At the end of the day, the issue is always “Who pays?” If you don’t think Europe matters, think again. It will affect you both directly and indirectly. If you are watching rioting in the streets of Athens, you need to know that sort of thing could be heading here. In fact, I would argue that it is already here showing up in the anger that is currently rampant in the country. And you also need to know that it will reach directly into your pocketbook. Your money will be buying more than baklava over the next few years.
If you want to understand what is going on, you need to know that Greece has a complete cradle to grave socialist system with generous benefits. Although the official age for retirement is 61, the vast majority of Greeks can retire somewhere between the ages and 50 and 55 with full pensions. For example, a hairdresser’s job is classified as hazardous and she can retire at age 50. The demonstrators are resisting governmnet efforts to raise the official retirement age to 63.
Greece manufactures very little. Its primary source of revenue is tourism and associated industries. Its government has been on a borrowing spree and right now owes something like 145% of its GDP. No matter how the Greek debt is sliced and diced, it is impossible to repay and there will be a default in one form or another.
Greece is part of the Euro zone. It consists of most European Union countries minus Britain, Switzerland and Sweden, and maybe a few others. It is a confederation of independent states with a central bank issuing its currency, the Euro, but with very little authority to control the fiscal integrity of the member nations other than to set “targets” for debt, GDP and the like.
The banks of all the various member countries are each other’s clients. So, Greek banks can buy Greek government debt, and the Euro Zone banks have to accept that debt as collateral for further Greek bank finances. The Greeks know this. So they continue to run up their debt, and lay it off to other European banks knowing full well there will be a default. One might as well make a little money in the process.
The debt is worthless. Greece cannot pay it back. A default of Greek bonds would have ramifications clear around Europe as European banks move to increase their reserves to write off the Greek government debt. The solution is to bail them out…and the only two countries strong enough to bail out the Greek government is Germany and France, who would do so to protect the interest of the German and French banks holding all of this Greek debt.
While the Germans and French citizens are kicking and screaming that they are being made responsible for another country’s debt, the Greeks riot in the street because they continue to want to retire at age 50 with the Germans and the French picking up the tab. What a sticky wicket.
And here is where you come in. The German and French banks are going to have to borrow money to pay off the Greek debt. While the Chinese have been skulking around Europe offering to assist, the Europeans are rightfully suspicious about the strings the Chinese will attach to any bailout money.
So they are looking to the Federal Reserve Bank, that would be our Federal Reserve Bank, to give them to the money to prevent the collapse of the European banks while they give the money to Greece to pay off the debt incurred by its citizens retiring at age 50. And Greece being the cradle of democracy and all, the Greek citizens are rioting in the streets…which means the Greek government may look like it is instituting austerity programs, but in reality they are really kicking the can down the street to deal with later…borrowing forward so to speak.
And you will be paying the bill, even though financially we are not too far behind Greece with our worthless money.
Spanakopita anyone?
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