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Wednesday, April 11, 2012

CBS's 60 minutes

CBS devoted only 14 of the 60 minutes to the simple subject of "An Imperfect Union: Europe's debt crisis". That kind of says it all. It was a fairly shallow report. The central actor was a top British economic analyst of whom the world had never heard before. Wolfgang Schäuble and Christine Lagarde were brought in to say some words to give the show some credibility (even though Lagarde's outrageous comments about Greece's possibly being forced to exit the EU were cut from the report). Overall, it was not a very balanced report.

The Greek side was represented by Prof. Yanis Varoufakis who - most eloquently as always - cited the Eurozone's faulty design as the principal reason why Greece is now effectively "in coma". Steve Kroft suggested that perhaps it was Greece's borrowing way too much; Greece's being a fairly unproductive society; and Greeks' not paying taxes which got the country into trouble. Prof. Varoufakis denied that. He said that these elements about Greece have always been around but they never caused a "coma" before. The "coma" was exclusively due to the Eurozone's faulty design.

I would strongly disagree with that. One of the above elements has never been around before and that is the amount of debt which Greece could raise abroad. One could, of course, argue that Greece could only borrow so much money as a member of the Eurozone. Had it not been a member of the Eurozone, it couldn't have borrowed so much and there would not be a "coma" today.

Obviously, no one can answer this question for sure but I would tend to disagree.

What started all the trouble was the lending frenzy on which virtually all international banks embarked. That lending frenzy was not limited to the Eurozone. A case in point would be Hungary where foreign banks made nearly unlimited CHF loans to the domestic banking sector so that those banks could make CHF loans to home buyers/builders. Foreign banks went so far as to advertise that borrowers would not need to submit financials because the only thing which mattered was the value of the property.

Thus, I would argue that Greece could have raised the same amount of debt outside the Eurozone as it did within the Eurozone. And that would have lead to the same "coma" which Greece is in today.

Obviously, loans are a joint responsibility of lenders and borrowers. Lenders were indeed "throwing money" at Greece (and other countries) and that is their responsibility. At the same time, the borrowing decisions were taken by professionals at Greece's public debt management, at the Bank of Greece and at Greek banks. Those were people who knew what they were doing (or at least thought they knew). They turned out to have been wrong just like those investment bankers who once thought that one could convert 3 bad sub-prime loans into one investment grade loan.


  1. I agree in general, but I have two comments.
    Yes, Greece might have borrowed more than before even if it had not been admitted to the monetary union, as you say, but I suppose it would have had to pay higher interest rates because of the currency risk (that was taken away in the euro zone); so these higher rates, in my view, could have served as a disincentive to borrowing too much.
    My other point: I agree that both borrower and lender have a responsibility. But if the borrower gives false information on the state of his finances - as Greece did by systematically delivering false statistics - then the borrower at least carries the bigger responsibility.

    1. Regarding the first point, it would be interesting to compare the borrowing volumes and costs of other non-Euro EU-countries. That would probably offer better conclusions as to how Greece could have borrowed with the Drachma as currency.