LESSONS FROM GREECE vs. IMF

Greece, on the other hand, has a slightly different problem – they have a BANKING CRISIS, similar to the US banking crisis in 2008. While the US banking crisis stems from bad mortgages to individuals, the Greek crisis stems from the sum total of bad loans to businesses, individuals, and government (source: Eurostat, Greek Stat). Those bad loans are with a few major French and German banks; hence, the involvement in their respective governments.

While the data shows that the Euro zone banking industry may be able to weather this storm, it is more convenient to invoke the too-big-to fail-policy and request a bailout – just like the US banks did. So the responsibility of paying those bank debts has fallen solely on the Greek Govt. As a friend of mine said, in the game of high finance, profits are privatized, but losses are socialized.

Nevertheless, the solutions for Greece and SKN are the same: spend less, tax more.

For Greece, the Govt desperately needed cash, and entered into an agreement that had certain fiscal targets and measures, including:

  • fire state workers,
  • cut or freeze state salaries and pensions,
  • shut down loss-making state organizations,
  • cut health spending,
  • speed up privatizations,
  • increase property taxes
  • increase VAT rate

But the Greek Govt has continuously failed to meet its fiscal targets.  Here is a summary of their performance:

Date

Performance

Remedy

1st Round, Feb 2010

Failed

Further cuts in spending; more taxes

2nd Round, May 2010

Failed

Even more cuts in spending; broader taxes

3rd Round, Nov 2010

Failed

Deeper spending cuts; higher taxes

4th Round, July 2011

Failed

Greater spending cuts; even higher taxes

 

After 4 attempts, by August 2011, their spending INCREASED by about $3 billion, and revenue DECREASED by about $2 billion. They are failing.

This above example underscores a crucial point: on average, past behavior is a good predictor of future behavior. In the past, the Greek authorities have had a poor history of financial management ….. and has continued.

Can SKN authorities reverse its behavior to save and spend less?

 

 

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