Greek Debt

The Greek sovereign debt is in the news today. I got to wondering just how big it is. Meaningful numbers are difficult to find, but I succeeded after a while by consulting the German Spiegel (link). It carries a listing of the debt subdivided into categories—thus the institutions that actually hold it. I show this in a tabulation. Only money actually dispersed, thus actually paid out, to Greece is included. Much more has been promised. My conversion of Euros to dollars uses a rate of $1.2671 per €1, a quite low rate reached this morning.

Greek Debt
	€ bill.	$ bill.	%
European States	41	52	18.0
European Central Bank	50	63	21.9
IMF	18	23	7.9
Greek banks	50	63	21.9
Foreign banks	39	49	17.1
Foreign funds	30	38	13.2
Total	228	289	100.0

Much of the fretting in the media circles around the smallest number here, the holdings by foreign funds (13.2% of the total); some of these are hedge funds. The reason for the barely suppressed hysteria is that hedge funds insure their holdings using credit default swaps; such instruments still exist and may still be sold as derivatives, hence the liabilities are spread God-only-knows where. The invisible consequences may materialize, who knows, even in this humble basement where I write, and I may succumb to dark evil things that will suddenly attack from thin air.

To get some feel for these numbers, I looked up the GDP of the European Union; granted, that is greater than the Euro Zone. That number was $16,282 billion in 2010. The Greek debt, therefore, represents 1.8 percent of the gross domestic product of all Europe. In 2010 Greek GDP stood at $305 billion. Germany’s was $3,315 billion—and the Greek debt, expressed as a percent of German GDP, was 8.7 percent.

The debts are high but are they monstrously high? Not at all. The dangers lie in our virtually non-existent powers of collective self-control—and our much vaunted markets that can spread panic in the flash of an eye.

Odd Use of “Bold”

European sovereign debt is held by countries. The lenders are banks and other investment combines. The sovereigns borrowed money in perfectly legal transactions. Failure to pay those debts has consequences. So why is it suddenly bold to transfer those obligations to third parties, thus to the populations of yet other countries, by inflating the Euro? All Europeans lose purchasing power so that some sovereigns are rescued and lenders are held harmless. Rob the weak to pay the powerful—and do so in such a way that it takes a long time to notice? That’s sophistication, not boldness. The sophisticates, like Paul Krugman, are on it. The Germans are resisting. They are now the bad guys.

The author of the piece in the NYT, Nicholas Kulish, through no fault of his own, was born in 1975. He is therefore quite able to write a paragraph like this:

The prospect of a dim historical memory — the antique photograph of the wheelbarrow full of nearly worthless bills — helping to drive the world off the economic precipice and into another deep recession may seem like the height of irrationality and even irresponsibility.

The memory is not dim for somebody like me, born in 1936. I actually saw a big box full of Reichsmarks at a street corner as a boy. The wind was blowing the bills down the street, and nobody bothered picking them up. 1947. I just happened to be on my way to the bakery. My mother gave me half of a cigarette—knowing in advance that it would get us two baked rolls. And it did. Indeed the baker immediately put it in his mouth and smoked it right then and there.

Kulish then goes on to contrast the American love affair with consumerism and the Germans’ dislike of consumer debt, high savings rates, and relatively low rates of home-ownership. In other words the Germans don’t get it. The sophisticated view is that you can stimulate growth, kick-start economies, and get rid of debt by inflating the currency.

The drums are beating because, directly or indirectly, American banks are exposed to the European liabilities as well. We’ve had to bail them out once already—meaning that the innocent had to pay for the guilty. We have not bailed out the miserable little borrowers who signed mortgages they shouldn’t have. We weren’t bold enough. But if our banks start failing again, believe you me we will be bold enough to bail again—if we can’t persuade those timid Germans to embrace the good old times to save our 1 percent.