Economy — 29 June 2011
A cooling breeze from Greece

In the summer months its always pleasant to walk home from my local Mosque after the sunset prayers via my local high street. There are many Turkish and Cypriot restaurants and cafes interspersed with fruit and vegetable shops that are open all hours ready to distract one’s attention. Although it is a little worrying to note a plethora of betting shops springing up recently in this London corner of the Mediterranean (I’ve counted 8 in the space of no more than a couple of hundred metres!). I’m sure that this phenomenon owes more to the newly liberalised local planning laws on betting shops rather than any perceived proclivity to gambling by my local neighbours, who are very ethnically and economically diverse. It just seems to me that it is very dangerous that vulnerable communities who are not very aware of the great dangers of gambling are increasingly being tempted into this vice, with few, it seems, concerned by the appalling social and family impacts that gambling addictions can inflict. The deeper issue seems to be that few question whether gambling per se should be challenged, it seems to have become a naturally accepted fact of society.

Of course there is another corner of the real Mediterranean garnering many headlines this week – Greece. Last Tuesday (21st June) PM George Papandreou’s government survived a confidence vote, clearing the way for Greece to receive a new 120 Billion Euro bailout from the IMF and EU. The confidence vote came after an angry 3 day debate on the governments proposed 50 Billion sell off of State assets and a new 28 Billion package of austerity cuts and tax rises. That’s the good news. The bad news includes rioting in the streets, including calls of “thieves” directed to the politicians, and the realisation that the country has persistently missed its spending and revenue targets during its 13 months under IMF and EU supervision, and that it will shortly run out of money without urgent loan packages approved. IMF plans have failed, growth seems as elusive as ever and the population are unwilling to take the bitter medicine on offer from Europe’s elite. The Independent said that Greece is trapped between the mythical sea monsters “Scylla and Charybdis” with the hated threesome of the EU, IMF and European Central Bank on one side demanding more drastic measures – and a desperate, angry and now violent public taking to the streets in thousands convinced that more austerity and higher taxes will not work. A default of sovereign (Greek) debt now seems highly likely with some very serious consequences.

Some opine that it will be better for Greece to default, leave the Euro and start all over again with a new Drachma. After all the Euro does seem to impose rather strict economic conditions (budget deficit limits, spending guidelines, and with no possibility for devaluing the currency) which are too restrictive for a population brought up on a generous welfare system. Why not default when others have done so (Argentina/Russia for example) and with all imposed plans seemingly failing? One can also have a degree of sympathy with Greece as there are countries in deeper in terms of debt/deficits (Spain, Ireland, even the UK) and the world’s largest economy with the greatest deficit (the US) steadfastly refuses to balance its books because it benefits from the dollar as the worlds global currency – and as long as its credit is seen as good (now debatable) will continue the $ printing presses.

Now if all of the above seems bad enough, there is more to come. The really big bets over Greece have come (surprise, surprise) from the banking sector. Not only have the major European banks and financial institutions taken enormous risks in backing Europe’s spendthrift children (Greece, Portugal, Ireland, Spain, et al) there is a deeper exposure. The basic sovereign debt transaction is the provision of loans or loan guarantees to the sovereign. The interest rate on these loans to Greece is high, now more than 16% (when 3 or 4% is usual for the solid economies). Fair return one may argue for a higher risk bet – rather like backing the long odds outsider in a horserace. If the banks had limited their exposures to such risks then this would be containable – the risks could be reasonably spread, losses absorbed. But today in the unregulated financial markets we have the “multiplier effect” of derivatives. With derivatives, bets can be doubled, tripled, or more… the sky is the limit.

With Credit Default Swaps (CDS) everyone can get in on the “action” with sovereign debt. A CDS is effectively an insurance policy against default, one party guarantees that if the bond is defaulted they will pay the full amount of the bond. In return for this guarantee they charge regular fees like insurance premiums – easy money if you think governments don’t default. One may think that this mitigates risk but Credit Default Swaps played a big part in the 2008 financial crisis. Part of the problem is that there is no limit to the number of these contracts that can be written, and there is little in the way of capital needed to back them up. Little wonder that in this gambling society the value of CDS have ballooned to more than $60 trillion, bigger than the world economy in total! The Royal Bank of Scotland wrote CDS contracts greater than £3 Trillion before its collapse – greater than the size of the whole UK economy.

So we have a potential “Lehman moment” with Greece. If/when they default many overextended banks could go down with it, like the giant US investment bank Lehman Brothers, and with the interconnectedness of the banking sector this will likely kick off many multi billion dollar losses. Just like those we saw in 2008 and for which western governments stepped in to bail out the “too big to fail” banks. It is as if we have learnt nothing from the 2008 crisis – the gambling menace grows larger, the risks greater, the divisions between the winners and losers even larger.

As part of the Greek governments massive fire sale of assets is its 34% stake in Opap, Europe’s biggest listed gambling company and its 100% stake in Hellenic horse-racing.

It looks like Greece is at least symbolically dealing with gambling – we must ask why the rest of the western world isn’t?

 

Jamal Harwood is a regular contributor to New Civilisation.  He is a lecturer in Finance, and a member of the UK Executive Committee of Hizb ut-Tahrir Britain

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