Why Greece Is The Precursor To The Next Global Debt Crisis

The one undeniable truth about the debt drama in Greece is that each of the conventional narratives—financial, political and historical—has some claim of legitimacy.

For example, spendthrift Greeks shunned fiscal discipline: here’s an account from 2011 that lays out the gory details: The Big Fat Greek Gravy Train: A special investigation into the EU-funded culture of greed, tax evasion and scandalous waste.

Or how about: Greek reformers want to fix the core structural problems but are being stymied by tyrannical European Union/Troika leaders: The Greek Debt Crisis and Crashing Markets.

Rather than get entangled in the arguments over which of the conventional narratives is the core narrative—a hopeless misadventure, given that each narrative has some validity—let’s start with the facts that are supported by data or public records.

The Greek Economy Is Small and Imbalanced

Here are the basics of Greece’s economy, via the CIA’s World Factbook:

Greece's population is 10.8 million and its GDP (gross domestic product) is about $200 billion (This source states the GDP is 182 billion euros or about $200 billion). Note that the euro fell sharply from $1.40 in 2014 to $1.10 currently, so any Eurozone GDP data stated in dollars has to be downsized accordingly. Many sources state Greek GDP was $240 billion in 2013; adjusted for the 20% decline in the euro, this is about $200 billion at today’s exchange rate.

Los Angeles County, with slightly more than 10 million residents, has a GDP of $554 billion, more than double that of Greece.

The European Union has over 500 million residents. Greece's population represents 2.2% of the EU populace.

External debt (public and private debt owed to lenders outside Greece):

$568.7 billion (30 September 2013 est.)

National debt:

339 billion euros, $375 billion

Central Government Budget:

revenues: $119.5 billion

expenditures: $127.9 billion (2014 est.)

Budget surplus (+) or deficit (-):

-3.4% of GDP (2014 est.)

Public debt:

174.5% of GDP (2014 est.)

Labor force:

3.91 million (2013 est.)

GDP - per capita (Purchasing Power Parity):

$25,800 (2014 est.)

Unemployment rate:

26.8% (2014 est.)


$35.8 billion (2014 est.)


$62.8 billion (2014 est.)

Imports - partners:

Russia 14.1%, Germany 9.8%, Italy 8.1%, Iraq 7.8%, France 4.7%, Netherlands 4.7%, China 4.6% (2013)

Reserves of foreign exchange and gold:

$6.433 billion (February 2015 est.)

By 2013 the economy had contracted 26%, compared with the pre-crisis level of 2007. Tourism provides 18% of GDP.

What can we conclude from this data?

  1. Greece’s central government is roughly half of its GDP (by some measures, it’s 59%), meaning that the national economy is heavily dependent on state revenues and spending.  For context, U.S. government spending is about 20% of U.S. GDP. As a rule of thumb, the private sector must generate the wealth that pays taxes and supports state spending. This leaves a relatively small private sector with the task of generating enough wealth to support state spending, pay interest on the national debt and pay down the principal.
  2. Greece runs a trade deficit, i.e. a current account deficit of almost $30 billion annually.  In the 14 years that Greece has been an EU member, this adds up to roughly $400 billion—a staggering sum for a nation with a GDP of around $200 billion.
  3. Austerity and a reduction in borrowing/spending have devastated the Greek economy, as GDP has shrunk 26% while unemployment has soared to 26%.
  4. While public debt is pegged at 175% of GDP, external debt is roughly 285% of GDP—a much larger sum. By all accounts, a significant portion of the Greek economy is off-the-books (cash); even if this is counted, the debt load on the private sector is extremely high.
  5. Foreign exchange reserves and gold holdings are a tiny percentage of government spending and GDP.

This data reflects an imbalanced, heavily indebted, heavily state-centric economy with major systemic headwinds.

The Problem with Not Having a National Currency

The problem with not having a national currency is that there is no mechanism to rebalance trade (current account) imbalances.

Ideally, a nation’s exports and imports balance, but in the real world, nations generally run trade surpluses or deficits. A trade deficit is a negative balance of trade incurred when a country's imports exceed its exports. A trade deficit is settled by an outflow of domestic currency to foreign markets.

Countries with trade surpluses end up with cash from their trading partners, while countries with trade deficits must pay the difference between their exports and imports.

Trade must balance: every nation cannot run a trade surplus. The problem for nations with current account deficits is: where do they get the money to settle their negative balance of trade?

Nations with their own currencies can simply create the money out of thin air. This is in essence how the U.S. supports its massive trade deficits: the U.S. imports goods and services and exports U.S. dollars in exchange for the goods and services.

This works as long as the country running trade deficits doesn’t print its currency with abandon.  If a nation prints its currency in excess, the currency loses value, and imports become more costly to residents.  As imports rise in cost (priced in the local currency), people can’t afford as many imports as they once could, and imports decline, reducing the trade deficit.

On the other side of the trade ledger, the exports of the nation that is depreciating its currency becomes cheaper in other currencies. This makes the nation’s exports a relative bargain, and this tends to increase exports as global buyers take advantage of the cheaper goods and services.

In this way, national currencies provide a mechanism for rebalancing trade deficits. By eliminating national currencies, the Eurozone also eliminated the only market mechanism for rebalancing trade imbalances.

With no currency mechanism left, nations borrow money to fund their trade deficit.  This is the engine of Greek debt since that nation adopted the euro in 2001.

If Greece had kept its national currency, trade deficits would have declined as the Greek currency depreciated and the cost of imports soared. Lenders would not have based their loans on the illusory guarantee of Eurozone membership.

For nations running large structural trade deficits, membership in the Eurozone was a guarantee of financial disaster, as the way to fund the deficit within the Eurozone was to borrow more money.

There is no way for Greece to fix its debt problem if it keeps the euro as its currency.  Every purported solution that doesn’t address the core cause of the debt is mere theater.

The Subprime Template

In the subprime mortgage bubble of the mid-2000s, people with modest incomes were able to buy costly McMansions under false pretenses by exaggerating their income (via “stated income” or liar loans). The mortgage originators issued the mortgage under equally false pretenses—that there was proper risk assessment/due diligence and a fair appraisal value for the property.

These false pretenses enabled unqualified buyers to borrow enormous sums—for example, someone with an actual annual income of $25,000 borrowed $500,000 with no down payment and very low initial rate of interest. While the borrower bought into the dream of get-rich-quick “house flipping,” the real money was made by the originator and the lender.

It is widely accepted that Greece was admitted to the Eurozone under false pretenses—national debts were masked or understated, reportedly with the assistance of Goldman Sachs.

That a few at the top of the political/financial heap gained from Greece’s entry into the Eurozone is demonstrated by the “Lagarde List” of 2,000 individuals who transferred 50 billion euros out of Greece to Swiss banks in 2010, when the debt crisis was first making headlines. These are clearly not middle-class households getting their assets out of risky Greek banks; these are oligarchs and the top .1%. (Source)

Since these transfers do not include money that fled Greece into the shadow banking system or hard assets, we can estimate the total sum taken out of Greece by the top 2,000 is more on the order of 100 billion euros—roughly half the nation’s GDP.

In the U.S. economy, this would translate to 60,000 households taking $8.5 trillion out of the U.S.

It is also widely accepted that at best 10% of the bailout funds trickled down to the Greek people—the vast majority bailed out private banks and other lenders. (Source)

These charts demonstrate how private loans to Greece have been transferred wholesale to the public ledger, i.e. taxpayers:

This is roughly the same template the too big to fail banks followed in the subprime mortgage crisis: after skimming vast profits from originating the loans, the banks faced insolvency as the phantom collateral of subprime mortgages evaporated.  To rescue the financial markets, the federal government bailed out the banks.

Faced with the prospect of a Greek default bringing down their overleveraged banking sector (i.e. the European equivalent of a “Lehman Moment”), the EU leadership opted to bail out their own too big to fail banks on the backs of their taxpayers.

Two Conclusions

There are two conclusions to be drawn from all this, and they have nothing to do with who is demonizing whom or the political theater currently being staged:

  1. Greece can never escape the cycle of increasing debt until it exits the euro and returns to a national currency.
  2. The debt is so outsized compared to Greece’s private sector that it must be written off. What cannot be paid will not be paid.

These facts matter not only because contagion from Greek debt defaults may ripple in dangerous ways through the financial system, but because they are also true for many other members of the Eurozone. As I predicted in my first article for Peak Prosperity four years ago, the Euro is a fatally-flawed monetary concept and what we now seeing playing out was eminently predictable from the start.

In Part 2: More Sovereign Defaults Are Coming - Prepare Ahead Of The Turmoil, we look at structural causes of the global debt crisis that are not limited to Greece. Many other countries are teetering on the same brink Greece is now falling off of. When they fail, the ripple effect their debt defaults will debilitate their creditor nations, causing a massive shrinking of the world economy. 

The key takeaway is this: even if the countries we live in can't live sensibly and within their means, we as individuals have the power to do so. But we need to seize that power now, before the next crisis arrives, for it to matter.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

This is a companion discussion topic for the original entry at https://peakprosperity.com/why-greece-is-the-precursor-to-the-next-global-debt-crisis/

I'm in France and have been conducting an informal, very unscientific, poll of French citizens asking them about the Greek crisis. So far everyone I have asked has told me they expect that the Greek situation will eventually spread to France. They don't think it is imminent, but most say they think it is inevitable.
When I ask if they are making preparations, I get the same blank stares I do in the US.

I work with individuals native to many countries around the world.  During this past week I asked a native German and a native Greek what they thought about the Greek crisis.  Both are bright, informed individuals with PhD's in physics or chemistry.

The German blasted the Greeks for their lack of productivity, laziness, and inability to collect taxes.  He was angry that his 'people' would end up eating a large chunk of the Greek debt.

This is part of what the Greek emailed me:

The game is deeper than you see and Greece is not as desperate as the media here want to present. They are expecting that this will not work and have been preparing for some time now. They have taken their money out of the banks (ECB has shipped over 150 B to greek banks in the last 4 months). 

The USA government is concerned and they have repeatedly stated that. But this is  about the Germanization of Europe, which I cannot believe will happen. WC once said that “we need to bomb Germany every 50 years and we do not need to know why, they will know”.

Too bad they haven't read that classic by Strauss and Howe.  Don't think it would have made a difference anyway.




Gail Tverberg suggests that the lack of cheap oil has unraveled oil dependent economies:
"We all know one thing that Greece, Cyprus, and Puerto Rico have in common–severe financial problems. There is something else that they have in common–a high proportion of their energy use is from oil. "


One small correction on an otherwise great report:
"For context, U.S. government spending is about 20% of U.S. GDP.".

That´s only federal spending. Total public spending, including state and local, is about 6 Trillion or 35% of GDP.


Rhodesia was not colonised at the point of a bayonet. The Matabele king, Mzilikazi kept Henry Harley in a goat kraal for months before deigning to meet him. So much for going in guns blazing.
Mziliazies indunas advised letting in the Moffats (missionaries) because they had better dental tools than the Matabele, and the indunas were old with bad teeth.

Mzilikazies successor, Lobengula allowed Rhodes to take a column to the emptied Mashonaland to look for gold, which the Nguni people had no use for. Lobengula was addicted to heroine for his gout, which gave us some leverage, but we still had to mind our Ps & Q's. The Matabele are a warrior nation. (For instance, never allowing ones head to be above the kings. Penalty instant death.)

Rhodes had to take a large detour to avoid contact with Lobengula's impies, each one consisting of 10,000 men.

Trouble started when the Matabele stole copper telegraph wire to make jewelry. More trouble was created when the the Matabele prey, the Shona, (hence Mashonaland) took refuge in our mines. We miners took advantage of their very straitened circumstances for cheap labour. The expected life span on the Jumbo mine where I grew up for whites was six months. (Malaria).

The Matabele were outraged that we were interfering in their affairs and attacked, threatening our existence.

That was when the gattling gun was first used.

You asked for that lecture, European.

Carlos, thanks for the additional information. As I recall, federal spending is around $3.2 trillion, state and local govt spending is around $1.5 trillion, but these might be higher now. US GDP is around $17T.
As large as govt spending is in the US, it is still considerably lower than countries such as France, where (as I recall) govt spending is 50% of total GDP.

Most interesting, thank you, Arthur–yes, there is definitely a spectrum of colonialism and control. I recall that England maintained its rule over India with around 25,000 soldiers and administrators–a small army given India's vast size and population.  The trick was (as I understand it) maintaining control over the rajas. Control the local elites and you control the region, and without bayonets.
I confess I wanted to work in the word "bayonets"… even though it is not entirely accurate, it has such a dramatic ring to it… buying the complicity of local elites is less dramatic and a lot easier. 

Weaving the industrial transition into my rant, the aBantu of Zimbabwe (Nee Rhodesia) have embraced industrial civilization.  
However it is not clear to me whether they have left their run up too late. In order to make the transition,  they have to rid themselves of their excess population. The Europeans sent their surplus to Africa and now the Africans are returning the favour.

I expect that in the long run it will yield the same result on both continents, the expulsion or extermination of the immigrants. Europe may collapse before it feels the full brunt of it's colonisation.


I just don't believe that the total population will follow a logistic curve (s- shaped) as you have shown in your picture.  That is wishful thinking.  Over time the death rate will go up as resources and fossil energy deplete which would make the total population resemble a Gaussian curve (bell shaped).

This article is the best explanation of the Greek situation out on the web so far. Billiant.
We are going to learn that we can't live beyond the carrying capacity of one's country for long.  Greece, welcome to reality.  Coming to the rest of Europe and the rest of the world soon. 


That a few at the top of the political/financial heap gained from Greece’s entry into the Eurozone is demonstrated by the “Lagarde List” of 2,000 individuals who transferred 50 billion euros out of Greece to Swiss banks in 2010, when the debt crisis was first making headlines. These are clearly not middle-class households getting their assets out of risky Greek banks; these are oligarchs and the top .1%.

For me…this was the most infuriating part of the article.   While the point was to focus in on the reality of Greek's situation, this small thread sparked enough interest for me to investigate the sources given.  Only remember small tidbits of this when it was actually published, and I am not sure what the most recent news on any of this is.  I know this money would be a fraction of the tax receipts needed to right the ship in Greece, but it is sickening.  So many of these elites play the system, sucking resources, not getting punished. 

It's like when the bankers buy physical silver in massive quantities because they know the silver price will rise.  Making money off a crisis.  Avoiding taxes.  It is sickening.

It is so sad.  Admittedly I don't understand all of the taxation laws, even in my own country…but has anyone been arrested/prosecuted for this?  I mean except the guy who published the names, of course.


Climber99 nailed it:

This article is the best explanation of the Greek situation out on the web so far.
You and Chris both have a wonderful gift for sorting the wheat from the chaff, and bringing clarity of understanding to what was previously a morass of unfiltered, conflicting and diverting information.  Thank you!  So glad you are a regular contributor here now!!

Lagaan – illustrates the place of the elites in colonialism. Plus great music.


The caste system helped too.

The Wall St Journal had a front page article this morning with the headline, Greek, Chinese, Puerto Rican crises all fall short of going global. Nothing to see here. Really.


It's quite clear that Greece has to default on all foreign debt, that of course means no more money will be lent until their economy is restructured in a way they may be able to repay future loans.
This doesn't mean they have to leave the Euro, it just means that all trade will need to be done on a cash basis, no cash no goods.

All imported luxuries and most consumer goods will vanish from the shelves. That includes oil, coal and gas. The EU will probably make grants for fuels for essential services. Cars, trucks and aircraft will not be imported. Export of Euros will be prohibited and funds exported to Swiss banks over the last few years will be recovered.

All of the Greek banks will have to default on their customers deposits (a bail in), all banking deposits are in effect unsecured loans not "your money" placed for safekeeping. The only question is how much in the Euro each customer will receive upon default.

The Greek government will also have to default on all bond issues.

The Greek Government will have to rationalize their oversized military, there is little they can do if their perceived enemy Turkey attempts to over run them, they need to get rid of their air force and navy and reduce their army to a civil disobedience and border protection force.

They need to collect their taxes and utility services payments, water, gas electricity and public transit aren't freebie's as the Greek seem to think.

All investment in the future needs to be devoted to import replacement, especially energy. It's a nation that can't afford a car and plane based transport system.

I don't see any arguments for Michigan leaving the US and implementing the Michigan Mark, so why are all the YouTube and internet Greek problem solvers splashing the Grexit as a solution when it's not. No Greeks want Drachma's, they know within a couple of months they will be worthless, a wheelbarrow load of money to buy a piece of Chinese underwear.

The only solution is to default let the chips fall wherever and start again with a complete rationalization of Government services that enables Greece to live within it's means.

I too am an expat in France. Who are you talking to? How do you think the French should prepare? You have no understanding of what you are reporting.
1.French household savings are rising faster than their GDP. (That means the French are saving more money and not spending). That is how they are preparing! Duh! They also want cash and will take more and more euros out of the ATM prior to September 1, 2015 when the new limit of 1000 euro transactions goes into effect. Imagine, they realize Greece could happen to them too! Wouldn't it be amazing for Americans to realize that?

  1. It's out of the question for Livert A rate not to drop.(They also know their Livert A interest rate will drop, so that makes them save even more money).

Americans don't know that the French DO NOT HAVE CREDIT CARDS. The French only have DEBT CARDS which they call "credit cards". There is no credit in France. The only possible long term debt would be for a car or a mortgage. What is in their bank account is all the money they own. Repeat…their are no credit cards in French culture. So get that straight, Americans! 

They have a universal health care system which provides them with doctors and medicine at very cheap prices. An MRI recently done for a friend cost 22 euros! A doctor's visit cost the same.

Their company provides them with 8.10 euros each day they work to buy lunch or eat in their cafeteria. They also take the metro or bus to work which is also paid for my their company. Most Parisians do not own cars and only take public transporation. Again, France is not America.

So what more do you think the French should do? They are not American debt serfs. They have labor rights, vacations, and a 35 hour work week. If all of those things go, at least, they are not in debt.


I love it when someone says "the only solution is…". Automatic yellow flag on the field.

Just sayin'.

Finland Echoes Germany, Wants Greece Out; Five Other Nations Back Grexit