Monday, February 22, 2010

The Big Fat Greek Debt Crisis: An Epic Financial Saga?

Even though the country’s sovereign debt problems only started to threaten the stability of the euro in 2010, is the sovereign debt crisis that affected Greece long in the making?

By: Ringo Bones

It can only be described as somewhat shocking news to anyone with a vested interest to the monolithic European super-currency – not to mention countless Greeks with nary a financial safety net – but the sovereign debt crisis affecting Greece which recently became newsworthy seems to have started as far back as 2001. It had been revealed to the mainstream financial news providers in February 19, 2010 that Greece made a currency deal / currency swap with Goldman Sachs back in 2001 in order to cover-up the country’s budget deficit. Though perfectly legal under the EU rules back then, many financial experts had now blamed this move as the root of the big fat Greek sovereign debt crisis that now threatens the value and long-term stability of the euro. With this fiasco, could the role of banks in financial crises such as these put them under scrutiny once again?

The current Greek administration insists that the practice was above board. Even Prime Minister George Papandreou keeps reiterating that Greece needs financial aid – not financial bailout. Given I’m somewhat perplexed of this arcane financial maneuver I started asking the financial experts in our neighborhood. All of them say that the sheer complexity and rigmarole of such over the counter instruments deals – like a typical currency deal / currency swap can be a very effective way of covering up a typical budget deficit problems suffered by a typical country. Of countries and individual persons, it can also be a very effective credit rating booster in the short-term, akin to someone sporting a 2,000 US dollar Armani suit even though they earn less that 25,000 US dollars a year.

As a recently designated member of the PIIGS countries – i.e. the poorest performing economies in Europe as in Portugal, Ireland, Italy, Greece and Spain – Greece has been forced to take extremely draconian actions in order to pay its sovereign debt. Like a proposed pay-freeze on public sector workers that made many Greek government employees threatening to go on a strike. Such unpopular austerity measures will probably only anger your typical working-class Greek who view the “institutionalized corruption” - described by most working class Greeks as the "Octopus" - in some sectors of the government as the root cause of the sovereign debt crisis. Not to mention the unprovoked shooting of a young demonstrator by the Greek police is still fresh on everyone’s minds.

And if this goes on any longer, the longer will Greece improve their sovereign credit rating from near-junk status as the world’s leading credit rating agencies downgraded the country’s credit rating since the crisis came to light. Remember back in 2008 when many highly paid non-American entertainers doing their shows in the US insisted on being paid in euro since the US dollar’s value kept on plunging? Now it’s the almighty euro that’s in trouble.