Global Finance

Greece, small fry in bigger scheme of things

Chinese exchanges more important than Greece

Outside of Europe and for South Africa too, the financial and economic importance of the Greek debt crisis will be largely only symptomatic of much bigger issues.

What has been happening in Greece reflects a fundamental weakness in the global financial system; it reflects fundamental geopolitical power shifts, which might impact on where South Africa is positioned in this new developing geopolitical environment; and it has far-reaching implications for the European Union.

More importantly, with so much attention focused on Greece, the much bigger and wider threat, also for Africa and South Africa, lies elsewhere – in China and Asia where overly speculative markets are playing havoc with stock exchanges.

Financial front

If the normal rules of bankruptcy applied, the Greek debt crisis might have been over some time ago. But they do not and, to exacerbate Greek’s problems, its main creditors, Germany in particular, are having amnesia regarding their own post-World War I and II history.

Around the world, legal frameworks are well-established to deal with unmanageable private and corporate debt, not only to deal with it in terms of bankruptcy, but also to inhibit the borrowing and lending practices that cause such unmanageability. In short, they place an onus on both lender to take on debt responsibly and on lenders to grant credit responsibly.

In the case of personal or business bankruptcy, courts can write down debt, forcing creditors to absorb the losses that come with the risks attached to being in the ‘business of lending’.

For private individuals, they provide a mechanism that allows them to start with a clean slate.

No such legal frameworks exist for debt guaranteed by governments or between governments.

For Greece it resulted in it being allowed to take on debt it could not afford and then being given more debt to pay the debt it could not afford in the first instance. It even kept happening after International Monetary Fund economists said as far back as 2010 Greece would not be able to repay.

The dictates of austerity and some restructuring, including the selling off of public assets, have clearly failed to deal with unmanageable sovereign debt. The burden of dealing with these debts has been moved onto the shoulders of taxpayers, pensioners and individual savers.

In an open letter earlier this month to German chancellor Angela Merkel, five internationally esteemed economists – among them Thomas Piketty, of Capital in the 21st Century-­fame – wrote: “… in recent years the series of so-called adjustment programs inflicted on the likes of Greece has served only to make a Great Depression, the likes of which have been unseen in Europe since 1929-1933. The medicine prescribed by the German Finance Ministry and Brussels has bled the patient, not cured the disease.”


History tells us that Germany has twice in the past benefited from debt write-downs.

In 1929 to 1931when it became clear that the amount of official inter-governmental debt could not be paid, the Young Plan (adopted in 1930), greatly relieved the burden of reparation payments imposed on Germany after World War I.

And Germany’s post-World War II ‘Economic Miracle’ was facilitated by Allied Monetary Reform, annulling all its domestic debts, except employer wage debts and basic working balances. Later, in 1953, its international debts were written down by 60%.

The result: After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP, ten years on, public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround.

Among the countries that at the time took a ‘debt haircut’ was Greece. Now, ironically, Germany resists a similar break for Greece – something even suggested by the IMF in a recent report.

Wider implications

In their open letter to chancellor Merkel, Piketty and his colleagues point out that in the 1950s, Europe was founded on the forgiveness of past debts, notably Germany’s, which generated a massive contribution to post-war economic growth and peace. They went on to say:

“Today we need to restructure and reduce Greek debt, give the economy breathing room to recover, and allow Greece to pay off a reduced burden of debt over a long period of time. Now is the time for a humane rethink of the punitive and failed program of austerity of recent years and to agree to a major reduction of Greece’s debts in conjunction with much needed reforms in Greece.”

Piketty in a recent interview with Die Zeit said: “We need a conference on all of Europe’s debts, just like after World War II. A restructuring of all debt, not just in Greece but in several European countries, is inevitable.”

In an article on the website The Conversation, Joe Deville of Lancaster University warns that the euro remains fatally fragile as long as the eurozone lacks a mechanism for forgiving debt.

There are clear signs that the German stance on Greece is also polarising Europe and playing into the hands of more extremist parties, especially in other heavily indebted countries.

Spanish anti-austerity leader Pablo Iglesias urged his countrymen: “We don’t want to be a German colony.” Italy’s populist leader Beppe Grillo said: “Now Merkel and bankers will have food for thought.” More than 260 000 Austrians have signed a petition calling for the country to exit EU, and now the Austrian parliament must discuss a referendum on the issue.

Even in France there are signs of the French government resisting Germany’s stance, prompting chancellor Merkel to visit Paris for what was described as “crisis talks”.

According to George Friedman of Stratfor Global Intelligence, European leaders might have miscalculated the importance of the Greek issue. He points out that while Greece’s economy accounts for less than 2% of the EU’s GDP, Spain and Italy are a different kettle of fish.

In the words of Deville: “The problem for the EU is that, unlike in the case of consumer credit, no real mechanisms have been put in place to allow debt forgiveness to occur.

“In their stead is the false choice offered to the Greek people of yet deeper austerity or the national immiseration of being forced to leave the euro.”

Geopolitical dimension

There is, however, also a broader geopolitical dimension – something that is likely to impact directly on where South Africa finds itself positioned in the new multi-polar world that is emerging.

It is not by accident that Greece found itself as an observer at the recent summit of the BRICS (Brazil, Russia, India, China and South Africa) group of countries in Russia.

If or when Greece exits the eurozone, Russia with which it shares religious and cultural ties going back to the days of the Byzantine Empire between 330 AD and 1453, would be one of the first Greece would turn to for money and support.

For Russia it would be an important strategic gain in its standoff with NATO and the US. It could not have gone unnoticed that one of the first global leaders that spoke to Greek prime minister Alexis Tsipras after the Greek referendum was Russian president Vladimir Putin.

A Greek-Russian deal could also find synergies with the recently launched BRICS Development Bank’s ambitions as a player in global development finance

A second option for Greece, also coming from the BRICKS ‘club’, is China with its ambitions as a global player. Greece might offer it an opportunity to extend its influence westwards.

A third possibility is that the Americans, in an effort to counter moves from either Russia or China, might encourage its private equity and hedge funds to get involved in the rebuilding of the Greek economy.

To what extent South Africa’s position in the new developing global landscape is becoming imbedded with the BRICS grouping, is illustrated by the news that its Department of Energy (DoE) and Russia’s Rosatom have signed memoranda of understanding.

The bigger danger

But in the meantime, while so much attention is focused on the relatively small Greece, a potentially much bigger and dangerous storm with implications for the global economy is building elsewhere.

Driven by world-wide economic uncertainty, Chinese stock exchanges over the past year have become what some commentators are calling “casinos” in a frenzy of speculation. In the process one million-plus new Chinese millionaires emerged over the past 12 months.

In the last month a correction has taken hold of some Chinese exchange markets, with share prices having plunged by a third after they have increased by 70% over the previous year.

In its wake and coupled with concerns with about the continued vibrancy of the Chinese economy, a wide range of commodity prices – from gold to iron ore –also came down drastically, exposing emerging market commodity exporters, including South Africa.

What is happening on the Chinese markets is fast becoming the more important economic/financial story to watch.

by Piet Coetzer

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