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| Alexis Tsipras |
As you may or may not know the country of Greece is effectively in default on its financial obligations to the rest of the world. It owes banks and countries countless billions. As a country its tax process is corrupt, its heavy with pension and other social welfare-style obligations, and its industry is stagnant.
It has countless loan obligations to other EU members both sovereign and corporate it has already defaulted on.
In the past several years Greece has been urged to "clean house." Slash public pensions, cut social welfare, and increase tax revenues. The house cleaning would probably take a decade and create significant hardship for the citizens of Greece in terms of reduced pensions, higher taxes, and the consequences of less governmental graft.
Over the last few years the "responsible" leaders of Greece have urge the country to move toward reconciling its obligations with its creditors.
But for a variety of reasons, among them the style of government Greece has, this has be difficult. Greece operates as a parliamentary republic with elected coalitions of parties that must together form a majority in order to run the government.
Over the last few years Greece's government has been in turmoil over its debt problems - ostensibly because no party wants to "given in" and cause the destruction of the current debt-funded Greek way of life. So coalitions have been difficult and progress on resolving the problem limited.
Now hear comes Mr. Tsipras. He is head of a small party. But, fortunately or unfortunately, his party forms the tipping point for the next coalition government and is a position to guide Greece's future.
So what does Mr. Tsipras say that people like so well?
Mr. Tsipras told the WSJ: "Our first choice is to convince our European partners that, in their own interest, financing must not be stopped, but if they [ Greece's creditors ] proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors."
Greece owes about $250 billion Euros to its creditors - which is about twice (I think) the size of its economy.
By defaulting Tsipras is threatening the financial markets around the world - the reason is that the countries and banks (mostly in Europe) that hold Greek debt probably would not survive such a default. In turn, other countries and banks, such as those in the US, would not survive, say France, defaulting on its obligations in order to make up for Greeks default.
So Greece is basically saying it will not take responsibility for its prior actions with regard to running up the debt unless it gets "favored treatment." This much like a petulant child threatening to call the local Children's Services on its parents unless its parents give in to its demands to have more cookies.
This is very similar to what happened in Wisconsin a little over a year ago. Wisconsin, the state, through a variety of public union collective bargaining laws, had become ensnared in a Greek-like scenario whereby the public unions would be able to drive up the states debt uncontrollably and beyond the state governments ability to repay.
The governor, Walker, sought to create a solution by reducing the power of the collection bargaining units, which he succeeded in doing. The result of which are that the state residents are already seeing reductions in their taxes. Unfortunately for Walker he must now face a recall vote over the issue.
Both Wisconsin and Greece, along with most other US states, Portugal, Spain, Ireland and countless other sovereign nations, have wound up in financial scenarios where the benefit of the unions and state employees has come to outweigh the state or countries ability to pay.
Now lets think about this. Joe works for the state of Wisconsin for 35 years - coming out of high school. He works on the road crew for the state highways. He is in a union and has decent health and other benefits.
[The following is an example amalgamated from a number of states and situations.] At 53 Joe retires from the state taking a pension of, say 80% of his salary. Typically union rules say that its 80% of your last year of salary, so Joe arranges a lot of over time and clears $100K USD his last year - leaving Joe with an $80K pension.
Joe, at 53, is bored so, when the state outsources a portion of the road maintenance Joe gets another job (doing what he did for the state) making $60K USD a year (including benefits and a pension). (This, in one form or another, is called "double dipping.")
In Greece things are not really any different - perhaps instead of a second job the Greek citizen is evading all taxes because his relative works for the government.
Different details - same outcome.
The government cannot afford to pay.
Unfortunately for non-government employees the public union "collective bargaining laws" are arranged so that road services (where Joe worked) offered to the public are cut in times of financial crisis in order to fund the pension Joe receives.
So the state has two laws: one to give Joe a pension and one to maintain the roads. Sadly the road maintenance law is second in priority to the pension funding.
Now in the last few decades there has been a run up in terms of government employees around the world. After all, government benefits and pensions are secured by law (and have the highest priority apparently over all the other laws) so why not through your lot in there. As long as you show up and do your job you're set for life.
The problem with all of this is
1) Governments, no matter how large, have limited revenue sources and there are no limits on the number of public employees.
2) Most government pensions are underfunded because the assume unrealistic returns on investment.
3) Government leaders turn over perhaps ten times over the course of the time an employee pays into the pension system and there is no personal responsibility for someone setting up a pension thirty years ago that cannot today be funded.
All in all a recipe for disaster.
Greece is now the proverbial straw that is threatening to break the camel's back.
If it does so the effects will ripple throughout Europe first, damaging its financial system, and, as that occurs, damaging our own.
Here in the US we are weak - though we don't owe as much percentage-wise directly as Greece our total sovereign unfunded liabilities (cumulative Social Security, Medicare, and so on) are actually a much larger liability than those of Greece.
Further, our creditors such as Japan and China (each into US for about a trillion or so USD) depend on our business for their growth. This creates a problem in that if we default they have no recourse, i.e., they cannot simply seize our assets because doing so would take down their economies.
So in effect we have a very large, world wide, government run "check kiting" scheme.
Each government, in order to fund liabilities it cannot manage, borrows money from the other governments with a wink and a nod. So long as the world economy expands and tax revenue expands and no one sees that the liabilities are growing out of control.
Only when the tax revenues cease to expand does the underlying liability problem become apparent - sort of like how all the "check kiter's" get caught - someone accidentally fails to make a deposit to keep the scheme running.
If sovereign nations cannot meet their obligations and take responsibility for their actions what's next?
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