THE most important economic and financial market story of the year is virtually being ignored by the Philippine press and media. That of course is the on-going negotiations between the newly elected leftist Greek government and its creditors.
Since the beginning of the global debt and economic crisis, Greece has been in a depression or recession. For six long years, the Greek economy has been shrinking. Twenty-five percent of Greek businesses have failed. The official Greek unemployment rate is over 25 percent and youth unemployment is at 50 percent.
In 2010, Greece was extended a loan by the ‘Troika’–the Eurozone countries, European Central Bank (ECB) and International Monetary Fund (IMF)–of about $150 billion. This was conditional on a so-called austerity program that including mass government employee layoffs, privatization of many Greek government assets, and other structural reforms including trying to get the Greeks to do something somewhat uncommon; pay taxes. Further, government social/financial programs have been substantially reduced.
By February 2012, the loan was increased to a total of about $275 billion. While those are staggering amounts of money, it is still not enough. In December 2012, the Troika agreed to loan Greece more money at the end of this February in the amount of about $10 billion. Now things get interesting.
The Greek economy has improved slightly. But that is about the same as telling a terminally ill patient how good they are looking today. In the long term, it means very little. The new Greek Finance Minister Yanis Varoufakis, when introducing himself for a newspaper interview, started with, “I’m the Finance Minister of a bankrupt country”.
It is impossible for Greece to repay its existing loans in spite of the fact that some mature decades from now unless a continuation of the austerity program involves Greek citizen eating tree bark and sending maids to the Philippines.
Therefore the new government of Prime Minister Alexis Tsiprashas has taken the stand that there will not be any more debt taken on by the government and the austerity program will be significantly curtailed. Public sector employees will be rehired, privatization will stop, and the minimum wage will be increased. Further, existing debt must be subject to some ‘forgiveness’ and a renegotiation of terms.
At that news, heads all over the financial community of Europe are exploding.
The Troika has demanded that Greece take the new loan under the current terms of the previous loans. Greece will run out of money in three months or so.
How this will eventually play out is all speculation. Greece could back down, take the money, and maintain the status quo. The Troika could blink first and agree to at least some of Tsiprashas’ proposals. Greece could leave the Eurocurrency regime and print its own currency and accept offers of new loans from Russia and China.
But whatever happens, things will never be the same again. Either, the Troika will prove its financial power to bend a sovereign nation in the European community to its will or Greece will reassert its sovereignty and forge a new path, bankrupt and broke. Neither alternative is very pleasant.
Two easy lessons can be learned from the Greek experience. The first is that there is no free lunch. Eventually the bill must be paid. Greece falsified government financial data and economic statistics to join the Eurocurrency system thinking this was a ‘free’ way to get cheap loans to fund its budget deficit. The Greek people cheered the moved. The government taxes swimming pools and in Greater Athens, about 300 actually paid the tax. But aerial photographs showed about 17,000 swimming polls. Now the borrowings for years of government budget deficit have to be paid.
Secondly, lenders are unsympathetic when you cannot repay your loan. If you decide not to pay under the original loan agreement as Greece has demanded, there are consequences. While Greece does not want to be a ‘debt salve’ of Europe, they may opt to do the same for Russia and China.
The lesson for the Philippines is simple. After decades of being the ‘Greece’ of Asia thanks to foolish and economy-killing borrowings to fund crushing government budget deficits, PHL put its fiscal house in order by 2009. As every personal finance guru will tell you, never borrow money for daily needs or to pay for unnecessary luxuries. The Philippine government learned its lesson. The Greek government is about to be educated.
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