What the Greek Debt Crisis is Really About

Long into the European night, the talks to save Greece continue. In today’s Markets and Money, we’ll do something we can barely stand to do: we’re going to write one more time about Greece. If you can stand to read it, you may come to the same conclusion we reached.

That conclusion is simple: what’s going on in Europe has nothing to do with solving the Greek debt crisis and everything to do with preserving a corrupt system based on limitless debt and growing government power. The sooner you understand that the sooner you’ll be able to prepare for what happens next. There are two options for what happens next, and we’ll get to those shortly.

First, though, doesn’t it strike you as strange that all of Europe can be brought to its knees by tiny little Greece? Greek GDP is just 2.4% of Europe’s GDP. In economic terms, Greece doesn’t matter. Its lack of growth or economic competitiveness shouldn’t be factors that can destroy Europe’s 13-year single currency experiment.

Yet Greece obviously does matter, or else markets wouldn’t be anxiously waiting for tonight’s announcement of a second bailout totalling €130 billion. The correct question, then, is why does Greece still matter? If you rule out the obvious things that don’t matter, that leaves everything else. Or as Sherlock Holmes was fond of saying, “when you have eliminated the impossible, whatever remains, however improbable, must be the truth.”

First, let’s see why the possible explanations for Greece’s importance to the world are actually impossible. Take the issue of debt reduction. As we wrote last week, the deal before Europe would reduce Greek debt to 120% of GDP by 2020. The IMF says that level is sustainable.

Back in a universe where common sense prevails, you can see that the plan is a joke, at least in terms of debt reduction. A plan to reduce Greek’s debt to 120% of GDP…EIGHT YEARS FROM NOW…is not a serious plan about debt. Therefore the plan cannot be about debt reduction.

Will the plan make Greece more competitive in the long run? Well, probably not. In order to get more money by March 20th, the Greek Parliament had to agree to certain structural reforms. Some of those reforms might even be a good idea. But cutting the minimum wage isn’t going to be popular. And with Greek GDP shrinking by 7% in the fourth quarter, years of austerity won’t make Greece more competitive. The lifestyle of the Greeks will be destroyed and the debt will remain. Therefore the plan cannot be about making Greece more competitive.

Does saving Greece save the euro? Not at all. The euro would be better off without Greece and Greece would be better off without the euro. The Germans are even planning for a euro that doesn’t include Greece. With its own currency, Greece could default, devalue, inflate and start over. Argentina did it in the last 10 years. It’s not rocket science. Saving Greece is not about saving the euro.

If saving Greece is not about saving the euro, and if it’s not about reducing Greek debt, and if it’s not about making Greece a more competitive economy…then just what IS it about? Well, now that we’ve rule out what’s impossible, let’s look at what’s left.

Saving Greece means preventing a technical default. But why is that so important to the European Central Bank (ECB) and the International Monetary Fund (IMF)? The current plan certainly looks like a default. Under the plan, €100 billion worth of Greek debt would disappear thanks to a debt swap agreement with private sector investors. The ECB has twisted enough arms to get creditors to accept a 70% haircut on their current Greek debt without actually calling it a default.

The final details of the agreement between private sector investors and the EU were supposed to be released before today’s meeting. But they haven’t been yet. This is one of those glitches that could still derail the whole agreement. For example, creditors could take legal action for being forced to accept losses without recourse to credit default insurance purchased in the event of a default.

It gets kind of wonky here. But really, it’s about who is making the rules in Europe and whether a name actually means anything. To you and me and everyone else in the universe where common sense prevails, a non-voluntary 70% loss on your government bonds is a default. If you loaned someone $1,000 and they paid you back $300 and asked you to be grateful, you probably wouldn’t be.

But you and I don’t get to decide what constitutes a credit default. That honour belongs to the International Swaps Derivatives Association (ISDA). The important thing to keep in mind here is that the ISDA is a trade group made up of banks and financial firms. Those are the firms that have the most to lose if Greek bonds default. It’s in the interest of the members of the ISDA that a non-voluntary credit event in Greece NOT be called a default.

It gets even murkier here. The ISDA essentially represents the global banking system. In Europe, the banking system is full of government bonds. Those bonds are nominally assets. If Greece defaults, it sets a precedent for how other countries might deal with unsustainable debt levels. This imperils the collateral of Europe’s entire banking system.

If you want to put it in simpler terms, let’s say that Europe’s banking system is full of rotting meat. Some investors bought that meat thinking they were going to get prime rib. But they can smell the stink of the meat from a mile away. They want to be compensated for the bad meat. The ISDA, which owns the freezer in which the meat went bad, says, “Well, we’ve decided the meat isn’t bad after all. And you have less of it than you thought anyway, as of now.”

This is a crude analogy. But you can see the basic problem: everyone else knows that if Greece defaults, the value of other government bonds in Spain and Italy and Portugal will plummet too. A Greek default wouldn’t be important because of the size of the default (although French and German banks would stand to lose a fair bit). It would be important because it would begin the process of blowing up bank balance sheets all over Europe.

When you realise that the ISDA and the ECB and the EU are in league to save their financial skins, you realise that the Greek rescue plans is about preventing other countries from realising that default is an option. In fact, it’s not even about preventing the realisation. It’s about making it impossible for a country to default on its obligations…even if it means selling the population into servitude for years to come.

If the centralised European Welfare State model is to survive, banks must not take losses on their government bond holdings. Individual and private investors, on the other hand, will be forced to take losses through a “collective action clause”. This clause allows your securities to be revalued without your consent if a majority of other bondholders agree to it.

Now we’re coming to the real nuts and bolts of what’s at stake. The technocrats in Europe are at war with private investors. The members of the ISDA are in league with the technocrats to preserve their system. That part is easy to understand.

The technocrats are employed by government and get to spend your money. This system is good for them. It’s good for the members of the ISDA too. Loaning money to the government is good business. Collecting rent off the expansion of credit is easy money. They want the system to last as well.

Who is the system not good for? Everybody else who’s on the outside looking in. Investors who want their capital to be productive are out of luck. And taxpayers who question the value of austerity measures and debt reduction plans that don’t really reduce debt are also out of luck. No wonder they are angry.

We’ve come a long way, then. Greece isn’t about saving Greece. The only reason something so small and insignificant can matter so much is that it matters in a way no one is willing to say. It’s about the subversion of sovereignty and democratic processes by removing decisions from people and giving them to trans-national financial elites. It’s about preserving a global system that’s based on the accumulation of debt and growing government power because there are two groups of people who benefit tremendously from that system, even if most people don’t.

Maybe we’re reading too much into what’s going on in Europe. It could be all about vanity. Europe’s policy makers believe they can move Heaven and Earth and make even the most unworkable economic model work. They refuse to chuck their theory aside in the face of reality. They’ve spit the dummy.

Or maybe this really is a struggle over the power and influence of the financial sector and the government in our lives. Hmm. What do you reckon? Who’s going to win? Send us your thoughts to letters@marketsandmoney.com.au


Dan Denning
for Markets and Money

From the Archives…

Mixed Economic Blessings
2012-02-17 – Nick Hubble

Lost in Translation: An Important Note for Daily Reckoners
2012-02-16 – Joel Bowman

How Warren Buffett Looks at Stocks vs. Gold Investing
2012-02-15 – Bill Bonner

That Fair Dinkum Bloke Barack Obama
2012-02-14 – Dan Denning

Building With New BRICS
2012-02-13 – David Thomas

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

12 Comments on "What the Greek Debt Crisis is Really About"

Notify of
Sort by:   newest | oldest | most voted

Dan, once again a very interesting and thought provoking article. It is not very good news for the “middle” class of persons around the globe!


Dan, great article. You raise some interesting points and I am surpriced that the financial press is not explaining more about CDS, looks like one of those things in life were you get ripped off and that is it! Bad luck.

Dan, many thanks for this excellent brainfood. In the case of Greece, the private sector(mostly banks i.e. the elite in yr article) is actually taking a massive haircut so the rescue effort is not saving them – although it is somewhat subsidised by government funds (otherwise the write-off would be even larger). In any case, governments and banks are picking up the bill. The crucial question I think is more why a credit event to trigger the CDS is so important to avoid. Clearly the beneficiaries of the current deal are those who wrote the CDS. Might some of them… Read more »

Interesting article and I think we must also consider who else profits from the bail out; obviously the Greek population who enjoyed a standard of living for many years that we can only assume was based on false economics / over inflated wages etc; 10yrs of scrimping to pay off 10yrs of sin; Sounds fair to me!


Sounds like a sickness that can only be cured by sound money, and all that it entails ;)


Excellent article Dan, it seems the machiavellian minds of the Eurocrats are hard at work here. I am shortly to go to Europe, so i suppose i shall be in the thick of it. I had hoped to have some peace in my retirement, but it seems not. Where do you think is the best place for my diminishing pile of money, the mattress maybe? I suppose i should buy some gold, and silver, for a rainy day.

Nina Larisch-Haider
Greece was the last country which was trading mainly in cash, then they introduced credit cards (I think Greece was the last country) …. and people started to spend more than they could afford etc…. like in every other country. But it is not about the money alone, it is about bringing these strong people onto their knees and destroying their country for the purpose of world domination. These people who are dominating the world, are needing slaves ….. like centuries before. When people get poisoned food (pestizides, herbizides) over a long period of time or have a lack of… Read more »
John Ward

This is a fascinating piece, and makes sense. However, there is an alternative view suggesting (with some evidence) that a Greek default is EXACTLY what Wall St, the White House and Berlin’s Finance Ministry want – but a controlled default that minimises damage.
My own gut feel is that the deal has been set up to fail, not succeed:



According to Zerohedge, the 2nd Greek ‘bailout’ is “is nothing but a Greek-funded bailout of Europe’s insolvent banks”



Greece story is very similar with those in book The Blood Bankers. This story started when Bil Clinton nulified Glass-Steagal act and unregulated derivatives were issued with CDS insurance of ISDA. There is 13x world’s GDP in derivatives. Just Bank of America has 5x US debt in ’em. So what they started to do is put those not insured assets into public books to prevent banks colapse. Mortgage crash in US is part of it. But when homeowners with not fixed rate get out. Iceland is the same. Would Ye believe that there is obstruction to make audit of Greece… Read more »

Search: Multi billion lawsuit dragon family. There is lot more going on and US is gonna pay astronomical money. There is 19 century bonds and shares from south america and asia chalenged @ courts. Astronomical money in game. Just Lee Wanta and Dragon family goes trilions dollars. There is gold certificates from one of south american country issued toward fertilizer in 19th century paid 350 000 dolls in gold! U know value today? Do U C stars on heaven? Good bless kangs beside ausies

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au