Greece: Positive Developments Mask Taxpayer Funded Profiteering and Distract from Long-Term Solutions

The Greek financial crisis has hurt almost everyone in that country and throughout Europe. It has ended one political administration, numerous careers and industries, and destroyed the Greek social net. As the citizens continue to absorb these multiple hits, they have consistently argued that the financial community has profited from their misfortune. While denying these allegations, global bankers have blamed this calamity on the generous benefits provided to Greek citizens by their government.

It turns out the Greek citizens were not entirely off-the-mark. To be sure, this crisis was largely caused by their country’s unquenchable demand for financial resources needed to support its overly generous social safety net. However, unlike those who are paying a price for their part in this debacle, the lenders who provided these funds are making an above-average profit on their investments.

The most recent chapter of this story begins on December 19 when the European Central Bank (ECB) lifted the ban on Greece’s use of its debt as collateral. This, consequently, made it cheaper for Athens to borrow funds as the ECB’s action lowered the yields on Greek bonds with the intention that it would reduce the country’s debt burden as a percentage of gross domestic product (GDP).

One agreed-upon way to reduce this burden was for Athens to purchase and retire the country’s bonds at a discount. The initial belief was that these bonds would be bought back – through European Union (EU) taxpayer funds – at a discount that would allow private investors to make some profit while helping Greece retire a larger amount of its debt.

However, not all private investors consented to this proposal; indeed, some demanded a full repayment. These included hedge funds that had bought Greek debt in 2011, and subsequently realized gains of over 100 percent. Policymakers went along with this demand under the assumption that if Greece – or the EU – forced lenders to accept lower prices, these fund sources would dry up for other European nations thereby spreading a contagion from Greece to Spain, Portugal, and Italy.

These negotiations and repayment demands are part and parcel of a capitalist market environment and, therefore, not a bad thing but the price that should be paid for a robust and active private financial sector. The buy-back is also a good step and will help Athens get a better foothold on the path of economic recovery. The problem, however, lies with the belief held by EU policymakers that austerity measures alone will lead to turnaround of the Greek economy.

Reliance exclusively on a belief of growth through austerity will limit Greece’s ability to meet the promised/mandated fiscal targets. In addition, it will not translate to increased employment and without more jobs, the protests and internal instability will never end and the EU will have to continue bailing out Greece.

While this is something they have promised to continue to do, there will come a point – and it may be close to being reached – when the citizens of the countries providing the funds become tired of their resources being used to support other nations or hedge funds. Clearly, time is running out and it is imperative that policymakers move away from a single lane short-term solution to one that focuses on multiple avenues and long-term growth.