Debt Crisis Follows Greece Getting A Second Look

After Greece joined the European Union, its government started borrowing money and spending lavishly. It nearly defaulted on its debts and needed a massive bailout. The Greek debt crisis unfolded, not just in Athens, but at a bond trading desk in Newport Beach, California.

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LYNN NEARY, host:

It's MORNING EDITION from NPR News. I'm Lynn Neary.

RENEE MONTAGNE, host:

And I'm Renee Montagne.

Turns out a big European bailout for Greece hasn't stopped some major unions there from calling on workers to strike. Again next week, Greeks will be protesting the government's decision to cut benefits for public employees.

Plenty of people are wondering how Greece got so deeply in debt. To sort it out, we sent two Planet Money reporters to opposite sides of the globe. Adam Davidson is in Southern California on the floor of the world's largest bond traders, PIMCO. And Chana Joffe-Walt is in Athens.

CHANA JOFFE-WALT: These two places are linked. So Adam, let's start with the Greek story.

ADAM DAVIDSON: Sure. I'll just stay in California and come in when I'm needed.

JOFFE-WALT: Deal. Okay. The Greek story starts with a change, a big change, around 10 years ago. For Theopolis Papalostakis(ph), it happened in a meeting. Theopolis is a banker. And one day his manager asked everyone to stay late and announced the euro is coming and that changes everything.

Mr. THEOPOLIS PAPALOSTAKIS (Banker): And one of the things, he said that you should forget what you know. You should forget everything you know about banking. Everything's going to be all new. Soon it's going to be like a supermarket. People will come in and buy all kinds of different things.

JOFFE-WALT: And when he said that, what did you think?

Mr. STAKIS: Well, you know, we laughed. We said, yeah, sure, yeah. I'm sure. Sure, yeah. Well, it did happen.

JOFFE-WALT: What happened was pretty amazing. Before this, Greek people didn't really take out loans all that often or do most of the kinds of things we do at banks. They deposited money and they withdrew.

But every morning after that meeting, Theopolis would come into work, turn on his computer and the interest rate up in the corner of his screen on consumer loans would be lower - 18 percent two days later, 15, 12, six, four.

Theopolis bought a car. Six months later, he bought another car. His neighbors bought a home, then they bought a vacation home. People came into the bank to get loans to go on vacation. And then loans to pay for those vacation loans.

Wherever you go in Greece, people remember this moment 10 years ago. My cab driver, Adonis Barcolis(ph), remembers it.

Mr. ADONIS BARCOLIS (Cab Driver): I used to own a Toyota. Now I'm owning a Mercedes, you know.

JOFFE-WALT: People were spending cheap money and so was the government. Loukas Tsoukalis told me about this. He's with the Hellenic Foundation�for�European and Foreign Policy. And he says the government took that cheap money and they put on an elaborate Olympics and they returned to a favorite practice of Greek politicians - addressing unemployment by hiring people and never, ever firing them.

What's the craziest thing you remember hearing of?

Mr. LOUKAS TSOUKALIS (Hellenic Foundation�for�European and Foreign Policy): I think there's(ph), for example, an organization which was set up for the drying up of a lake. I think the lake has been dried up for the last 30 years, but the organization is still there. So there are a few employees who are paid.

JOFFE-WALT: Everyone here knows that there was this moment where suddenly money was cheap. What they don't know is why.

I was at a brunch at Theopolis's house last weekend, the banker, and his neighbor's were over, this couple Claudia Falemeyer(ph) and Elliott Scalataro(ph), and they're all sitting around, they're talking about: where did the money come from?

Ms. CLAUDIA FALEMEYER: It was like the manna from heaven.

Mr. ELLIOTT SCALATARO: That's what happened.

JOFFE-WALT: But why now? Like why one year do you not have any money to buy cars and vacations and homes, and then the next year you have everything you could possibly want?

Ms. FALEMEYER: Maybe he knows. He was working in a bank. I don't know where the money comes from.

JOFFE-WALT: You know.

Mr. THEOPOLIS: From - I don't know. I don't know.

DAVIDSON: Chana, I think this is where I should come in, because I actually do know where the money came from. I know where Greece got that money and it wasn't from heaven. It was from Newport Beach.

This is the quietest room of 200 people I've ever been in. It's a little noisier than usual right now, but there's no nose.

That quiet room is a bond trading floor at PIMCO, one of the largest bond trading outfits in the world. Bonds, of course, are how governments borrow money. They sell a bond, which is like selling an IOU. PIMCO's Scott Mather remembers a meeting that he was in around 10 years ago, right around when Theopolis, the Greek banker, was called into his meeting.

At Scott's meeting, the traders at PIMCO decided, hey, let's take a second look at Greece. Let's start lending them money. Let's buy a bunch of their bonds. And PIMCO was not the only one.

Mr. SCOTT MATHER (PIMCO): And the market was basically giving Greece the benefit of the doubt, because they were a eurozone member, part of the club.

DAVIDSON: Sure, Greece's governments were famous for their long history of lousy financial management. But now they promised to act like grownups, to be responsible. After all, they'll be carrying around the same currency as the Germans and the Fins. And Scott figured even if Greece did screw up, the richer countries would step in and help them out.

JOFFE-WALT: That's a nice crystal ball.

DAVIDSON: Yeah, it worked out that way. Right. So PIMCO starts lending the country money at rates closer to what those Germans and Fins are paying. And that makes all loans in Greece cheaper, not just government loans. And this goes on for nearly a decade.

JOFFE-WALT: And so back in Greece, 2009, there's a new government that comes into power and the new government makes a surprise announcement. They say, remember how the previous guys said that our deficit was six percent? It's actually twice that.

DAVIDSON: The traders at PIMCO, like bond traders all over the world, were shocked. They were furious. Thats a big difference and that led to traders at PIMCO to take action, bond action.

Dr. MOHAMED EL-ERIAN (CEO, PIMCO): At the end of last year, we sold all our Greek exposure(ph).

DAVIDSON: This is Mohamed El-Erian. He is the CEO of PIMCO. And he says when they told Greece no more loans, we're not buying anymore of your bonds, the Greek government asked them to reconsider.

Dr. El-ERIAN: The Greek government came with lots of offerings.

DAVIDSON: Did they come to you directly?

Dr. El-ERIAN: They did come to us directly, via our offices in Germany and London. And we said thank you, but no thank you.

DAVIDSON: Not just PIMCO, most bond buyers all over the world were saying: No, Greece. We won't lend you money. We won't buy your bonds. The governments of Europe though, said okay, Greece. We'll bail you out but only if you stop paying all those teachers, and postal workers, and lake dryer-uppers all that money.

JOFFE-WALT: Which pretty much brings us up to date, the Greek people are really mad.

(Soundbite of chanting protestors)

DAVIDSON: And the guys at PIMCO understand that. The Greek government made some bad choices and now the Greek citizens are being asked to pay for them, with their salaries and their pensions. And Scott Mather says it's not just Greece.

Mr. MATHER: Most of the developed world is screwed. So the rich world has continued to spend more than theyve made for decades. To us, the most startling thing is this disconnect where people think there is some easier way out. There is no easy way out.

JOFFE-WALT: Greece may be one of the worst examples, but almost every developed country - including the U.S...

DAVIDSON: Especially, Chana, the U.S.

JOFFE-WALT: Especially the U.S., every country has been borrowing more than they can pay back without making difficult choices; without raising taxes or spending less.

DAVIDSON: Greece's solution for now is to borrow more money, which the bond buyers at PIMCO are worried about. They say it doesnt address the core problems; it's just a way to kick the can down the road a bit.

Im Adam Davidson.

JOFFE-WALT: And Im Chana Joffe-Walt, NPR News.

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