JEFFREY BROWN: And from economic troubles here to the beginning of a series about big problems abroad.
“NewsHour” economics correspondent Paul Solman is reporting all this week on Europe’s ills, as seen by what is happening in Greece and Spain.
Tonight, he starts with how the mess began in Greece. It’s part of his ongoing reporting on Making Sense of financial news.
PAUL SOLMAN: Greece, striking public servants, outraged pensioners, a usually laid back populace up in arms about cutbacks, tax scandals, and the specter of bankruptcy, which in turn has undermined faith in the euro and markets around the world.
This week, we will be reporting from Greece about what’s happening now. But to help explain the cause of the Greek economic crisis, as well as the prospects for the future, we went first to Nashville, because it’s home to a professional investor named Jon Shayne, whose alter ego, Merle Hazard, writes clever country songs about economics and, at our prodding, an economic song about a country.
It just so happens that Nashville also has the perfect set for this act, a full-scale replica of the Parthenon.
JON SHAYNE, Musician (singing): Oh yes, the Greeks gave us Pythagoras and Euclid and Plato and other wondrous stuff. But balancing their national budget, their budget, their budget, apparently is tough.
PAUL SOLMAN: The song is supposed to be funny, of course. But Greek economist Yannis Ioannides is completely serious in explaining his country’s recent plight.
YANNIS IOANNIDES, Tufts University: In the ’80s, there was an enormous expansion of social welfare programs of different kinds. But, basically, the kind of massive spending on education and research that is necessary to transform a country, this didn’t happen. And it didn’t happen even though it was one of the things that the European Union really was striving for.
PAUL SOLMAN: In 2001, Greece joined the European Monetary Union. The deal was that Greece would drop its currency, the drachma, and adopt the euro. That meant that Greece could borrow in euros, a stable currency backed by the likes of Germany and France, instead of in drachmas, which an unreliable Greece could print with abandon, creating drachma inflation, and thus wiping out the value of Greek debt.
Adopting the euro obliged Greece to invest in research and education and promise not to borrow too much.
But, says KEN ROGOFF:
KEN ROGOFF, economist, Harvard University: When they got the euro, it was like, you know, a teenager getting a credit card with no limit. And they just — their debt just exploded.
YANNIS IOANNIDES: And an amazing increase of private borrowing by individuals, on their credit cards, on consumption loan or consumer loans, on all those things.
KEN ROGOFF: They borrowed really double, triple what a country at their level of development normally borrows as a share of its income. And people said, well, euro fairy dust will make it OK.
PAUL SOLMAN: Besides euro fairy dust, the only hope was investing in economic growth, so why didn’t they?
YANNIS IOANNIDES: Perhaps, deep down, the sense of education they have is related to the glories of the past, you know. And, so, they can invest in a project which uplifts a certain ancient archaeological area or something that complements that.
PAUL SOLMAN: An archaeological project related to the glories of the past, like refurbishing the ancient Acropolis itself, for example, which actually leads to another piece of the Greek tragedy, again, a bit of tuneful comic relief:
JON SHAYNE (singing): They used derivatives from Goldman, from Goldman, from Goldman, expenses to postpone.
PAUL SOLMAN: The much-publicized derivatives from Goldman Sachs, the U.S. bank, were actually loans, to be paid from future tourist income. But, like so many Wall Street products, they were crafted to hide the fact that they were debt in order to avoid the euro debt limits. And there was a rationale.
YANNIS IOANNIDES: There are going to be people visiting our country forever, OK, right? And so that is a pretty predictable stream of money, OK? They securitized — to use a modern word, they securitized the future stream of ticket receipts.
PAUL SOLMAN: And then didn’t report the securities or derivatives as debt.
But, says Ken Rogoff, Wall Street is just an easy scapegoat.
KEN ROGOFF: This is very marginal. Everyone in Europe is trying to blame the United States, trying to blame others for what they did, I mean, really.
PAUL SOLMAN: In fact, what everyone in Europe did was borrow bountifully and borrow short, a policy which transported Merle Hazard and his Greek chorus to new heights — or depths — of cowboy comedy.
JON SHAYNE (singing): They borrowed short at a lower rate, like the Wall Street brokers we have grown to hate.
PAUL SOLMAN: But borrowing short is the Achilles’ heel of every financial crisis, says Ken Rogoff.
KEN ROGOFF: If will you borrow at two-month horizons or three-month horizons, constantly turning it over, lenders will usually give you the money for less, because they feel like they can get out, if you are lending to a country that’s a bit risky, you don’t want to get locked in for 10 years.
The problem with making your borrowing shorter and shorter, even though it’s cheaper, is, it is cheaper now. But if the market decides that you’re not going to pay, suddenly, they charge you three times as much, five times as much. And it can blow up in your face.
PAUL SOLMAN: And the Wall Street brokers in the song, that’s what happened at Bear Stearns, Lehman.
KEN ROGOFF: It happened to the whole system. Our whole system had all this short-term borrowing in it that was predicated on the notion there would always be a tomorrow with cheap short-term borrowing. And when the crisis hit, they nowhere to turn. All of a sudden, this great business model, where you borrow cheap money and then make these risky longer-term investments, it shattered.
PAUL SOLMAN: And just as Wall Street flew too close to the sun, so did Greece; so did all of Europe.
JON SHAYNE (singing): The budget problems of the Greeks, of the Greeks, of the Greeks, are a European pain. I hope it doesn’t spread to Portugal, Portugal, Portugal, Italy or Spain.
KEN ROGOFF: All of Europe is leveraged, borrowed to the hilt. If the weakest link falls, people will get scared about the others, that there will be a stampede. And it’s a very legitimate concern.
YANNIS IOANNIDES: The scenario is clear. Look what happened to Greece.
PAUL SOLMAN: But lots of European countries are now beginning to practice grudging austerity.
YANNIS IOANNIDES: Absolutely. The European model of the modern state and its social welfare apparatus has to be reconsidered, has to be rethought.
PAUL SOLMAN: But with 40 percent of the work force in public jobs, 30 percent of the economy underground, and exposes of corruption almost coming daily, can government officials hold firm, or will their austerity plan dissolve in the face of public protest?
KEN ROGOFF: They are under tremendous stress. Not only do they owe a lot. They don’t have a lot of ways to pay for it. The big problem with Greece was that they were borrowing in euro. They weren’t borrowing in a currency they controlled.
PAUL SOLMAN: But if they had been borrowing in drachma, you mean they could have just printed more.
KEN ROGOFF: Yes. It gives them more levers, and the currency can go down, making their goods more competitive.
PAUL SOLMAN: Is it a possibility that Greece will go back to the drachma?
KEN ROGOFF: They’re going to restructure their debt. They’re going to default. And, once they do that, they might as well take advantage of the opportunity to go back to the drachma for a while, find a way to get their debt down.
PAUL SOLMAN: On the other hand, says Ioannides:
YANNIS IOANNIDES: It would destroy any confidence in financial institutions in modern Greece. And it would take forever to get back into the kind of financial monetization, financial sophistication that Greece is into right now.
PAUL SOLMAN: Well, maybe Greece will default and return to the drachma. Maybe it won’t. And the same uncertainty hovers over proposed public sector reforms to work rules, pensions, retirement age, social welfare in general.
The only safe guess would seem to be that the Greek economy will continue to stagger, trying to cut back, now even promising to sell off state-run companies in order to raise cash.
And if that still is not enough?
JON SHAYNE (singing): And if it still is not enough, not enough, not enough, maybe they can sell off Crete.
JEFFREY BROWN: In his next report, Paul goes to Greece — I’m not sure what music we will hear from there — to look at salary cuts and pension reforms aimed at dealing with the debt crisis.