Greece and the Euro: Towards Financial Implosion By Prof Rodrigue Tremblay

In sowing the seeds of the Greek crisis, European politicians have made the same mistakes as American politicians before the financial and banking crisis of 2008-09, that is to say encourage excessive indebtedness of some economically weak countries with loan guarantees.

What really created the conditions for a major financial and banking crisis in the U.S., starting in 1999 when the so-called Glass-Steagall Act of 1933 was abolished by the administration of Bill Clinton, was the innovation of insurance given to risky loans.

In the U.S., the regulatory agencies that are the U.S. Treasury (controlled by mega banks) and the central bank (the Fed) (controlled by mega banks) closed their eyes when risky banking products were created, not the least being the famous derivative products such as the mortgage-backed CDOs (collateralized debt obligations) whose risk of default was artificially reduced with insurance contracts (the famous Credit Default Swaps or CDS) against payment default and issued by large insurance companies such as AIG (American International Group). In doing so, borrowing was greatly encouraged and bank lending became more risky. It resulted in a mountain of mortgage debt, which led to the creation of a speculative housing bubble that began collapsing in 2005, and which turned into a general global financial crisis in 2008-09.

However, European politicians seem to have made the same mistake as American politicians. In their case, they encouraged a rise in the public debt of the poorest countries in the Eurozone by giving guarantees against default to large banks if they continued lending to them despite growing risks. This is what enabled a government like the Greece government, for example, to continue piling on debt upon debt even though lenders would have by themselves stopped lending, if they had not received guarantees against default. Today, the Greek debt represents an unsustainable 177 percent of its annual GDP (yearly total domestic production). Indeed, when a country’s debt exceeds 100 percent of its gross domestic product (GDP), creditors begin to get nervous. They react normally by raising interest rates and by reducing the volume of their loans.

But in Europe, politicians wished to keep interest rates as low as possible on loans to the most economically weak countries of the Eurozone. In doing so, they created, in 2010, the European Financial Stability Facility (EFSF), with guarantees from member States, in proportion to their participation in the European Central Bank (ECB). At a minimum, the EFSF has secured 131 billion Euros of Greek debt. Thus German taxpayers, for example, are on the hook for 41.3 billion Euros of guaranteed Greek debt, while French taxpayers, through their government, are responsible for 31 billion Euros of that debt, and so on for the other 17 member countries of the Eurozone. In so doing, an economic debt problem has been transformed into a major political issue.

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