bank.

As the spiritual home of democracy, Athens has been home to many public debates. In the past, logic frequently played a role. Not this time. Indeed, when it comes to developing a sustainable solution to Greece’s woes, everyone, from the anxious mass of citizens to the panicking financial plutocrats, seems to have lost touch with the art of reasoning. As a result, the country now threatens to further destabilize the already rickety global economy, while the only reasonable option—a controlled Greek default that significantly reduces the nation’s crippling debt—isn’t even on the table.

Syntagma Square, named after the constitutional document the Greeks demanded from King Otto in 1843, has been home to many protests in a country known for its labour disruptions and massive public demonstrations. The intended audience for these massive public gatherings are Greece’s politicians, who work in the nation’s Parliament building, located only a few dozen metres at the head of the square, within earshot of the near-daily barrage of raised voices and clenched fists.

Today, the square is in a state of decay, deteriorated, and no longer glimmering under the relentless Mediterranean sun. Its lavish white marble façade and benches, beautifully restored for the 2004 Olympic Games, have been hammered off into small chunks to be thrown at the riot police. The palatial marble steps of the nearby five-star Hotel Grande Bretagne also lie in ruins after the June 29 riot that filled the square with clouds of tear gas.

A tent city has sprouted up, shaded by young trees, providing a refuge for the Indignant,

a permanent protesting community. French and Spanish youth have travelled to Greece to join the movement, and every night, local protestors and their foreign supporters make their way to the square to vent against the impacts of the austerity measures imposed by Prime Minister George Papandreou in a bid to tackle Greece’s crippling debt and to ensure the IMF keeps sending bailout cheques.

Two young Athenians, Vassilis, 31, and Stavros, 25, have erected their own tent in the corner of the square. Both are dressed in blue jeans and T-shirts and appear to be typical Greeks from middle-class families. “Can you explain something for me?” Vassilis asks, sitting under a tree across from a sign that reads “We’re not borrowing, We’re not paying, We’re not selling,” the slogan of the Indignant. “They say that we are the problem, Greek society. Let me give you one example then: The IMF is lending its money to Greece at 5%. A Greek bank can borrow money from the European Central Bank for 1%. Why is this?” he asks. “This is how they want to help us? What kind of help is this?”

Both men are adamant about not giving out their full names. Stavros, an anthropology major waiting to complete his mandatory Army service, explains their suspicions, saying that just as police get paid to hit protestors with batons and fire tear gas, the media is on the government dole to perform its PR work. “I can’t just sit at home and watch the police attack people, fire tear gas and violate our rights. I have to do something,” he says, still clearly agitated over the late-June riots that made headlines around the world.

“What are we supposed to do?” asks Vassilis. “Even 70- and 80-year-old men were wearing gas masks and throwing rocks at police. People thought they were anarchists. They were just ordinary people.”

When times were good, Vassilis says he made ends meet working in real estate, doing property valuations. With nervous sellers and the banks on shaky ground, he hasn’t had stable work in months.

Over by the tent city’s makeshift medical centre, Villi, 36, sits with a group of unemployed men sipping on iced coffees and nibbling on simitia, pretzel-like pieces of bread covered with sesame seeds. “My economic situation has deteriorated” are the first words out of her mouth.

A psychologist by trade, Villi says her earnings have plunged due to cuts to the nation’s mental-health institutions, forcing her former clients onto the streets. She says she currently makes €800 a month, pays €630 in rent, and must fit in a bimonthly €1,000 expense for health insurance. The look in her eyes suggests that she’s fully aware of the obvious disparity in her numbers, she begins to explain the new austerity measures, including the upcoming increase in the value-added tax to 23% from 13%, due to begin in September. “I’m not making any more money to give to the state,” she says with a raised voice and with open hands.

Except the issue isn’t about the Greek government trying to extract more money from its citizens; it is about paying back the country’s creditors, who also have rights. There has always been something of a discrepancy between how the people of Greece see their country’s financial situation, and what is actually going on. What is exacerbating matters now is that this fundamental disconnect is being mirrored at the institutional level, with the international financial community refusing to accept some basic truths about the Greek economy and the EU itself.

At last count, Greek debt was set to surpass the US$500-billion mark. Notoriously, the nation’s finances were fudged by local politicians (who had a little help from the accounting wizards at Wall Street’s Goldman Sachs) to gain entry to the European Union, which provided Greece with a stable currency and easy access to credit. But since then, there have been no mass protests in Syntagma Square over unsustainable public spending, which pushed the percentage of Greek debt-to-GDP to more than twice the 60% limit EU nations are supposed to respect. (Greek debt-to-GDP now officially sits at about 155%, although nobody really trusts that number.)

Critics insist the dinner bill for Greece has finally arrived, after years of electing self-serving politicians who bought votes with borrowed funds that allowed the general population to live well beyond what would be possible with balanced government books. And they note the nation’s books would be in better shape if the population worked harder and didn’t evade taxes with an Olympian effort.

But Greek citizens are being forced to accept austerity measures that wouldn’t easily be implemented, if at all, in the United States, where state overspending and national distaste for taxes is surely a greater threat to the global economy. It is also important to note that the austerity measures in question make little sense if the goal is to generate money for creditors by improving economic conditions in Greece, where GDP grew at just 0.2% in the first quarter, as unemployment jumped above 16% and investment plunged almost 20%.

“There is no logic to this other than political objectives to kick the can forward,” says Peter Pauly, a Rotman economics professor. “There is no way Greece can, under the current arrangement, get out of the hole. They have a fundamental budget deficit, even without the interest payments. There is no chance under the current circumstances that this can be resolved without a significant writeoff.”

The truth of the matter is that European finance ministers are desperately trying to avoid the unavoidable, meaning a significant financial haircut for the not-so-stable EU banks that foolishly assumed taxpayers would cover the risks tied to lending capital to the EU’s basket case economies that have frequently defaulted on debts in the past. “Greece is a serial defaulter,” says Alex Jurshevski, a sovereign debt expert who heads Toronto’s Recovery Partners. “It should never have been allowed to join the EU.” But pressures to expand the union, not to mention increase the market for German and French exports, won the day because “politics has always trumped economics in the EU.”

According to Jurshevski, Europe has found itself in a Mexican standoff, with guns pointing at all concerned, and a growing number of Greeks willing to start shooting.

The exposure of German and French banks to Greek debt exceeds US$45 billion. And that money was lent despite the fact the recorded history of sovereign defaults can be traced back to Greece in fourth century B.C., when local municipalities defaulted on loans from the Delos Temple. When it comes to Greece, which has defaulted on obligations to creditors at least five times since 1800, the only idea that reaches anything close to consensus in financial circles is that another default is on the way. As things stand, many economists insist the only real questions are when a Greek default will happen, and whether it will be disorderly enough to put an end to Europe’s monetary union.

Greece could simply default and tough out the consequences, as Argentina did about a decade ago. It might even be able to do that and remain in the EU. But without control over its monetary policy, the go-it-alone path could prove a total disaster. The generally accepted best solution to Greek woes is a controlled default that cut debts to a manageable level while still allowing the nation’s banks to borrow from the EBC. Such a move would spread the pain to North America by triggering credit-default-swap payouts from U.S. banks that insured European exposure to Greek debt. But EU banks have been holding out for a solution that doesn’t cost them a dime while the policy-makers worry that a controlled default would be seen as template for Europe’s sovereign debt woes. If that happens, creditors could stop lending to other troubled EU nations such as Spain and Portugal, both of which have bested Greece at defaulting in modern times. (In July, ratings agency Moody’s downgraded Portugal’s debt to Junk status.)

According to conspiracy theorists, panicked EU banks paid a New York maid to accuse Dominique Strauss-Kahn of sexual assault because he supported inflicting losses on Greek creditors. That theory sounds insane, but it actually has a greater internal logic than the current plan of forcing an insolvent nation to keep borrowing money while forcing it to choke its economy with spending cuts and public sector layoffs.

History suggests the Greek government’s game plan won’t solve its problems. As Harvard University professor Dani Rodrik noted in a recent commentary, “When the demands of financial markets and foreign creditors clash with those of domestic workers, pensioners, and the middle class, it is usually the locals who have the last say.” But let’s hope the folks in Syntagma square are prepared to get what they think they want in this conflict. After all, expecting to gain without feeling any pain is ridiculous in this case, and attempting to do so will simply produce the greatest of all Greek tragedies.