Financial markets around the world have been in a delirium for the past month. The Greek stock market continued its decline as it fell over 41% last year! The anxiety related to the Greek default also spread to all the major markets in the world. Everyone from NYSE to FTSE is experiencing a sell-off!

The countdown to the Greek default and the avalanche of financial difficulties that it will bring with it seems to have started. Many experts believe that the Greek government is now bankrupt and has no means to pay its debt. Creditors, including the International Monetary Fund (IMF), on the other hand, are hopeful that if the Greeks accept austerity measures they might be able to repay the loans. Hence, there are many opposing views and opinions that are flooding the financial world as of now. No one seems to be sure if the default can be warned? Should you be warned? Or what are the consequences of such non-compliance?

In this article, we will try to answer some of these questions about the growing crisis situation in Greece.

The Greek game of spread and pretend

Any expert looking at the situation from a purely mathematical perspective would have known years ago that Greek debt is simply not payable. The real mess had been created when loans were made to the Greeks. That was the moment when the discussions would have made sense. Around 2009, when the world woke up to the Greek crisis, it was too late!

Greece, in 2009, was like a college student who had somehow gained access to multiple credit cards and now had such a large balance that bankruptcy seemed the only option. The income generated by the Greek government from taxes was not even enough to pay the interest owed on the debt! So the Greeks simply did not have the means to hold on to this debt for eternity even if they wanted to. They were going to default even if they simply tried to pay the interest owed on the loans.

Rather than accept the situation and let the inevitable happen, the IMF and others came up with an ingenious plan. They would lend more money to the Greeks at a scandalous interest rate of 14%. The money they lend to the Greeks will be used to pay back the interest on the same loans they were owed.

So, in essence, they were lending money and withdrawing it immediately. However, the huge interest rates of 14% on the new loans caused the old Greek debt to grow. As a result of playing this extension and simulation game for five years, the Greek loan has now become much larger than it was originally.

Dark losses

In retrospect, the Greek rescue attempt appears to be an attempt to hide the losses in reality. The mathematics simply revealed that the Greeks are obliged to pay much more than is mathematically possible. Thus, by extending even more credit and pretending that things will get better over time, the IMF appears to be trying to hide the losses from investors who have made the investments. The Greek population has been forced into extreme austerity, as this “spread and pretend” game is causing massive unemployment there.

The referendum

The Greeks recently faced a situation where the IMF would not grant more credit unless Greece agreed to humiliating terms and without IMF help, Greece basically did not have the cash to pay its obligations. Therefore, a default was almost inevitable. As a result of this, there was a lot of panic in all the financial markets of the world. If Greece defaulted on their loan, they would also end up exiting the euro.

Therefore, most of the Greeks were trying to get hold of their euro-denominated deposits and were trying to convert them into gold or some other real asset that had value even if the euro ceased to have value in Greece. The result was massive bank runs in which Greek banks, already bankrupt, struggled to return money to depositors, prompting fears of a financial collapse.

As a result, the Greek government reacted by closing banks until the crisis was resolved. They limited the amount of withdrawals to 67 euros per day per account. This was the amount of money a family would need just to get through the day. Regardless of the restrictions imposed, there were people queuing outside the banks and waiting for hours to withdraw as much money as possible.

The Greek prime minister was not sure how to deal with the IMF and creditors. Therefore, he left it up to the public to decide whether it should accept the humiliating terms offered by the IMF or whether it should simply default. More than 61% of the Greek population voted in favor of the default. Therefore, the Greeks refused to accept the IMF bailout at first, causing markets around the world to plummet. However, an agreement was later reached between the creditors and the Greeks and Greece is not defaulting on its debts, at least momentarily.

Greece’s latest bailout simply appears to be an addition to the “spread and pretend” game being played. The fundamentals of the Greek economy have not changed and remain as ruined as before. There does not seem to be a way out of the Greek crisis and granting more credit definitely does not seem like it.