20150629 Greece – as banks close for a week, it’s déjà vu writ large.

We’ve been here before and if it wasn’t so serious, at least part of it would be funny.

Instead, MLROs across Europe have a nightmare in the making.

Greece was instrumental in the crisis that brought Cyprus to its knees. Greece doesn’t like Cyprus much. There’s a northern, Turkish, part that it all but refuses to acknowledge because it was taken in a military coup in the mid 1960s. The south is much closer to Greece – in all senses of the word.

When the global financial crisis that was created by dangerous and irresponsible lending by US financial institutions in their domestic housing market and the failure of the US Federal Reserve to control the growth of high-risk lending (I have to keep reminding readers of this because the focus repeatedly and distractingly shifts to the investment banks who exported what was, until then, a domestic problem, insofar as anything capable of massively undermining the US economy can be regarded as domestic) Cyprus was badly hit. Its banks were poorly capitalised and the money in the banks was foreign money – so foreign that much of it was not even EU money.

Cyprus took rapid and – some felt – hostile action. To prevent runs on the banks, it closed bank branches and froze bank accounts, allowed only very small withdrawals – sufficient to cover living expenses – and then only from ATMs on the Island. The Russians had a hissy fit. It was their money.

They turned to Greece and tried to get Greece to put diplomatic pressure on Cyprus to let them have their money back. Cyprus told Greece, and through it the Russians, that it would manage its economy in its own interest. It did relent and allow some expatriation of funds – but only within certain, clearly defined, limits.

Cyprus asked Greece for help: Greece said no – go to the European Central Bank. And Cyprus, with help from the European Central Bank, stayed in the Euro, turned its banks around and while it remains a fragile economy, it is at least not so high risk.

Across the water, Greece has not fared so well. It has been playing a dangerous game with international finance for far too long. Its tax base has long been bottom-heavy with a large slice of its vast shipping industry being tax exempt while – as a strategic industry – receiving grants and soft loans. Several years ago, a report was published alleging that 60% of Greece’s GDP operated in the black economy – and therefore paid no tax.

Government spending was directed towards a continuing increase in the size of the civil service and increases in pay – while failing to take proper care of emergency and security services. The government was playing chicken with special interest groups, playing one part of society off against another, using increases for some to imply that similar benefits were on the way for others.

The thing about chickens is that they come home to roost and in Greece’s case, they all came home together.

While in other countries, austerity meant cutting back on non-essential services, in Greece’s case, austerity meant reducing the pay and pensions of the civil service. In the whole history of the world, nothing good has ever come of it when politicians and civil servants butt heads. The reason is simple: the authority lies in the hands of politicians but the power lies in the civil service and its derivative powerhouse, the civil service unions.

The moment Greece’s politicians began to reign in the civil service, to talk about taxing exempt industries (the rich) and enforcing tax laws (the purported poor and the genuine poor, of which Greece has many in its regions) it was doomed.

External financiers, that is the IMF, the ECB, the EU all applied conditions before they would provide aid. The principle conditions were. reign in civil service costs, tax exempt industries and start effective tax enforcement. The government was suddenly a target – bizarrely, most of the noise came from the left. They were joined by nationalistic voices claiming that the external financiers were trying to tell Greece to change its way of life. The wealthy stirred it up behind the scenes, making it clear that any hope of party funding could be kissed goodbye if their sweetheart deals of taking state money while contributing no taxes on profits was hobbled.

Bobbing and Weaving

As it became increasingly obvious that Greece would

a) not meet its “austerity” targets and

b) default on its repayments,

the government began to bob and weave, more like a cork on a stormy sea than a boxing contender.

To keep protestors off the streets, it said that austerity had gone far enough and that Greece would meet its obligations but would miss payment deadlines; to keep the EU off-balance, Greece held high-level discussions with Russia (ships, oil and money are common interests) and did nothing to quell speculation that it was seeking financial aid from Russia so as to avoid the EU’s actions.

All the while, the clock ticked towards default and all the while Greek politicians held up their hands – literally held up their hands – and said that they would continue to do things their way.

The foreign financiers see this as passive resistance. The amount of money that was not paid yesterday (despite it being Sunday) is actually tiny: it’s only about euro1,500 million. But much bigger debts fall due within the next few months. Yet the amount of money flowing into Greece’s coffers remains far below what is needed – and it continues to spend at a rate which is little changed.

While there are those that feel sorry for Greece, the fact is that it caused its own financial disaster. It had teetered on the brink of economic collapse for years. The global financial crisis was simply the last straw. Just as it was in Cyprus which was having its own recession before the crisis, and was kept afloat, largely, by Russian aid, investment and travellers visiting their money.

Greece’s precarious finances have always threatened the Eurozone – in fact, the benefits to Greece are access to cheap capital and the ability to provide expat labour who could send money home. Good idea except the Greeks won’t travel to work as plumbers, shop workers or roadsweepers and send money home, unlike Poles and some other Eastern Europeans. And why would they? They enjoy one of Europe’s most generous pension schemes (while we in the UK are told our pensions are being postponed just as companies are rejecting the notion of engaging experienced staff), the benefits system is .. the word generous is a gross understatement. In addition, in recent years it has been found that several hundred thousand benefits claimants were fraudulent – or dead.

There have been big changes to entitlements – for example, unemployment benefits are payable only after two years qualifying employment – and payment into the relevant schemes. The new system also covers part time workers – benefits are capped at 450 days over a rolling four year period. This has yet to work its way through the system.

For information on the reforms, see http://www.oecd-ilibrary.org/governance/greece-reform-of-social-welfare-…

The closing of banks for a week starting today (29 June, 2015) is a measure to promote calm and prevent a run on the banks. However, many customers have already withdrawn moneys, fearing the imposition of a “levy” similar to that proposed for Cyprus under which deposits above euro100,000 would be, in effect, confiscated and used to support the public purse.

The immediate effect of the failure yesterday is a significant fall in the value of the Euro in Asian markets this morning, which follows on from a fall in the US on Friday. There were falls in Asian stock markets on Friday with some analysts saying that the uncertainty over the Greek position was to blame.

There are only two certainties: Greece is not going to meet its payment obligations and it cannot pay its day to day bills unless it gets money from somewhere else.

Premature fear of ejection

Talk of Greece being forced out of the Euro is premature. The EU is far too ego driven to allow a major economy, even one that is an recidivist basket case, to be seen to fail.

While the EU might or might not come up with more money it will keep Greece in by fudging the figures. It’s done it before, to bring in countries that did not meet the entry criteria. And while it will wring its hands, the EU will come up with some money or, at least, an excuse for accepting delay.

There isn’t really a crisis at all, other than a man-made one and man-made crises can be resolved with pragmatism. What cannot be easily resolved is the simple fact that the EU is not a homogenised union. There are huge cultural differences. The Greek social security / pensions situation is not, per capita, much more lavish than those in Scandinavia. The difference is that Scandinavians are charged much higher taxes – and they pay them. Greece more or less worked as an isolated entity. Where it could not function was as part of a wider economic group.

It worked because of an informal socialism – everyone had their noses in the trough but no one paid enough taxes. Deficits were acceptable because one loan could always be paid off with another. Too many Greeks see the EU as a bigger trough to which they do not need to contribute.

The rest of the EU says “our trough, our rules.”

The Greek Government cannot do what it needs to do without risking civil unrest and, potentially, a forceful overthrow, which would be the ultimate irony in the seat of democracy.

But they’ve had it before – from 1967 to 1974. Then it was instigated to fend off the forces of communism and other hard left groups – and to prevent spreading trouble when Turkey took possession of Northern Cyprus.

Now, an Egypt-style takeover might be the only hope for containing widespread violence in the streets. This is something the EU fully understands – and wants to avoid at all costs.

So no matter how hard the German-led criticisms of Greece, the economic crisis will not go loud, because to do so would be to cause far more trouble within the EU itself.

However, the constant briefing against Greece and the vast amount of media coverage has its own effect. We can expect to see huge outflows – through informal channels or simply by people moving cash around the Schengen area – of money from Greece. Some of this will be moneys lawfully obtained and removed from banks due to financial concerns. Some will be businesses saying “a Euro account is a Euro account – it doesn’t have to be in Greece” and some will be proceeds of a wide range of criminal proceeds from benefits fraud to tax evasion. This, then, is where the issue arises for MLROs.

The due diligence nightmare has just begun.

Note: FYI: when the Cyprus situation was unfolding, World Money Laundering Report published a special issue. Read about it here: WMLR Special – Cyprus. This report is currently available for just USD20

© 2015 Nigel Morris-Cotterill
All rights reserved.

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