Et tu, Obama?

Illustration by Manos Symeonakis

Having seen the caliber of some of the Republican Party’s presidential candidates, it’s hard not to want with every fiber in your body for Barack Obama to succeed during his first term in the White House. But this week, thanks to the comments he made aboutGreeceafter meeting German Chancellor Angela Merkel, it was difficult not to feel respect for the American leader slipping away.

The headlines after the two politicians held their news conference inWashingtonrevolved around Obama and Merkel’s warning that the Greek debt crisis could bring the world economy to its knees if it’s not tackled properly. “America’s economic growth depends on a sensible resolution of this issue,” said Obama. “It would be disastrous for us to see an uncontrolled spiral and default inEuropebecause that could trigger a whole range of other events.”

With no attempt by Merkel to correct him, Obama had suggested that by some bizarre twist of fate,Greece, that speck on the global economic map, could undermine the world’s most powerful economies. One has to ask: Who do they think they’re kidding?

If we just regain our senses for a moment, what we witnessed on Tuesday was the leader of the world’s most potent nation, one with a $14.6-trillion economy, and the head of Europe’s economic powerhouse, with a GDP of $3.3 trillion, claiming that Greece, which struggled to turnover $310 billion last year, posed a threat to them. To say that this premise seems absurd is an understatement.

Of course, the problem is debt, not just the size of the economies in question.Greecemade the unforgivable error of being a small country that ran up a huge bill with its creditors and it did so while being part of a single currency. With it currently standing at over 300 billion euros and close to 150 percent of its GDP,Greece’s debt is unsustainable and therefore a headache for lenders.Athenshas managed to bring to life in glorious Technicolor the maxim of British economist John Maynard Keynes that: “If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.”

But one has to ask how much of a problem for the global economy the Greek crisis really is because what we witnessed on Tuesday was a gross exaggeration, and with good reason. Obama is concerned about a prolonged crisis in the eurozone because the longer the euro remains weak against the dollar, the longer US exports will suffer. In contrast, German exports are profiting — they hit record levels in March — from the euro’s slump. Merkel conveniently fails to mention this whenever addressing the crisis inGreeceand other eurozone countries. She talked up the dangers of the Greek situation because she wanted to present a united front with Obama. The German chancellor needs theUSpresident’s support for a second Greek bailout so she can sell the idea to her domestic audience with greater ease.

“The message to those inEuropewho recoil at lendingGreecemore money is — you’re endangering the global economy,” wrote the BBC’sEuropeeditor Gavin Hewitt on his blog. “It is a heavy hand being played.” In reality though, the message was just heavy handed. Suggesting thatGreece’s debt, especially if it has to be restructured, would have a thoroughly destabilizing effect looks unnecessarily alarmist when you examine exactly who holds Greek debt and how much of it they hold.

According to new data from the Bank for International Settlements (BIS) German lenders were the biggest foreign owners of Greek government bonds in 2010 with $22.7 billion in holdings. French banks followed with $15 billion. In fact, 96 percent of foreign banks that own Greek debt are European and 69 percent of those are French or German. The European Central Bank owns about 50 billion euros of debt, while Greek banks find themselves in the worst position as they hold about 60 billion euros of state bonds. A restructuring, therefore, would involve a relatively limited number of lenders having to accept lower returns, not losses, on their investment. Although this would have a knock-on effect, it hardly seems like Armageddon for the global economy, especially as these banks have had over a year to recapitalize.

It’s interesting how this pales in comparison with what foreign banks are owed byIreland, another country that has been bailed out by the European Union and the International Monetary Fund, but which was not mentioned by Obama or Merkel. Overall foreign claims on Ireland, which has about half Greece’s GDP, were three times as high as those on Greece, totaling $462.3 billion, BIS said. This includes household debt (which is low inGreece) as well as government debt. It makes the suggestion that the fate of the world economy rests on what happens inAthensseem risible. Well, at least it would be something to laugh about were it not for the fact that two of the world’s most prominent leaders allowed the Greek sideshow to become the main attraction, thereby drawing attention away from their failure to address the structural flaws that have allowed the global economy to roll towards the precipice.

In Merkel’s case, the fuss aboutGreeceacts as a convenient smokescreen for the glitches in the euro’s architecture, which allowed a country that represents less than 3 percent of the eurozone’s GDP to become such a major factor.

Daniel Gros, the director of the Brussels-based Center for European Policy Studies, explained in an article last week just how this absurd situation came about. “The financial system’s entire regulatory framework was built on the assumption that government debt is risk-free,” he wrote. “This assumption makes sense, however, only when a government issues debt in its own currency; only then can it order its central bank to print enough money to pay its creditors.

“But the countries that adopted the euro can no longer rely on the printing press. They are, instead, effectively borrowing a currency that they cannot individually control. It should thus have been clear that with the start of European Monetary Union (EMU), participating countries’ public debt should no longer have been considered risk-free.”

Of course, this never happened and the result is that the European banking system has become vulnerable to a default because it holds a third of public debt in the EU. The European Commission is now trying to address this issue through its CRDIV proposal.

But if it’s structural weaknesses that we want to talk about, then Obama is really our man. He’s the president of a country that is set to matchGreecethis year by running a deficit of more than 10 percent of GDP and a public debt greater than 100 percent of GDP. But beyond that, there’s an immense irony in theUSpresident’s warning ofGreece’s potential danger to the global economy while the dust on the world’s greatest financial crisis — a catastrophe born and made in theUSA– has not settled.

To put things into perspective, the IMF calculated that banks lost just over $4 trillion during the financial crisis (the majority from US loans and assets) and that another $1.1 trillion was spent to remedy its effects. It is estimated that 8 million jobs in theUSalone were lost as a result of the financial crisis. That’s what an “uncontrolled spiral” really looks like.

Furthermore, the fact that the US has done little if anything to address the root causes of the crisis, such as a largely unregulated financial sector and credit agencies that are less than transparent, makes it seem the height of hypocrisy for the leader of that country to express concern about “a whole range of other events” that could be triggered by a Greek default. It is the type of scaremongering and sensationalism that we have come to expect from his opponents. What a shame, we hoped for better.

Nick Malkoutzis

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