Global Financial Crisis, 2008. Wall Street was in meltdown. The crisis sparked by reckless lending by American banks had spread way beyond the USA. They were giving loans to the rich, the poor, the poor and elderly, without any risk review. Banks granting the loans knew they shouldn’t be giving out these loans, they wouldn’t get their money back. ‘No doc loans’ and ‘liar’s loans’ issued by major banks and some smaller banks. Stuff which appeared like a scene out of a fantasy story playing out in real life. Banks for whom risk management should be the first precept in the bible ignored all rules, laws, principles and ethics.
Financial deregulation had led to ‘exotic products’, bad loans bundled up with the good and sold as triple-A-rated. You could mix good apples with rotten, sell them at the price of good apples, making a profit. Pack them in brown paper bags; people bought the apples without being able to check their condition. They, in turn, would sell these to someone else, who sold to someone else, who sold to someone else etc. all making a profit. It does look and feel like a fantasy story.
Banks in other countries would join the charade; they didn’t want to miss out on lucrative profits. Then it came down a house of cards.
Some of the more affluent countries were able to bail out the banks. Greece was less affluent. The structure and politics of the EU are not conducive to helping these countries in an economic crisis.
The government of Greece collapsed. Fresh elections saw the left-wing Syriza party, campaigning on an anti-austerity platform win 10% of the votes. The newly elected government collapsed within a few months. Yet another election; Syriza won 36% of the vote, enough to form the next government. The dramatic swing to the left reflected the deep dissatisfaction of the Greek people. Yanis Varoufakis found himself as the Finance Minister of the new Syriza led government.
Post -World War11 Greece was led twice by the armed forces, following coups overthrowing democratic governments. Yanis’s father was a political activist who was imprisoned by a military-junta, tortured to make a false confession, which he resisted. This experience left a deep impression on his young son.
Yanis was an obscure economics professor in an American university; shoulder tapped by Syriza party to be their economic advisor and later appointed Finance Minister.
To say that the Greek government was in an economic crisis at that time was an understatement. They were nearly bankrupt and fighting for survival. Negotiations held with a ‘troika’ of three parties- European Union (represented by their finance ministers – Eurogroup), European Central Bank and the IMF. A tough negotiation, made worse by troika’s prejudice towards a left-wing government.
The new government, with a strong mandate from the Greek people, expected flexibility and a realistic approach from the troika. What they found was an inflexible foe, who wanted even tighter conditions than they had conceded to the previous government. The Eurogroup led by the Dutch Finance Minister Jerome Djesselbohm proved to be the harshest party in this negotiation. They embarked on a course of ‘maximum pressure’, which nearly brought the Greek economy and the banks to a complete shutdown. The inflexible position effectively shut off the possibility of a deal. While many people in this story came off poorly, Jerome was probably the most disliked.
Long hours of negotiations came to an impasse and conditions the troika were demanding were extremely unpalatable and unrealistic.
Syriza was extremely unhappy with the ‘deal’ that was offered but agreed to hold a referendum so that the Greek people could have the final say. Syriza would campaign against the deal and outline what rejecting the agreement would involve- leaving the EU and a hard road ahead. The Greek people would retain their pride and independence, instead of bowing to the troika. The Greek people voted to reject the deal.
Then came an entirely unexpected twist in the saga. The Greek Prime Minister and leader of the Syriza party, Alexis Tsipras blinked. He rejected the will of the people and opted to accept the deal offered by the troika.
Yanis resigned as he could not agree to reject the people’s will, the primacy of the people. Nearly a third of Syriza MPs refused to back Tsipras, triggering the 5th election in 6 years. Syriza won the election, which Tsipras considered as a mandate to reject the referendum vote and accept conditions laid down by the EU.
A few passages from the book are so memorable that they stick in my mind till now. Christine Lagarde head of IMF at the time admitted privately to Yanis that the deal was not viable. Still, they had too much politically invested, and it was too late to back down. As ‘adults in the room’ they had to go ahead with the deal, hence the title of the book.
Greece would be in ‘debtors prison’ for a very long time. The troika was pushing for a fire sale of Greek government assets, at a time where the market was at it’s lowest ebb. At one point they were insisting that even the Parthenon be on the block! Suicides by Greek pensioners, whose pensions were cut by 30% or more. Remarks by Larry Sommers to Yanis, ‘You need to be an insider to get a deal. If you are an insider, you cannot criticize other insiders’, effectively saying criticism of those in power meant shutting off the possibility of a deal.
German Finance Minister Wolfgang Schauble ‘we cannot negotiate a deal just because there is a new government’. A government of an EU nation elected with a mandate from their people to renegotiate terms of an agreement had no right to do so. Yanis expected negotiations with the EU to be tough and challenging; but most disheartening was the lack of support from his party. Especially the Prime Minister, Deputy PM and people he considered close friends.
Lack of support from American President Barack Obama, whose words turned out to be empty. The only American politician to support him was Bernie Sanders, an obscure senator from Vermont at the time. Writing to Christine Lagarde that American funding of EU shouldn’t inflict more pain on the Greek people, threatening to block funding.
The book is a blistering criticism of EU, IMF and ECB, prominent figures in those establishments and their approach towards economically less affluent countries like Greece and Spain in a crisis. The Greek economy shrank by 30%; a result worse than the US economy at the height of the Great Depression. The unemployment rate reached 26% (youth unemployment rate of 50%) and is still around 15%, ten years on from the crisis. Economic targets proved to be unrealistic, debt repayments which were supposed to end by 2040, look unlikely. A recent proposal by the IMF aims to end repayments by 2080! Greece is in ‘Debtors Prison’, and it appears for a very long time.
EU approach to economic crisis now caused by COVID19 appears just as ineffectual. Funding released is far less than required, with some commentators casting doubts whether EU itself will survive.