Greek Crisis Threatens EU, And Perhaps US

Guests

Alkman Granitsas, Greek bureau chief, Dow Jones Newswires
Steven Erlanger, Paris bureau chief, New York Times
Marilyn Geewax, senior business editor, NPR

After months of financial instability, Greece is at the tipping point of potential default. If it does, the repercussions are likely to ripple through the eurozone and across the Atlantic to the United States.

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NEAL CONAN, host: This is TALK OF THE NATION. I'm Neal Conan, in Washington. A sigh of relief in Europe after German Chancellor Angela Merkel and French President Nicolas Sarkozy vowed to keep Greece in the eurozone yesterday. Then today, the U.S. Federal Reserve led a move to ease pressure on besieged banks, and markets responded with a rally.

But Greece remains in deep trouble, and many analysts believe default is just a matter of time. So what happens if, and when? We'll follow the dominos from Athens to Paris, and then across the Atlantic. If you have questions about the debt - Greek debt crisis, give us a call. We'd especially like to hear from those of you directly affected by this crisis.

800-989-8255 is our phone number. The email address is talk@npr.org. You can also join the conversation on our website. Go to npr.org and click on TALK OF THE NATION.

Later in the program, an update on the Gulf of Mexico after last year's massive BP oil spill. But first, repercussions of a Greek default. We start in Athens, where Alkman Granitsas is the Greece bureau chief of Dow Jones Newswires. Nice of you to be with us today.

ALKMAN GRANITSAS: Hello. How are you?

CONAN: I'm good. Thank you. The assurances from President Sarkozy and Chancellor Merkel, though, depend on Prime Minister Papandreou's ability to keep his end of the bargain. Is that going to mean another round of austerity?

GRANITSAS: It most definitely will. The government's already announced new property taxes. They announced it on Sunday. Today's Thursday in Athens. And that follows on a raft of other sort of austerity measures that have been taken in the last year and a half.

People are already pretty unhappy. The economy is slumping. New taxes have come fast and furious. There have been lots of spending cuts in government. And it can't be ruled out that there may be more of the same coming in the next few months.

CONAN: Also, Greece has promised to sell off some of its assets to provide another $100 billion or so.

GRANITSAS: That's right. And one of the promises that Greece has made its international creditors is that it would jumpstart a very, very ambitious privatization program. The truth be told, though, nothing of that has materialized yet. And one of the things that you see is both the European leadership and also Greece's creditors at the International Monetary Fund are starting to become a little bit impatient with Greece's foot-dragging on that.

CONAN: And indeed, there is still - is there still doubt that Greece is going to receive the next payment - it's called a tranche - the next tranche of the bailout money?

GRANITSAS: For the moment, that fear has receded. As was said in the introduction, there's a sigh of relief. There have been a couple of steps in the last few days that seem to suggest Greece is OK for now, that it will get the next dollop of aid, which is expected sometime at the end of the September, beginning of October, which will be enough to cover its sort of financial needs for the next three months.

But as you know, Greece is under sort of international supervision, and gets these tranches of aid every three months. And it remains to be seen whether Greece fulfills its promises in order for it to get the next dollop of aid sometime in December.

CONAN: So is there much - how gloomy is it there in Athens?

GRANITSAS: It's pretty gloomy. It's - the recession, you feel it, you see it, you see it in shop closures, you see it just talking to people. I was just talking to a friend of mine who's an engineer, and naturally, things like the property sector here has really fallen. In my own family - just to give you a very personal dimension to it - two of my brothers-in-law are both unemployed now. And you also feel it in other ways, too.

There's a lot of uncertainty that's dogging everyone these days, and people openly talk about sort of a national state of depression. And there are indications of social indicators that are - how society is starting to be affected by the ongoing crisis. We're really in the second year of the crisis now, and you see things like suicide rates have increased, divorce rates have increased, personal bankruptcies have increased, business bankruptcies have increased, and, naturally, things like unemployment has shot up, has doubled from where it was a couple years ago.

CONAN: Aside from this short-term relief, do people there believe default is inevitable?

GRANITSAS: Well, I suppose they hope that it's not, but one wonders. Greece has been living a little bit on borrowed time. It borrowed too much money, and I think there is a general recognition in the Greek public that it couldn't go on like that. We had a very bloated public sector. There was not a particularly good, an effective public administration here, which is what ultimately caused the deficits and finally the debt to get out of control.

And there was a sense that some of these reforms are long overdue. But there's also no particular light at the end of the tunnel for all that.

CONAN: And is there a sense of resentment? Greece has been called spendthrift. There's been suggestions by very high officials in Germany, for example, that maybe Greece ought to leave the eurozone.

GRANITSAS: There's definitely an element of resentment. I mean, the Greeks have always been, shall we say, have admired the Northern Europeans up to a certain extent. A lot of Greeks emigrated to Germany, for example, in the 1950s and '60s, and a lot of Greeks have sort of fond memories or associations with Germany.

But nonetheless, some of the rhetoric has been quite harsh in the last several months - or actually, last year and a half - and there is an element of resentment. But there is also, like I said, some sort of a feeling among Greeks that they're also to blame, that the country was not well-led and has gotten itself into this - into its - into these problems.

CONAN: And are people there convinced that a default would be disaster?

GRANITSAS: I'm sorry?

CONAN: Are people there convinced that a default would be a disaster?

GRANITSAS: Yes, I think so. I think so. For example, the fear of going out of the euro, it is arguable whether Greece should have ever been allowed into the euro, given sort of its debt metrics at the time when it joined the eurozone 10 years ago. But that - be that as it may, Greece benefited - has benefited mightily from being, first of all, a European Union membership. And generally, there is a certain, shall we say, if nothing more than pride at being a developed economy that could share the common currency.

There's been grumblings over the years about the euro, that it's led to inflation. When the currency switched, a lot of prices jumped because people weren't really able to reckon the conversion rates, and there was a little bit of an exploitation at the time. But you don't see people generally thinking that Greece should leave the euro.

I mean, public opinion polls show something like 10 or 15 percent of the population think it would be a good idea. The rest think it would be disaster.

CONAN: Alkman Granitsas, thanks very much for your time. We wish your brothers-in-law good luck finding a new job.

GRANITSAS: Thank you very much.

CONAN: Alkman Granitsas is Greece bureau chief for Dow Jones Newswires and a contributor to the Wall Street Journal, and he joined us on the phone from Athens. So let's move now to Paris, where two of that country's biggest banks were in serious trouble earlier this week because of the amount of Greek debt they owe.

Joining us from Paris, Steve Erlanger, Paris bureau chief of the New York Times. Nice to have you back, Steve.

STEVE ERLANGER: Hi. How are you?

CONAN: I'm well, thanks. Is that - is the gloom lifting a little bit in Paris?

ERLANGER: Well, it is a little bit. I mean, the French banks thought they were lucky because they only got downgraded by Moody's one notch. They're still in pretty good shape, and the government promises that they will be behind the banks. But French banks are exposed to Greek debts, and the more people worry about Greece as a creditable lender, borrower, you know, the more people worry about the banks. And this thing gets circular.

I mean, the problem is Greece remains a ticking time bomb for the euro. It has been a long time now. It is not resolved. And everyone is very, very anxious.

CONAN: And as you say, Greece is not the only country in this situation. It may be most dire in Greece, but Portugal, Ireland, Spain, Italy, further down the road. Is everybody feeling that this is just punting this crisis another week, few weeks or months down the road?

ERLANGER: It's not so much that. It's, you know, Greece is a - I mean, what they're trying to do is isolate Greece. It's very hard to do. But Greece is a special problem, one because of the things your previous guest very articulately talked about, but also one thing he didn't mention: the Greeks lied. The Greeks lied to everybody about what their debt was, how big it was. They fiddled their figures.

People kind of knew that they were fiddling, but they hadn't realized quite how big the hole was, and the hole gets bigger and bigger. Now, the problem is this austerity push everyone's been making on the Greeks has thrown the country into a deep recession. It's going to be three years of recession. It's very hard to grow out of debt if you're in recession.

Unemployment's getting very high. I think it's true that people are getting sick of the pain, and there doesn't seem to be much light at the end of the rainbow. But the other problem with Europe is it moves very slowly, and I do see, darkly, a path forward, which is what the Germans and the French have been talking about. But we're really not there yet.

I mean, there's already been - I mean, let's put it honestly. The Greeks are already in default - I mean, in default in the sense they couldn't pay their bills. So everyone had to help them pay bills for them. That's just adding more debt to this big pile of debt. And in return, Greece promised to make adjustments, to fix its budget, fix its economy, and it has actually worked very hard at doing that.

But Greece is still in a primary deficit, and what that means is that even if you took away debt payments - which are very high - the Greek government is still running a deficit. I mean, debt is still piling up day to day. So what they have to do is fix the budget, the economy, the tax systems to the point where at least if you put the debt payments aside, Greece would have a budget surplus.

Then they can figure out how much debt servicing the Greeks can pay, and then they can restructure the debt further to make it possible to have a sustainable level of debt. But we're not there yet. I suspect we're going to get there by the end of the year.

CONAN: Email question from Bob in Wilmington, North Carolina: Late last week, there were rumors that BNP Paribas was in much greater trouble that previously known over a possible Greek default. How real are those fears? Of course, that's one of the biggest banks there in Paris.

ERLANGER: Well, they were not downgraded, but Moody's has kept them on a negative watch, which means they're still thinking about it. Now, the banks have moved to shed themselves of some of their Greek debt, mostly by selling it to the European Central Bank.

They have discounted the value of their Greek bonds - which was part of a decision made in Brussels in July - by about 20 percent or so. But most people think actually Greek bonds are only worth 60 percent of their face value. So the banks need to work to fix themselves, to cover, I think, an inevitable restructuring of Greek debt, which will bring down, you know, the pile, the mountain of Greek debt by perhaps the end of the year.

And it may be that some of those banks will need to be recapitalized to cover over some of their Greek debt. Actually, Societe Generale and Credit Agricole were in worse shape in terms of Greece than BNP.

CONAN: We're talking with Steve Erlanger of the New York Times about the debt crisis in Europe and why, when it comes to debt, what happens in Greece is very unlikely to stay in Greece. If you have questions, give us a call. We'd especially like to hear from those of you directly affected by this crisis: 800-989-8255. Email us: talk@npr.org. Stay with us. I'm Neal Conan. It's the TALK OF THE NATION, from NPR News.

(SOUNDBITE OF MUSIC)

CONAN: This is TALK OF THE NATION. I'm Neal Conan in Washington. Though fears eased a bit today on a couple of different moves in Europe, there is still a fear that the debt crisis in Athens will cause dominos to fall, first in Paris and in Berlin and then across the Atlantic in this country, that we could be in for a major economic crisis as the result of Greek debt.

We're exploring that today. Our guest is Steven Erlanger, Paris bureau chief of the New York Times. If you have questions about Greek debt, or if you're directly affected by it, give us a call, 800-989-8255. Email us, talk@npr.org. And let's bring another voice into the conversation, NPR senior business editor Marilyn Geewax, who's with us here in Studio 3A. Nice to have you with us.

MARILYN GEEWAX: Hi, Neal.

CONAN: And interesting, this happens to be the third anniversary of the collapse of Lehman Brothers, which triggered the financial crisis just before the presidential election. I think everybody's going to remember that. And the new president of the IMF, Christine Lagarde, was in town to make a speech that you would have thought would have been a little bit of backslapping: Hey, we staved off a major economic crisis.

GEEWAX: It is really so frustrating. It was three years ago literally today that Lehman Brothers fell into bankruptcy. And that triggered all the economic chaos we saw three years ago. You remember just before the election how panic-stricken everyone was. We couldn't figure out what to bail out first. And you would think that three years later there would be a congratulatory mood around, that the world leaders would be saying, boy, remember, we were on the precipice three years ago and we really pulled back and we saved the world and good for us.

But instead, Christine Lagarde, the woman who is now heading the IMF, she gave a speech this morning, and she used repeatedly in the speech and in interviews afterwards the word dangerous. She said we've entered a dangerous new phase of this crisis. And it's, boy, three years later, and you're entering a new phase that's dangerous? Hmm, that's a little disheartening.

And we also have a lot of bad economic news. Today we've got things like more job - initial jobless claims. It seems like consumers are pulling back. We're just not where we had hoped we'd be three years ago. This should have all been in the rearview mirror, and here we are.

CONAN: And Steve Erlanger, is Europe recovering any quicker than the United States?

ERLANGER: No, and in fact it's partly - it's a little circular. It's suffering from low growth in the United States, and it's problems are creating anxieties in the United States also. So these things go around. The fact is the West is in a period of low growth. There's worries about double-dip recession. Many parts of the European Union are low growth or near recession. I think growth will be practically nil this year in the European Union, and that creates a big problem because without growth you don't have more taxes, you don't have more economic activity, and it's harder to get out of debt.

And in the European Union the big problem has been debt, in the currency union, where people can't print money. So it is a bit circular, but it's - people are anxious. They are anxious. They're anxious about European Union solidarity, which they were very proud of after the Second World War. They're anxious about the euro itself, which was supposed to be a rival to the dollar as a reserve currency.

They're anxious that the debts of more profligate countries, particularly in the south of Europe, are going to pull down others. And the fear is that if the euro goes, the European Union may fracture also.

GEEWAX: It's important to remember how tied together our economies really are. The United States, its single biggest trading partner is the EU. Collectively, we do about a half-a-trillion dollars in trade every year with EU countries, and - that's the European Union - and we really have a great deal of overlap between them.

You could go to Europe and go to McDonald's and stop at the Starbucks, and there's just lots and lots of U.S. businesses that do business in Europe, but we also have so many European countries over - companies that are doing business in this country, from automakers to Siemens to Airbus, all sorts of ways that we use European products in our daily lives and even things like you look in your wallet and you may have an HSBC credit card.

I mean, we are tied to their banking system. That's a banking company based in London. So these routine things that are everyday parts of our lives, where we drive BMWs and we go to Europe on vacation, we can't really separate ourselves from the European economy. We're very closely tied.

CONAN: Let's get a caller in. This is Kelly(ph), Kelly with us from River Falls in Wisconsin.

KELLY: Well, good afternoon, Neal. On Lehman Brothers and GM, I just say that my broker put me in both of those because they were rock solid, and the world has turned upside-down. He finally sold my Lehman shares for 11 cents on the dollar last week, and I'm still stuck with the GM stuff.

But my question is, you know, Iceland went bankrupt a few years ago and defaulted on their debt. I'm wondering what impact that had and how that compares to the situation in Greece.

CONAN: Steve Erlanger, Iceland would seem to be a lot smaller than Greece.

ERLANGER: Well, it is, and Iceland is probably more comparable to Ireland, actually, than Greece because Iceland was a bank problem, and Ireland was a bank problem, and basically banks got out of control, made all kinds of loans that weren't paid back, and the people of those countries then were stuck with the bills. And so Iceland is faced with these huge bills its banks run up, and that's the problem with Ireland too, because Ireland nationalized or said its - the bank debts would become the debts of Ireland, which some people thought was a very stupid thing to do.

Now, Greece is really a different thing. It's small, but it's bigger than those countries. And the problem in Greece is more about the governments and the budget. It's really not so much a bank crisis.

CONAN: Kelly, thanks for the call, and I hope your broker is doing something else.

(SOUNDBITE OF LAUGHTER)

CONAN: Let's see if we go next to...

ERLANGER: Buying Chrysler.

(SOUNDBITE OF LAUGHTER)

CONAN: Dontry(ph), Dontry in Davy, Florida.

HELENA: Hi, this is Helena Yeoman(ph). I'm calling actually from my macroeconomics course in South Florida. My class is here with us. They want to know how specifically the European, the debt crisis and even more specifically the Greek default could affect the American economy. And again, more specifically, how much money has the Fed lent to the European Central Bank through swap lines, and how much exposure do American banks have to European banks?

And I'm going to go ahead and take my answer off the air so the students can hear the answer.

CONAN: So they can take some notes. OK, Marilyn Geewax.

GEEWAX: Well, one thing that's really a big problem has been money market funds. That's something where a lot of people, if you want to just stash your money away, get a little bit more interest than just putting it into your checking account, you put your money in a money market fund.

Well, U.S. money market funds, in the prime funds, you have about half of the money, more than $900 billion has been invested in European banks, in short-term loans. Now, European banks, for example, they often need overnight loans. They just need a little bit of money. So these are routine transactions.

They might borrow money for a week or a couple of days or whatever, but these short-term loans pay a little bit of interest, and the U.S. money market funds invest in them. Well, if all of a sudden you're worried about the solvency of these European banks, then the U.S. money market funds don't want to invest in those short-term debts.

So they've been pulling back, and that's what's causing this concern about liquidity in Europe. Is there enough money to just kind of keep the whole system sloshing around? So today that's really what happened. The world's five major banks - the United States, the EU, Switzerland, Japan and the Bank of England - all got together and said we're going to do everything we can to make sure that there's plenty of liquidity and that dollars keep moving around and that you shouldn't worry about your money market funds and these kinds of overnight little loans.

We'll make sure that there's plenty of money for that. But it's a good example of how something that you don't even think about, that you may have like a, you know, a little money market account at your bank that you don't worry about much, and then you find out it's deeply tied to the European economy.

So we've got all kinds of overlaps here that just, you know, really tie our systems together, and it can really cause the kind of - if it were to start to really unravel, would cause a lot of the kind of financial panic that we saw, seizing up of these markets, that we saw three years ago.

Now, Treasury Secretary Tim Geithner is trying to make sure that everybody knows that this is a coordinated global action. So he's actually on his way to Europe this weekend. They're going to be meeting - finance ministers from the major countries are getting together, and they're going to try to reassure everyone that the money will be there and that the liquidity is OK.

So we should all be reassured, but I think the problem is that people have had so many traumas over the last three years, so many things that we thought would never happen, like the downgrade of the U.S. debt, something that just seemed inconceivable - the inconceivable has been conceived. It happened.

So there is a lot of concern that some of these things that we didn't use to worry about maybe we should be worrying about.

CONAN: Here's an email from Paula(ph) in Ohio. When I hear people talking about Greek debt and possibly the debt of other European countries, no one says much about this: Why don't they just pay their taxes? If Greece had an effective taxation system and people retired a few years later, wouldn't that go a long way to resolve the Greek debt? Steve?

ERLANGER: Well, that is exactly the question that most Germans are asking. This is exactly the problem. Germans, French, the Dutch, Northern Europe ask why should we be subsidizing, you know, people who retire at 55, who are not paying taxes the way we pay taxes? There's a kind of cultural issue. I mean, it's partly north-south, the kind of north-south issues that Thomas Mann used to write about. I mean, these things are really nothing new, but all in one currency and then it becomes an issue.

There is now very serious talk about the need to move toward more harmonization within the eurozone of just those things, which are tax rates, corporate tax rates, retirement ages and so on. Because as the Germans say we retire at 67, why should we pay for someone else to retire at 57? So these really are issues, and they're important. Now, the Greek government for a long time, you know, for lots of reasons, it's not that new a country after all, I mean, in its current circumstances.

I mean, it's only postwar. You know, it took on a lot of the kind of pro-union, strong union, semi-communist, you know, attitudes which meant very strong support for the workers, very strong labor protections, good pensions, very good health care benefits. The problem is it can't really afford it anymore, and there's a lot of graft. There's graft in every country. But in Italy, the black market is probably a quarter of the economy. That's Italy. And in Greece, it's probably 33 percent of the economy.

And it's true. If you would just get everyone to pay the taxes they owe, it might solve the problem, but you don't do it by necessarily raising taxes. I mean, there's a cultural issue. It's going to take a while for people to understand the importance of doing it. And they will only do it if they feel that the state itself is transparent, and that their money is going to good ends and not into the pockets of the pals of politicians. It's going to take a long time.

CONAN: Steve Erlanger of The New York Times and also with us is Marilyn Geewax, NPR senior business editor. You're listening to TALK OF THE NATION from NPR News. And let's go next to Tom(ph). Tom in Denver.

TOM: Hi. Thanks for taking my call.

CONAN: Sure.

TOM: I take a little opposite to the reporters. I've been in the market for probably 46, 47 years. Basically, I think what - all the central banks got together today, that is effectively the end of the problem for the world. Now, it's probably not for the Greeks, and it's probably not for some of the German banks. But if we recall, when Lehman came along, that surprised everybody - maybe not everybody. It certainly surprised me, I can tell you that. Those who are panicked really do freeze up the market.

But there is liquidity out there - plenty of liquidity. And ironically, the U.S. has benefited from a weaker euro because the money is floated to the dollar. And contrary to a lot of the inflation worries and things like that, the dollar has strengthened and (unintelligible) looks rather strong.

CONAN: Marilyn Geewax - or Steve, I hear you coming in here. Is this a permanent fix or are these Band-Aids and bubblegum?

ERLANGER: Well, I think, it's an important moment of confidence because the risk was banks were going to stop lending to one another, which is what happened after Lehman Brothers. If the banks worry that another bank isn't really solid or that even though its loans are going to come due, that it's not good for what it promises. And if they're scared, they just sit on their cash, and they don't loan it anybody. So this was a way, I think, for all these central banks to say we're going to try to ease up interbank loans.

But it doesn't really solve the euro problem, and it doesn't solve the fundamental problem in Europe, which is between the north and south of Europe, between the countries in surplus who have high productivity and relatively moderate debt levels and the countries like Spain, Italy, Portugal, Greece who, you know, have - are just weaker and are importing things, of high debt levels or inflexible labor markets where productivity is not very high. And, you know, you have two different economic cultures, that has to be solved, too.

CONAN: Marilyn Geewax, I was wondering...

TOM: You can say that, but tell me how it affects anybody?

CONAN: Marilyn?

GEEWAX: Well, I think here's the question that we're really facing right now: Is this a liquidity problem, or is this a solvency problem? And if it's just a liquidity problem, the caller is right that if the banks get together and say, look, everybody calm down, stop being so jittery. You know, there's plenty of cash in the world. We'll keep all of this flowing - that word liquidity is a little intimidating. But basically, it just means is everything going to keep flowing? Is there enough money to keep everything nicely lubricated and moving along?

And if the central banks say, don't worry, we're going to jump in here and make sure that happens, then maybe that's right, maybe there's really no underlying big thing to worry about at this point. But what if actually Greek - the Greek default is just the first of many? What if actually Italy and Spain and Ireland and Portugal and other countries, even France has been mentioned, really are just in so much financial trouble that they can't pay any of their debts?

And now, we're not just talking about jitters and liquidity. We're talking about actually huge banks failing. And then if that happens, our largest trading partner goes into a huge recession.

TOM: Which huge bank?

ERLANGER: Let me...

CONAN: I'm sorry. Go ahead, Steve...

ERLANGER: Sorry.

CONAN: ...you have the last 30 seconds.

ERLANGER: I mean, I was just simply going to say it's not quite so bad in France and other places. I mean, the problem is if the banks hold a lot of sovereign debt from edgy countries and people worry those countries are going to default, then they worry about the banks. What people have to do, they have to solve the Greek problem, and they have to - for once and for all, and give people the confidence that the euro will be fine. Then, I think we will be OK.

CONAN: Steve Erlanger, thanks very much for your time. And our thanks to Marilyn Geewax as well. Our apologies to Tom in Denver. I hung up on you by mistake, but we're running out of time anyway. Stay with us. I'm Neal Conan. It's the TALK OF THE NATION from NPR News.

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