Toxic Mix: Bad Debts and Blowhards

Toxic Mix: Bad Debts and Blowhards

For a while it looked like one country in particular was going to crash the world economy.

The outlook for the mighty European Union seemed to centre on what happened in this tiny economy built on holidays in the sun and olive oil.

It was in distress. The government had no money. The unemployment rate was soaring. The local banks were bankrupt. Poverty and distress was everywhere.

Even the euro was said to be at risk of dying if this country was allowed to default.

As you’ve already guessed, I’m talking about Greece.

We’ve all forgotten about it now. But it grabbed the world’s headlines — and shook asset markets — in the aftermath of the 2008 crisis.

Remember the argument? If Greece was allowed to leave the euro, other countries could follow, leaving the Eurozone at risk of cracking.

It never happened. The headlines moved on. Stocks went up around the world. Economies grew healthier.

But the dregs of the crisis are still in the Mediterranean and reveal everything you need to know about today’s economy…

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Greek property deals going now

The Financial Times revealed last week that around 45% of Greek bank loans are still non-performing.

That means the borrowers are not paying back their loans.

That’s very problematic for the Greek banks. They had to set aside provisions to account for all these bad debts.

The more money there is tied up like this, the fewer loans banks can lend to credit-worthy borrowers now that the Greek economy is actually growing again.

What’s the solution?

The government in Athens made a deal with the IMF and EU.

For the Greek government to get the ‘bailout’ money it’s currently relying on to run the country, Syriza, the party in power, agreed to hold and speed up auctions on foreclosed properties. This helps clean up the balance sheets of the Greek banks.

You may not remember this but Syriza was originally swept to power on a platform of rejecting austerity and conditions that the ‘Troika’ (European Commission, European Central Bank and IMF) demanded of Greece.

Syriza even promised to help indebted Greek homeowners stay in their homes.

But power can be its own reward, and Syriza eventually bent the knee to their new masters.

Now the Greek government has to stand by as ordinary Greeks have their properties sold — most likely to foreign investors.

Such was the scale of the collapse that this may affect one in 10 Greeks.

Few are happy about it. There’s been violence and protests.

But no dilly-dallying please…

According to the Financial Times:

The eurozones bailout mechanism this month released a 5.7bn tranche of bailout aid but held back a further 1bn because of concern over Athenscommitment to the auction process.

Why should you care about this?

Perhaps you might like to swoop in and buy a nice Greek holiday home. Real estate prices there are no doubt much cheaper than in Sydney or Melbourne.

But it also shows where power lies in today’s economy…

Greece martyred to the debt gods

This entire process does not need to be happening like this.

For example, the European Central Bank (ECB) is currently still pursuing quantitative easing (QE). It creates €30 billion a month from nothing and buys different bonds in European markets with the money.

This is all public knowledge. The ECB says it wants inflation in the Eurozone to hit is target level, at around 2%.

If it really wanted, the ECB could buy up the bad debts of Greek banks and make their balance sheets healthy again.

That would mean the Greek banks wouldn’t have the same pressure to auction off distressed properties on their books.

And because the Greek banks would be in better shape, they could lend more in the Greek economy. That would stimulate economic growth and create more jobs.

Some of those jobs might put those distressed borrowers back to work and allow them to start paying back their debts.

The non-performing loans sold to the ECB could even become healthy assets again.

But even if they didn’t, and the ECB ended up with a bunch of worthless Greek mortgages, the damage would be limited.

The cost of money for the ECB is zero. So even if it had to write off 80% of the money it spent on the mortgage bonds as bad debts, the 20% that stays good would still leave it with a profit.

That’s the magic of owning the printing press.

But the ECB hasn’t done this…and it’s been dragging on for years.

QE for some, but not for others

How strange it is that the ECB print €30 billion a month and does not think to send some to Greece in this way to help its economy grow again.

Surely an employed and prosperous Greece would help generate demand and inflation the ECB says it wants…

However, one man’s foreclosed home is another man’s bargain asset.

Perhaps there’s a constituency in Europe that likes Greek property cheap and in distress under a government with no money and weak banks.

Perhaps — and I’m guessing here — this constituency can buy Greek assets with money borrowed at very low interest rates. In time they can even sell them back to the Greek people at a profit when the economy has returned to health.

Or perhaps they can keep these assets and enjoy the fruits for years to come, with cheap Greek labour to serve drinks and treats on the beach.

We will know what the Greek people think of all this — especially Syriza — next year when the incumbent government faces re-election.

Regardless, there’s a universal lesson here from all this: Political promises are as empty in Greece as they are everywhere else…and central banks are accountable to no one.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia