Greek Crisis: Why Greece’s Lenders Need to Suffer

These first excerpts from an excellent, thought-provoking analysis by Adam Davidson published in The New York Times Magazine on 28 July 2015 deserves the closest attention of anyone who wishes to have a balanced understanding of the events shaping what we call here the “Greek crisis”. (A misnomer if there ever were one since what it is really and so tragically if you take the time to think it through is “The European Crisis: A sad tale of  greed, incompetence and haste compounded by unbearable hubris”.)

Bond traders goldman SachsThere is definitive proof, for anyone willing to look, that Greece is not solely or even primarily responsible for its own financial crisis. The proof is not especially exciting: It is a single bond, with the identification code GR0133004177. But a consideration of this bond should end, permanently, any discussion of Greece’s crisis as a moral failing on the part of the Greeks.

GR0133004177 is the technical name for a bond the Greek government sold on Nov. 10, 2009, in a public auction. Every business day, governments and companies hold auctions like this; it is how they borrow money. Bond auctions, though, are not at all like the auctions we’re used to seeing in movies, with the fast talkers and the loud hammers. They happen silently, electronically. Investors all over the world type a number on their keyboards and submit it as their bid: the amount of interest they would insist on receiving in exchange for the loan. Just as with mortgages and credit cards, the riskier a loan is, the higher the rate would need to be, compensating the lender for the chance that the borrower in question will fail to pay it back.

We think of stocks as the paradigmatic investment, but bonds are the single most important force in the financial world, determining which companies and economies rise and which collapse. A bond is a form of i.o.u.; when a government or a company issues one, it is actually borrowing money with a precisely defined promise to pay it back after a specified period of time at a set interest rate. Every bond has the same basic criteria: duration, yield and risk. This means that bonds can be easily compared and traded. The typical bond may be resold dozens of times over its lifetime, for a discount or a premium on its issuing price, based on how the market feels the prospects for that issuer have changed. The current price of old bonds is updated constantly, providing a real-time scorecard for the relative riskiness of those issuing bonds, from the government of Kazakhstan to Citibank to your local hospital.

Forget the global fight against terrorism or the Internet and globalization: When historians come to write of our age, the time we are living through now, they may well call it the age of bonds. This age began in 1944, near the end of World War II, when sober men in suits gathered in Bretton Woods, N.H., to prevent future wars. What they wound up creating was the basic architecture of a new global financial system, in which rational economic calculus, not military and political power or ancient prejudices, would determine where money flows.

For decades, this was a much better world. Federal bonds funded the growth of an American highway infrastructure and created a truly national economy; municipal bonds brought the South out of its agrarian doldrums. In Europe, the impact was even greater. European bonds allowed money to flow freely across borders, knitting disparate states that had warred for millenniums into one unified economy. More prosaically, bonds provided objective rigor to the funding of private companies’ activities, helping to break up a cozy, WASPy boys’ club that had determined which enterprises got to borrow money.

On that day in 2009 when GR0133004177 was issued, investors had every reason to assume that this was an especially risky loan. The Greek government wanted 7 billion euros, or $10.5 billion, which would not be paid back in full until 2026. These were all sophisticated investors, who were expected to think very carefully about the number they typed, because that number had to reflect their belief in the Greek government’s ability to continually pay its debts for the next 17 years. I was shocked, looking back, to see the winning number: 5.3 percent. That is a very low interest rate, only a couple of percentage points above the rate at which Germany, Europe’s most creditworthy nation, was borrowing money. This was a rate that expressed a near certainty that Greece would never miss a payment.

In hindsight, of course, we know that the investors should not have lent Greece anything at all, or, if they did, should have demanded something like 100 percent interest. But this is not a case of retrospective genius. At the time, investors had all the information they needed to make a smarter decision. Greece, then as now, was a small, poor, largely agrarian economy, with a spotty track record for adhering to globally recognized financial controls.

– – –  > Continues at http://goo.gl/3GWXOH

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Adam DavidsonAbout the author:

Adam Davidson writes the It’s the Economy column for The New York Times Magazine. Davidson co-founded Planet Money, NPR’s team of economics reporters whose goal is to translate often confusing and sometimes terrifying economic and financial news. His column seeks to help readers understand the sometimes maddeningly opaque worlds of economics and finance. Much of the public discussion of economic issues is done in screaming form, with angry commentators promoting their views and deriding those of their opponents. Others discuss crucial financial issues using arcane language that only the already-involved can understand. He tries to provide understandable and engaging analysis of the economic news.

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About the editor:

Eric Britton
9, rue Gabillot, 69003 Lyon France

Bio: Britton is an American political scientist and sustainability activist who has lived and worked in Paris since 1969. Professor of Sustainable Development, Economy and Democracy at the Institut Supérieur de Gestion (Paris), he is also MD of EcoPlan Association, an independent advisory network providing strategic counsel for government and business on policy and decision issues involving complex systems, social-technical change and sustainable development. Founding editor of World Streets, his latest book, "BETTER CHOICES: Bringing Sustainable Transport to Your City" focuses on the subject of environment, equity, economy and efficiency in city transport and public space, and helping governments to ask the right questions. A pre-publication edition of Better Choices is currently undergoing an international peer review during Sept.- Oct. 2017, with the goal of publication in English and Chinese editions by end-year. If you wish to participate drop a line to BetterChoices@ecoplan.org .

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