krebscycle

Once upon a time, a small, poor and poorly run country called Greece borrowed a whole lot of money, most of it from giant banks in Northern Europe, although some also went to banks in Spain. The weaknesses in the Greek economy were well known and the corruption of its government was legendary. It was also well known that anyone with any kind of real income in Greece had the option of not paying taxes at all. Which would make it harder for the Greek government to pay loans back. So the loans were known to be risky. The investors, however, were desperate for yield (higher interest payments) so they lent billions and billions of euros to Greece. At first, things went great. The interest payments were high, which helped the banks report high earnings, which helped their stocks go up, and undoubtedly got all sorts of bonuses paid. The corrupt Greek government could spend all that loan money staying in power and perhaps helping itself to a nice share. The world was having a big finance party and everyone who counts was making big money.

But then one day, everything went wrong and in a worldwide panic followed by recession Greece became unable to pay interest or pay back loans that were due. So these banks and investors lost all their money and learned a valuable lesson about the relationship of risk and reward and Greece had to renegotiate its debts and clean house! Also the investors who had lent money to the imprudent banks, which the banks had used for this risky gamble learned the same lesson. Oh, wait, just a joke, that’s not what happened at all.

What really happened was that  Germany and France, two of the richest countries in Europe, got worried about the health of their banks – the ones who had made all these reckless loans ( it turned out that these bankers had gone all over the world making crazy bets). So these countries and the European Central Bank and International Monetary Fund bought the Greek debt from the banks, paying the banks hard cash so that the lucky public now owned these tattered debts (“distressed debt” as it is called in the poetic language of finance) and rescued both the banks and the investors who had lent money to those banks.  All the private investors walked off pretty much unscathed. But now European governments and agencies owned a lot of worthless paper Greece couldn’t pay for. So the European governments went to Greece and offered the Greeks a wooden horse, no a wooden nickel, well actually they offered to lend them money to keep paying interest on the loans they already could not afford. Because the Greeks were not in debt enough, apparently.

And these European governments and agencies also asked the Greek government to “reform” which turned out not to involve cutting off corruption and collecting taxes from the rich, but firing poor women who scrubbed the floors on government buildings, dropping the minimum wage, leaving hospitals without drugs, and generally trashing what was left of the Greek economy. But the loans did allow the Greeks to keep current on their debts – in fact the new loans to Greece, didn’t even have to go to Greece they could recycle right away to the agencies and governments that were “lending money to Greece” – saving postage. All this worked out great  and soon 40% of Greek children were in poverty and the Greek economy shrank by 25% making it even less able to pay its now even bigger debt.  But on the positive side none of those big European banks failed and none of the investors in those banks lost their money – only the taxpayers in rich European countries and everyone without a Bermuda numbered bank account in Greece suffered. As long as the Greeks kept paying, the politicians who had purchased the loans from their rich bankers could  jump up and down and tell their voters they were making those lazy Greek bums pay. In fact, most people in Germany still believe that Germany and the European Union sent money to Greece, not to bankers in need. So the people who count still did ok. Also some of the money loaned to Greece went to pay German and French companies for expensive military equipment the Greek government had ordered during flush times. Birds sang and stuff.

And then the wicked Greek people elected a new government that promised to actually clear up the corruption, rehired the cleaning women, and increased the minimum wage. The new government said it was no good making Greece into a nightmare just to pretend that the debt would be paid back. And, of course, this made the governments and agencies that owned all that Greek debt very mad. Because what good is capitalism if rich investors actually can lose money on risky investments? Update:  Order was restored and Greece went back to kleptocracy.

The end (so far).

For a related story click here.