No Band-Aid for Greece

The Greek government household is staring down at a large bill due at the end of next week to the sum of €1.6 billion. A government spokesman also confirmed that Tsipras and Co. will be paying out government paychecks and pensions as well. This all comes as a bit of surprising news, considering the fact that this government doesn’t have that kind of money. In fact, it sounds more like someone who is trying to figure out how to pay his consumer credit card bills before paying his mortgage. But that’s typical for someone who is always getting bailed out.

Greece’s creditors are pushing for harder austerity measures as a means for establishing trust in the lending relationship. Greek Finance Minister Varoufakis and his fellow party members were elected by the Greek people based on promises that they would not comply with further austerity measures. And so the talks have been called “friendly and constructive” by German Chancellor Angela Merkel, yet all sides agree that they require more time to develop anything concrete. It takes plenty of time to make a contradiction work on paper.

Why Is This Taking So Long?

It’s easy to get lost in all the updates about Greece’s debt explosion and forget how things got this ridiculous in the first place. To begin with, Greece only entered the Eurozone based on lies. Approval to join the currency union is and was contingent upon certain economic performance levels. The Greek government throughout the 90’s and early millennial years fudged those reports so they could drop the drachma. Much of this trickery involved accounting sleight-of-hand such as selling shares of the government-owned rail system to the government to pay down the $1 billion/year loss it produced. Paying for government losses with government funds – brilliant!

Adding insult to injury, Greek citizens began complaining during the beginning of the crisis that their pensions would be slashed and their retirement age would go up. That’s a problem because the countries bailing them out have a lower percentage of GDP paid toward retirements and higher retirement ages across the board. This led to more political pressure against Greece abroad as Germans and Dutchmen faced the prospect of retiring in their late sixties in order to bail out Greeks who had already retired in their late fifties.

And then there is the issue of the Greek government generating any revenue to pay off debt. As recent as last year, The Economist reported that over 60% of Greek citizens either claim less than actual earnings or no earnings when filing their taxes. It's difficult to pay government debts when you can’t get your people to pay taxes.

Add up over 20 years of both the government and general citizenship of Greece keeping two sets of books and you can understand why it might take so long for creditors to risk lending another cent.

But if Greece defaults on their debts, then it’s mostly private bond holders who foot the bill, right? Wrong. The deeper issue lies in the fact that Greece is no longer defaulting on private debt. Most of the mountain of Greek sovereign debt has been transferred to other governments’ balance sheets over the last 5 years of the crisis. What started out as a few tricks to join a currency union has ended with the entirety of the Eurozone holding high-risk debt.

The Scary Word

And so the Eurozone and its currency hang in the balance of the scariest word on this topic: the Grexit. Kicking Greece out of the Eurozone would potentially plunge Greece into a real depression as they establish a new drachma. The Eurozone would suffer serious investor distrust for a period as well. But Greece isn’t General Motors or one of the investment banks of 2008. It is not too big to fail, and it definitely isn’t capable of buying back its debt without actually collecting taxes.

Greece has played the role of the lying, cheating, overly dependent child in Europe for far too long. The wild child needs to go live alone and grow up in order to learn how to make proper decisions. It’s time to stop enabling unsustainable practices. In truth, cutting Greece off could end up being the best for all parties, despite the short-term disruption it would cause. Either way, despite what the Greeks are saying, I doubt we’ll see sudden progress as of next Friday.