Global investors and EU analysts are beginning to learn the lessons of Greece's crisis. It is delusional to think of Greece as an isolated case, like simply another Dubai. Greece is credit crunch plus concomitant recession impacts in miniature. It is an example of a credit boom economy, more extremely so than the USA.
The US economy has massive size with a trade deficit and currency weight able to act as counterpart to the rest of the world, and with a 'soft dollar landing' power that economists know well. Greece may be tiny by comparison but it too has a soft landing capacity, if at one remove, by being sustained as part of the EU and of the Euro common currency Area. How Greece got into trouble is comparable. It was seduced by the examples of US, UK, Ireland, Spain - lend and borrow so long as property collateral is rising in value fast; banks only have to chase where profits are greatest and not worry about the sustainability of the economy - take the bonus first, ask questions later.
Among OECD countries Greece ran the highest trade deficit risng to 19% ratio to GDP. It is a classic example of 'isms, where Monetarism was the advice advised to the country externally, while most Greek economists are more intelligent Keynesians, but were politically sidelined in the policy debate. Greece's present and future is now Keynesianism. As in other countries there has been a shift in universities and growth of business schools tending toward micro-economics such that the big picture of the external account deficit's importance were greatly under-estimated,
The burgeoning trade deficit was both enforced and financed by Greek (Hellenic) banks pushing mortgage business out of all sensible balance relative to lending to exporters. Mortgage books were securitised and sold to foreign investors - about one fifth of total loanbooks worth about 30% ratio to GDP. The government also securitised future revenues to about 10% ratio to GDP. USA has a technology and services strength in exports, Greece a dominance in world shipping. Greek shipping operated at near 100% capacity for years and did not demand fast growth in borrowing.
Other Greek manufacturers were, however, denuded of loans as banks weighed into mortgages, property boom and consumer credit - refusing to re-balance their loan books despite Bank of Greece pleas to do so. The banks took the view that as part of the Eurozone they did not need to worry about the external account. The Hellenic banks also bought and grew banking subsidiaries in SE Europe and Turkey.In 2006, I forecast the coming crisis for Greece precisely, with 90% wipe-out of bank capital from recession impacts alone, mainly property and construction collapse.
With time, analysts will see Greece as epitomising the problem of unsustainability of credit boom growth when the country's external account is ignored. The budget and banks' solvency crisis of Greece is currently somewhere near the top of the EU agenda, even in some over-active feverish minds threatening to EU integrity! The symbol on its 2-euro coin is the rape of Europa (after which Europe takes its name) and also represented in a large bronze at Bank of Piraeus's HQ. The myth (see notes at end of this blog) may be exercising some metaphorial minds?
How the problem is resolved is also instructive. Greece received ECB and EU loans and the Government has provided direct capital support to the big banks and is necessarily running a budget deficit fiscal stimulus. Because it is part of the Euro zone it has to do this on-budget by issuing bonds. If it still had its own central bank money market powers it could do off-balance sheet asset-repo swaps for treasury bills with the banks. But, had it not been a Euro Area economy, arguably, it would not have been able to sustain such a credit-boom growth. The Drachma would have depreciated to rebalance the external account and domestic growth would have been lower. Greece's property boom was its first based on massive mortgage growth i.e. on home-ownership. This broadened and deepened the domestic economy, but governments exploited that feel-good wealth without doing enough to ensure it was being externally supported by trade. The economy was on a trajectory that some hoped could defy gravity, so long as the risks could be rolled up and thrown as far away as possible - Europa's moon accompanying Jupiter would do just fine.
Like other astrophysics, Greece's external trade is something of a mystery, not unlike the question of how big its GDP really is. In 2006, GDP was severely revised upwards to allow for a 10% (probably truly 15-20%) black economy and thereby squeeze its budget deficit and national debt ratios to satellite closer into cosmic proximity with the EU's Maastricht criteria. There was a debate at the time as to whether the Greek stock exchange should be classed as an 'emerging market' with the possible consequence of it losing its OECD status. This would have severely raised the sovereign cost of banks' cross-border borrowings. Political instability factors and exposure to the Balkan economies were also negatively viewed. Greece was the fastest growing EU country in GDP terms if only 3% of the EU total - both assuring and very worrying?
Since the mid-'90s, Greek banks penetrated deeply the banking systems of Balkan countries. 7 Greek banks established 20 subsidiaries in Romania, Bulgaria and other countries amounting to nearly 2,000 branches, employing nearly 25,000 people, with the goal of growing retail banking (mainly consumer and housing loans and credit cards, which under-developed emerging countries' own banks are least able to compete in). By '05, Greek banks granted nearly 40% of loans in Albania, 30% in Bulgaria, 40%in Macedonia, 15% in Romania and 20% in Serbia, altogether totalling at end of '08, to €147.1bn, against €126bn deposits with transfer funding from parent banks of €121.8bn equivalent to one third of Greece's GDP, 
. This is quite a large and generous benefit to the economic development of neighbouring states, if also twice the black market valuation. Quite how and what the black market is and what it means for the economy is a study yet to be completed convincingly.
Greece was not big enough to really matter to global investors, and not anyway so long as the EU stood by as a safety net. Athens port of Piraeus is the biggest in the Mediterranean and the suspicion is that imports where entrepot trade with much of its through-trade exports being smuggled across its northern borders and therefore not appearing in the official statistical records. Arguments rage back and forth still about the accuracy of its GDP national income accounting.The trade deficit was financed by banks securitising large parts of retail loanbooks, as much as 20%. This should have been a major concern in 2007 and 2008, but it was not transparantly obvious to analysts, no more than the funding gaps in the big banks' balance sheets and how these were financed was obvious. They were financed largely by other banks looking to expand their business in Greece including Citicorp, among others. And, when the credit crunch hit USA, UK and EU, Greece was below the radar of global concerns, well behind Ireland with which it ould and should have been compared. greece therefore had some time to usefully spend before the ripples of the crdit crunch uncovered Greece's crisis. sadly, that time, two years, was wasted, not least because of poor focus by the government to understand the key issues. The Central Bank was totally aware, but its advice discounted in the general viw that a combination of being informally associated with emerging markets and being under the defence umbrella of the EU meant it might survive through to when US and other major economies would recover, which the EU did achieve generally quite rapidly. The error was in not seeing that unlike other emerging economies, which is what Greece really was, like most of central Europe and the Balkans, and there was a huge external debt that developed (in ratio to GDP) and proportionately at more than three times that of the USA.
Greece will be sustained of course, but by the time it gets back on track I predict the EU will then enter its normally due recession. The EU's brief recession in 2008 was a shock response to the credit crunch. It normally recesses 8 quarters after US and 6 quarters after UK. Analysts may class this as 'double-dip', which will not be exactly correct.
The advice of the Central Bank of Greece's advice to the country's banks still stands - shift your lending to productive and exporting industry, now including shipping, but especially small firms and SME's as well as the few big food processing producers. It will hard.
If any country is going to have a tough ten years it will be Greece. What will emerge is a much more savvy economic management of the country.
NOTE: RAPE OF EUROPAEuropa (Εὐρώπη) was a high-born Phoenician lady whose name became that of the whole continent. Her abduction by Zeus in the form of a white bull carryuing her off to Crete where Zeus made her the first Queen - a Cretan story.
Zeus today, in our more secular panoply must be the USA, and the modern Crete is Brussels, depressingly?
Most love-sex stories concerning Zeus originate (like also Leda & The Swan) in ancient tales describing his couplings with goddesses - Europa's name is also among that of daughters of Oceanus / Tethys. The daughter of earth-giant Tityas and mother of Euphemus by Poseidon is also Europa.
Europa's earliest literary appearance is in Homer's Iliad, a story of exuberance gone wrong, nearly 3 millennia old. The earliest vase-painting identified as Europa, dates from mid-7th century BC. As a goddess she represented the lunar cow, at least on some symbolic level, and therefore as a broad-faced moon of a Mother, Astarte, and mythical nymph beloved of Zeus, who was transformed into a heifer.
Such myths are as complex as the financial economy. Ovid's poem on the matter is depicts the classic first half stages of a credit cycle:
And gradually she lost her fear, and he
Offered his breast for her virgin caresses,
His horns for her to wind with chains of flowers
Until the princess dared to mount his back
Her pet bull's back, unwitting whom she rode.
Then — slowly, slowly down the broad, dry beach —
First in the shallow waves the great god set
His spurious hooves, then sauntered further out
'til in the open sea he bore his prize
Fear filled her heart as, gazing back, she saw
The fast receding sands. Her right hand grasped
A horn, the other lent upon his back
Her fluttering tunic floated in the breeze.
