Why Greece will Default

 Going Down With the Ship

Countries and governments declaring bankruptcy have ignoble but many historical precedents.  Why would we think that we in our generation are any different?  Hubris.  That's the fundamental reason, we believe.  Defaulting on debt obligations has been expected in the Third World--but not in the magnificent, mighty, enlightened West. 

Greece will almost certainly end up defaulting on (euphemistically these days referred to as "restructuring") its debt.  The size of the hole to fill if national bankruptcy is to be avoided is huge, according to the Financial Times:

New figures published by the European Commission make clear just how big Greece’s budgetary hole now is. Over the next three years, the Commission says Greece will need €172bn in financing. But the current bail-out only has another €57bn left – meaning €115bn has to be found.

We suspect that 115bn will turn out to be an optimistic, best case number. 
How did this situation come about?  It is a sordid tale, often told.  Successive socialist and populist Greek governments bribed their way into electoral favour by bestowing munificent benefits on grateful subjects, in exchange for electoral support.  The subjects justified their greed by telling themselves that these were riches to which they were legitimately entitled: it was a matter of human rights. 

Payments and commitments far outstripped tax revenues.  The government began a relentless programme of borrowing.  It borrowed from Greek banks, European banks, and from other nations.  Now it has not a hope of repaying--practically speaking--so, either it defaults, declares bankruptcy, refusing to pay back all those billions of government bonds, or European taxpayers (read, German taxpayers) must pay them off. 

In the meantime, Greece cannot pay its daily government expenses, so the European Community is lending it still more money, so that teachers, police, and other government employees can be paid. 

Greek banks are also in deep trouble.  They have loaned money not just to a now bankrupt government, but in the normal course of business to homeowners, businesses, speculators, etc.  Now that deposits and savings have dried up, their own ponzi scheme is on the verge of collapse.  They need financing daily from the European Central Bank. 

Greek banks are currently running their daily operations by borrowing money from the European Central Bank in return for Greek sovereign bonds.

The European Central Bank is running with the fiction that Greek sovereign bonds are actually worth something; they are accepting them as collateral from Greek banks, who are handing them over, in exchange for fresh daily credit from the ECB. Why?  Because we are Europe, and that means we are important.  We have our dignity and our pride, you know.  

Meanwhile the pitchfork carrying, baying mob is not at all in agreement with the idea that they should accept hardship to help pay off the government debt.  After all, they have these state payments as a human right.  Hairdressers are entitled to retire at 45 on a full, generous government pension because, well, it is their right.  No government can survive when the electorate in general will not accept its dictats and laws.  Since the population at large will not accept the austerity demanded by the European lenders, Greek government votes, promises, and commitments will not be worth the airtime they are given.  Default is the only option: the sooner it comes, the better; the longer it lingers before the inevitable happens, the less the pain to be borne by the rest of Europe.

The only real collateral left to the European Central Bank, and other lenders (banks) in Europe is a vote in  the Greek Parliament to agree to an austerity programme of asset sales, government cost cutting, national austerity measures, and tax hikes.  This amounts to a promise of intent--nothing more.  But governments cannot meaningfully promise what their citizens reject.  And overwhelmingly Greek voters believe that it is someone else's fault, so why should they take the hit.   

When a company or a household have taken on debts they cannot hope to repay, bankruptcy is a necessary step.  Rolling their debt over into ever larger mountains might put off the day of reckoning for a few months, but it is a fool's paradise.  

Greece and Europe is now in a slow motion train wreck.  Wincing and averting the eyes is not going to make it go away.  Europe needs to lay aside its hubris, acknowledge what the debt markets are already telling it as the truth, and accept the inevitable. 

Greece is now a Third World country.  But--let us be clear--only because it was stupid enough to elect governments that enticed citizens to live way beyond the means of other taxpayers. It is where socialism always end up. 

In the end, other people's money always runs out.  The only question now is whether Greece will take down Europe as a whole.  The longer Europe funds Greek largesse, the more likely it, too, will go down.