Fried in Greece

So, now it's time to look at the mess that is Greece.

Greece has been a mess for a very long time, and of the Nato members who joined the Euro, it's probably the one that should not have joined.

John Mauldin notes, correctly, that the core of the problem is that the terms of joining the Euro block were excessively generous for the less well off nations, basically Germany and France successfully created a mechanism which over valued their national currencies.

This served to both minimize their labor cost advantages with regard to Northern Europe and to provide a market for northern European products:

First, we need to go back to the creation of the euro. Most of the Mediterranean countries that are now in trouble were allowed into the union with an exchange rate that overvalued their currencies relative to the northern countries, but especially to Germany. That meant that Greek consumers could buy products and services that previously may have been out of their reach. Plus, with government debt at low rates, the Greek government could borrow more to finance deficit spending, without the threat of higher interest rates. And Greece began to increase its debt with abandon.

Of course, there was the problem that the debt, and deficits, were exceeding the Euro Zone mandates, but with the use of some clever financial instruments it traded with about 15 banks, most notably that great vampire squid wrapped around the face of humanity,^* Goldman Sachs, it concealed this debt from regulators:

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

Note also that this was a mess that the Panhellenic Socialist Movement inherited from the right wing New Democracy party:

George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.

Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

It sounds a lot like the mess that Bush and His Evil Minions^™ left for us.

One of the problems in dealing with this is that the Germans, remembering the hyper-inflation of Wiemar Germany as if it were yesterday, are suggesting that austerity measures are the way to go, and there are rumblings from them that they want Greece expelled from the Euro and losing voting rights in the EU Parliament.

In response, Greece is accusing Germany of not providing compensation for the stuff that they stole from Greece in WWII:

Athens has accused Germany of failing to meet its World War II compensation obligations following the Nazi occupation of Greece in 1941, a claim Berlin has firmly rejected.

In a radio interview on Wednesday (24 February), Greek Deputy Prime Minister Theodoros Pangalos criticised Germany's attitude towards the ongoing Greek debt crisis, adding that Athens had never received adequate war reparations.

"They took away the Greek gold that was at the Bank of Greece, they took away the Greek money and they never gave it back. This is an issue that has to be faced sometime in the future," Mr Pangalos told the BBC World Service.

<sarcasm>It's so nice when you have mature people solving problems.</sarcasm>

One of the problems here is that the prescription by the central bankers is more austerity for Greece, but the reality is that Greece has among the most austere social safety net, and spending in the Euro zone.

The real problem is that because of endemic tax evasion and systemic corruption throughout the bureaucracy, their tax collections are truly pathetic.

One bright side to all this is that a number of people are starting to realize that Goldman Sachs is not simply a banker, but that all roads on most of this corruption lead to the Squid^*, most notably those in the European Commission, who are, if Simon Johnson is correct, going to execute a detailed audit of Goldman's dealings in Europe.

It doesn't help that Goldman Sachs engaged in similar maneuvers with other European governments:

Greece's 2001 deal to swap some of its debt using currency derivatives was in line with what other euro-zone countries were doing, Yiannos Papantoniou, the country's finance and economy minister when the deal was made, told CNBC.com Wednesday.

………

"We took a loan that was to be repaid in 2019," he said in a telephone interview. "It was public. I know that what we've done then was consistent with what was done by many euro zone countries."

………

Italy, France and Spain were among the euro zone members doing such swaps at the time, he added. Eurostat, the European Union's statistics office, has asked Greece for explanations on these debt swaps by Feb. 19.

What's more it appears that these transactions may have been a part of a fraud perpetrated by the banks on these governments, which is why law enforcement officials in Milan have frozen accounts of a number of banks, "UBS AG, Deutsche Bank AG, JPMorgan Chase & Co. and Depfa Bank Plc," as a part of an investigation.

BTW, while we are at it, it should be noted that Bank of Italy Governor, and dark horse candidate for ECB president, Mario Draghi used to work with the Vampire Squid.^*

As it stands right now though, it appears that Greece should be able to do its required borrowing for the next 2-3 weeks.

^*Alas, I cannot claim credit for this bon mot, it was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.