Greece and EU Attempt to Avoid Disastrous Default

By William Pfaff

Athens, Greece

Athens in recent days has experienced continuing popular protest, sporadically violent, against the economic austerity program demanded of Greece by the IMF. This reaction has been more severe than most of those seen elsewhere since Wall Street's "sub-prime" mortgage scandal, or collaborative swindle as we might indelicately call it, which provoked global economic crisis, its prime (or "sub-prime," let us say) victims being the ordinary citizens of recklessly indebted national economies, such as those of Greece and the United States.

Among worldly Greeks, most recognize that Greece itself invited what the ordinary Greek citizen interprets as victimization -- in particular, victimization by the German government and banks, implacable critics of Greek profligacy and until now opponents of any "bailout" for Greece. The Greeks will tell you that the Germans have never paid war reparations for what they did to Greece, and they also accuse the Germans of having stolen Greece's national gold reserve during the war.

Ordinary Greeks are nonetheless aware of their country's national fiscal insouciance during the good years of the past decade -- when Greece won the UEFA European Football (soccer) Championship in 2004, brilliantly staged the summer Olympic games also in 2004 and enjoyed unprecedented individual prosperity.

The Harvard-educated Andreas Papandraeou (father of the present Greek prime minister George Papandraeou) spent years in political exile in the United States, ending as head of the Economics Department at the University of California at Berkeley (of all things, in view of what has followed!). He returned to his homeland after the collapse of the Greek military dictatorship of 1967-1974, becoming prime minister in 1981. As one Greek remarked at a recent meeting here of economic and political observers, "Andreas brought back from exile an American-style populism to a Greek population lacking the economic prudence instilled in most American families by their native Protestantism."

The conservative New Democracy governments that followed the departure of Andreas and held power from 1985 to 2009 contributed to national irresponsibility. When they left office, Greece had a deficit of 12.7 percent of GDP, four times the euro-zone limit. The country had entered the European Union on false pretenses, tolerated by an EU leadership that believed "Europe" could not be fully European without Greece's membership.

Andreas' son, George, born in the United States and also educated at Harvard (and in the United Kingdom and Sweden) during his father's foreign exile, inherited leadership of his father's PASOK (Pan-Hellenic Socialist Party). Possibly he did so reluctantly, as one of his actions has been to change the electoral system in an attempt to end "dynastic politics" in the country.

As foreign minister he put an end to the ancient hostility between Greece and Turkey, sending Greek firefighters to help the Turks in a national emergency. He was elected Greece's prime minister in 2009, just in time for the world crisis -- for which the electorate is now holding him responsible.

However, he recently won his second vote of confidence for his austerity program (155 to 138) within days, despite a 48-hour general strike and massed protestors outside the parliament. Angela Merkel called this "really good news," although the immediate financial community comment was confused, with a negative bias (as usual). Greece -- a miniscule nation of only 11 million people -- has recently been the most convenient press and popular scapegoat for the euro-zone crisis.

The result of France's effort last weekend to rescue Greece and the euro zone still has unclear results. Nicholas Sarkozy's weekend announcement of an innovative rescue plan was a typical French effort to support Europe while fashionable opinion forecasts default for Greece (and possibly the whole euro zone). The French Treasury, the Bank of France and a national bank confederation (the largest European holders of Greek debt) propose to "roll over" half the Greek debt for thirty years, allowing debt-holders to take an immediate reimbursement of 30 percent, with 20 percent invested in a "guarantee fund" of 30-year zero-coupon bonds with triple-A ratings presumably underwritten by the IMF, European Central Bank or the EU itself. The great advantage of this to banks is that it would allow them to remove Greek debt from their balance sheets, lodging the debt in an ad hoc vehicle known on the markets as an SPV. The guarantee fund and the SPV are designed to attract participation by other European and foreign banks.

The plan in part resembles the "Brady Bonds" solution to Latin American debt in the 1980s, which allowed creditors to exchange defaulted bank loans for secure instruments, usually backed by U.S. Treasury Bonds.

The French invented "Europe" with the coal and steel community treaty in 1951. They have since driven it forward with such European projects as the European high-speed train network, Concorde, the Airbus industrial alliance (Boeing's deadly enemy), the European space agency and its Guiana Space Centre, which dominates commercial space launches, and the Franco-British European military link now being tested in Libya.

President Sarkozy's debt relief plan has won qualified interest thus far, including from the most important European financial paper, The Financial Times, but people at the fatally influential rating agencies are talking about it as a disguised Greek default. George Papandraeou's parliamentary victory on Wednesday, with Angela Merkel's endorsement, may prove crucial in what will follow.

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