To be honest, I wanted to write this article for a while now. I have heard almost everything concerning whose fault it is for the current situation: banks, politicians, people, Greece etc. Thus, today I am giving you my honest opinion on whose fault it is for the chaos we are currently living. The answer is not, as some may have thought, just a person or a nation. It is a continuing series of absurd, irrational mistakes which have, step-by-step, led us to this situation. Without further ado I present you with the list of the 3 groups of people to blame for this situation:
1. Greek Politicians and Greek People
Politicians in Greece, strong proponents of a system named Kleptocracy, which in essence means a system where the government increases the personal wealth and political power of its officials and the ruling class at the expense of the wider population. Greek politicians were (are?) notorious for embezzling state funds, shipping their money to Swiss bank accounts and receiving bribes so that they could arrange something for someone. Greek government debt, issued to fund such abuse of power rose from 94% in 1999 to 167% in 2011 as one may see from the graph below.
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| Source: Wikimedia Commons and Eurostat |
The reason for this astonishing debt growth is obviously the large government deficits, which allowed for politicians and other officials (or their affiliates and business partners) to practically steal from the state using as a preface works for public good.
Then why the Greek people one might ask? Well, to put it simply because they tolerated and perpetuated this situation. When in public hospitals (which are supposedly free for everyone) you have to bribe doctors for the right to an examination, when you know that many are stealing from state funds and not only you do not do anything to oppose such a thing but try to come up with ways to steal some yourself, when people's parents die and do not mention the fact to the police so that they can continue to receive their pensions (and this has happened repeatedly) then one cannot just blame politicians for it. I am not at all suggesting that every person in Greece is at fault for this directly. Nevertheless, they are at fault indirectly since they have tolerated and perpetuated this situation throughout the years. All that is necessary for the triumph of evil is that good men do nothing.
2. EU Banks
Although EU (and non-EU for that matter) banks must have had the data for the increase of the Greek debt (Eurostat publishes a quarterly analysis which is free and open to public) they had chosen to ignore the possibility that a country issuing large amount of bonds could possibly face trouble. The following data is from the Bank for International Settlements in 2011 and indicate the exposure of non-Greek banks to Greek sovereign debt.
An casual observer can see that the first 12 banks have an exposure of more than 1 billion. At first, your reaction might be that obviously they had enough money to compensate for large losses in Greek debt. After all they are large, well-off organizations aren't they? Well, have a look at the next data set.
What is more astonishing is that people running the two Cypriot banks, Dexia or BPI, Commerzbank or any other bank which had a large exposure in Greek debt, did not think about having more than 10-20% of their equity in one single country. Now I am no expert in risk management, but from what I can remember there is a notion called diversification which means that you shouldn't put all your eggs in one basket. It looks like the officials who ordered such massive buys of Greek bonds should have taken a good look a their exposure and the amount of Greek debt before they invested. They did not.
3. Decisions by the EU
So far the usual suspects were at blame: greedy bankers and corrupt state officials. Now how about we take it to the next level? In an announcement in February 2012 the Eurogroup decided that the Private Sector Involvement (PSI) in the Greek debt restructuring would amount to a total of 75%. For those of you counting, the first 15 banks of the above chart lost a total of 21 billion euros in one day. These were the biggest losses of all times for most of the banks involved.
As if this was not enough for the banks, the European Banking Authority had issued a "temporary" rule (which now is bent on making it permanent - for details read this) of increasing Core Tier 1 Capital requirements from 8% to 9%. Although this might not seem like much, the increase forced the banks to come up with €116 billion of new capital. And all that in the midst of a crisis, where finding funds is even more difficult. For a detailed view of where these funds came from have a look at the following image:
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| Source: Wall Street Journal |
Thus, keeping in mind that when banks are in need for money they do not lend out much it not amazing why we have reached a situation where individuals and companies are struggling for liquidity. The worst part is that due to the severity of the decisions many banks in the EU are struggling for liquidity as well, which has led countries like Cyprus and Spain to seek for assistance. What has happened is that, in essence, the EU authorities have taken a country-specific crisis and transformed it to an EU-wide one through erroneous handling. These decisions can (unfortunately) be compared to the ones the US Federal Reserve had made in the early 1930's which had strengthen the Great Depression, prolonged its duration and increased its severity.
As a conclusion I would like to remind you of the timeline of errors which led to the crisis:
1. Corrupt officials and politicians in Greece were stealing money from the country and were financing their spending with government bonds,
2. Banks had not paid attention to the increase in government debt and kept on buying more and more lured in by the high returns offered, and
3. EU authorities, by handling the situation badly, have transformed the Greek crisis to an EU crisis
The situation worsens as politicians and policymakers in the EU are throwing good money to follow bad. As they cannot admit their mistakes they hope that two wrong can make a right. Well, the saying doesn't go that way.
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