There is no Greek Financial Crisis

There are many crises in the world today; there are wars in Afghanistan and Libya, there is unrest in Syria and insurgency in Iraq and many people are losing their lives, but the crisis that is dominating the news today is what is called the Greek Crisis. Greece has as a sovereign nation borrowed money and it cannot afford to repay it. Greece is being urged to accept severe austerity measures to enable it to repay the money that it cannot afford to borrow. It must, it is being told, sell national assets, work harder for less money and pay more taxes to enable it to repay what it cannot repay. I do not know whether to solution is that which is being put forward by the European Union and the International Monetary Fund. I do know, however, that the crisis is not one about Greece, but one about banking and the way we organise our international lending and borrowing.

When a person or a nation borrows more that it or he can afford to repay there are two parties affected. There is the old story about a man who has borrowed money from his neighbour and cannot sleep. He paces the room every night disturbing his wife who eventually tells the husband to stop it. The husband explains that he is worried that he cannot repay his debt to the neighbour. The wife moves into action. She opens the bedroom window and shouts across to the neighbour “Hey, that money that my husband borrowed, he can’t repay it”. She closes the window and says to her husband “now let him worry, you go to sleep”.

It is not quite as simple as that with Greece but it is similar. There is not Greek financial crisis. The institutions most affected by a Greek default will not be Greek institutions but the international banks who have lent money to Greece. In addition, those banks will have insured the debts (rather like a bookmaker who lays off bets) with other banks and insurers. Those other banks and insurers will also lose money by a Greek default and the overall sums, €300 billion, are not inconsiderable. Those banks will have also laid bets with hedge funds about a Greek default and all sorts of complicated financial instruments will have been created at the time when the borrowings took place.

A Greek default will set off a chain reaction of a second banking crisis, which in turn may well set off the famously talked about double dip recession. What is going on with Greece is about the self interest of the lenders and the associated lending institutions. A default will bring all those lending institutions into default and put at risk the savings that people entrusted to those banks.

I do not know the specific solution to the problem of Greek debt. I do believe that if we are not to see these problems constantly recur lenders have to be more rigorous and more demand when they lend money to sovereign nations, and more carefully examine the purposes of the loans. Loans have to be repaid and therefore they should be repaid from projects, rather than from some amorphous concept of economic growth. Hedging and insurance should not be considered as an answer to mitigating the risks of making loans because ultimately, in the final analysis, the merry go round of international finance will stop, and when it stops the ordinary savers will have to pay for the ride which they never enjoyed.

 

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