About a billion barrels of ink has been spilled regarding the economic collapse of Greece, but after 6 years of watching a country twist between the ropes of international finance, inhouse currency manipulation, a corrupt billionaire class and a demand for austerity that would make Leonidas suggest they should slow down a sec, it is all coming down to a referendum on Sunday that is tightening by the minute.
There's still a lot of bullshit on just how Greece got to this state. After all, in 2006, for all of the supposed profligate public spending, Greece still maintained a 100% ratio to GDP (far from ideal but only fractionally different from several healthy Euro based economies) and just under 10% unemployment. Greece’s ruin began with secret, fraudulent currency swaps, designed a decade ago by Goldman Sachs, to conceal Greek deficits that exceeded the euro zone’s 3%-of-GDP limit. In 2009, when the truth came out, Greek debt holders realized they had been cheated. Greece's debt ratio was closer to 140% of the GDP; a level that simply was beyond the ability to pay.
Now, shouldn't the government be responsible for it? It depends who you talk to. While part of the ECB, Lucas Papademos was responsible for a flood of cheap French and German investment flowing into the Greek bond market. There's some compelling evidence to suggest a level of collusion between the ECB and the Bank of Greece (of which Papademos was the former President) that pushed the Goldman Sachs plan to conceal deficits through currency swaps. Those deals gave the ruling New Democracy a slush fund to tap into and in return, foreign and local investors made tremendous short term gains that they could funnel out of Greece.
In 2009, the affects of the Wall Street collapse reached the point that the scheme could no longer be hidden. Greece found itself suddenly against a wall, unable to leverage further liquidity. The debt buyers of Greek bonds demanded usurious levels of interest (or, if you prefer, a high spread) to insure themselves against future fraud. The compounding of this interest premium brought the Greek nation to its knees. Eventually a bail out of sorts was devised, especially since the majority of the risk was being held by American, French, and German creditors. Of the $260B that Greece has received, only 10% has gone into recapitalizing its economy. The other 90% immediately went right back to private creditors in Germany, France and the US. Essentially, the Eurozone bailed its our interests out by using Greece as a financial conduit. In the meantime, Greece's unemployment rate is over 25%, over 50% for young works, pensions have been decreased by 40% and there are demands to increase that by up to 80%, and the Greek economy has shrunk by 25%. In order to meet the demands to stay in the Euro, Greece will be unable to recapitalize its economy without a massive transfer of national wealth in the form of existing infrastructure, resource rights, and oh, real estate to the German and French governments. Which is exactly what Germany's finance minister Wolfgang Schäuble has demanded.
Following that route, Greece's economy will re-stabilize, but only at a reduced level. The loss of capital infrastructure and resources will flow profits from growth out of the country, placing them in the position of being a client state; essentially an off-shoot of the Eurozone without having any say within in. Finally, it will create long term elements that disincentivize growth as infrastructure and industrial expansion will require high interest borrowing to facilitate.
The other option is for Greece to leave the Eurozone and re-adopt the drachma. This approach, similar to what both Iceland and Argentina have done will allow the Greek government to write-down a significant portion of debt as well as internally recapitalize their banks. While the conversion will likely cause short-term pain, a significantly lower drachma will allow Greece to halt the bleed they've been suffering against Turkey's lira since adopting the Euro. It would also enable them to begin investment immediately in national infrastructure that will generate long term revenue and stability. They've been warned by the Germans that if that happens, Germany will block their access to international money markets to raise investment. But Greece's financial position is toxic enough that the interest attached to foreign debt looks more in line with a loan shark's register than a normal financial transaction. For Greece to survive, it needs to rebuild its national market and attract outside investment and consumer dollars, not loans.
The tragedy of this farce is that had the Germans and French in the ECB and the Eurozone moved quickly with a stimulus package that was tied to government restructuring and financial accountability as opposed to austerity, Greece would have likely been able to stabilize its economic position within two years for under $60B. Instead, but forcing savage austerity as well as prioritizing private foreign debt holders, more than five times that have been pushed through the country resulting solely in the constriction of their economy; a true case of the 'medicine' being worse than the sickness.
I personally think the referendum on the 5th will produce a 'No' result. There will be several months of contradictory discussions about Greece remaining with the Euro and even a few bailouts proposed last minute. But the scope of German greed and inflexibility as all but poisoned that well for the relationship to remain. I expect the new drachmas to be available before Christmas.