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Because of the rampant fraud and money printing in the financial system,
the real “bottom” or level of “price discovery” is far lower than anyone
expects due to the fact that the run up to 2008 was so rife with accounting
gimmicks and fraud.
The Greek debt crisis, like all crises in the financial system today, can
be traced to derivatives via the large investment banks. Indeed, we now know
that Greece actually used derivatives (via Goldman Sachs) to hide the true
state of its debt problems in order to join the Euro.
Creative accounting took priority when it came to totting up
government debt. Since 1999, the Maastricht rules threaten to slap hefty
fines on euro member countries that exceed the budget deficit limit of three
percent of gross domestic product. Total government debt mustn't exceed 60
percent.
The Greeks have never managed to stick to the 60 percent debt
limit, and they only adhered to the three percent deficit ceiling with the
help of blatant balance sheet cosmetics...
"Around 2002 in particular, various investment
banks offered complex financial products with which governments could push
part of their liabilities into the future," one insider
recalled, adding that Mediterranean countries had snapped up such products.
Greece's debt managers agreed a huge deal with the savvy bankers of
US investment bank Goldman Sachs at the start of 2002. The deal involved
so-called cross-currency swaps in which government debt issued in dollars and
yen was swapped for euro debt for a certain period -- to be exchanged back
into the original currencies at a later date.
http://www.spiegel.de/international/europe/greek-debt-crisis-how-goldman-sachs-helped-greece-to-mask-its-true-debt-a-676634.html
The above story for Greece is illustrative of the story for all “emerging
markets” starting in 2003: tons of easy money, rampant use of derivatives for
accounting gimmick, and the inevitable collapse.
From a big picture scenario, in 2003, the global Central Banks abandoned a
focus on inflation and began to pump trillions in loose money into the
economy. Because large banks could loan well in excess of $10 for every $1 in
capital on their balance sheets, global credit went exponential.
The effect was sharply elevated asset prices that greatly benefitted tourism-centric
economies such as Greece.
As I stated in our issue Price Discovery:
If the foundation of the financial system is debt… and that debt
is backstopped by assets that the Big Banks can value well above their true
values (remember, the banks want their collateral to maintain or increase in
value)… then the “pricing” of the financial system will be elevated
significantly above reality.
Put simply, a false “floor” was put under asset prices via fraud
and funny money.
Take a look at the impact this had on Greece’s economy.
Below is Greek GDP dating back to the 1960s. Having maintained a long-term
trendline of growth the country suddenly saw its GDP MORE THAN DOUBLE
in less than 10 years after joining the EU?
In many regards, this “growth” was just a credit binge, much like housing
prices, stock prices, etc. By joining the Euro, Greece was able to borrow
money at much lower rates (2%-3% vs. 10%-20%).
Rather than using these lower rates to pay off its substantial debts,
Greece funneled as much money as possible towards Government employees
(nearly one in three Greek workers).
As a result, Government wages nearly doubled to the point that your
typical Government employee was paid 150% more than his or her private sector
counterpart. Add to this a pension system in which retirees are paid 92% of
their former salaries and you have a debt bomb of epic proportions.
In simple terms, Greece from 2003-2010 was an economic boom driven by
incomes, which were in turn driven by cheap debt NOT
real organic growth. Thus, the collapse in GDP was yet another case of “price
discovery” in which asset prices fall to economic realities…
Another Crisis is brewing. It’s already hit Greece and it will be
spreading throughout the globe in the coming months. Smart investors are
taking steps to prepare now, before it hits.
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