As the Gyro Turns

Wed, 04 Feb 2015

The real name of that Greek sandwich is gyros, which is actually the singular of the noun and it is pronounced YEEross (I studied Greek in high school). The word means turn because the meat is usually roasted on that familiar rotating spit.

The Greek economy is a disaster after years of forced austerity, with overall unemployment close to 25 percent and twice that for young people. True, the Greeks, whose economy is woefully inefficient, were living beyond their means and were far less than truthful in disclosing the extent of their indebtedness. In exchange for financial assistance from the European Central Bank (ECB) and the International Monetary Fund (IMF), they were required to make drastic budget cuts and implement economic reforms, such as privatization of certain industries. As I’ve been saying for several years, imposing austerity measures of that magnitude in the midst of a recession would simply make things worse … and it did. With the economy contracting, the Greeks found it even harder to pay their debts, and now their economy is in ruins.

Financial markets have been getting increasingly concerned in recent months. Debt payment deadlines are approaching and Greece is very likely unable to meet these. And in a snap election for prime minister held on January 25, the left-leaning Syriza party candidate, Alexis Tsipras, won on a platform of reversing many austerity measures and reducing the Greek debt burden. This helped push Greek Treasury interest rates to double digits: the 10 year yield has surpassed 10 percent vs. less than 0.4 percent in Germany. And the Dow Jones has lost several hundred points as the anxiety spread.

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How Will Things Turn Out?

The “powers that be” (I call them PTBs) are the European Central Bank, European Commission, and International Monetary Fund. With a lot of influence from the Germans, the PTBs are so far insisting that the Greeks will have to pay their debts in full. The Greeks says this is impossible. One bright light: the new Greek Finance Minister, Yanis Varoufakis, who has a PhD in economics and teaches at the University of Texas. He also has a sense of humor. When asked how a socialist wound up teaching in Texas, he responded, “I was teaching in Austin … not Texas.” Anyway, let’s see if he can help reach a solution that’s bound to make many people very unhappy inside and outside of Greece.

Right now, I think a lot of posturing is taking place, much like the haggling over a basket of figs in a Greek market place. Abandoning the Euro is out of the question, at least for the time being. It is the “nuclear option.” The Euro master agreement has no provisions for an orderly withdrawal. The Greek financial system would collapse as funds poured out of the country. The replacement currency (the “new and improved drachma or maybe the “Gyros”) would plunge in value. As a result, the Greeks would repudiate all or most of their foreign debts. And that’s only the start of the story as the anxiety spread to other troubled Euro nations such as Spain and Italy.

The more likely outcome is for compromise on all sides. But it will have to come quickly. Greek banks are already experiencing deposit withdrawals by anxious customers. The newly elected government will have to postpone or abandon some of the more ambitious goals such as raising the minimum wage and get behind measures to reform their moribund economic system The PTBs will have to give Tsipras something with which he can “declare victory.” The debt burden will have to be reduced somehow. Maybe they’ll offer a major lengthening of the maturity which would reduce annual payments. This would still allow them to claim they are getting paid back … it would just take a lot longer. The PTBs will also worry how other indebted nations suffering under austerity mandates (such as Spain) will react to any deal cut with the Greeks

Hope for the best. More realistically, hope that we can avoid the worst in which the Greek situation would spin out of control and risk global financial turmoil.

Nick Perna

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