Greece: How the EU Got it Wrong

By Karen Rogers - June 11, 2012 | Tickers: BAC, C, JPM | 0 Comments

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There’s a showdown set for June 17, 2012 in Athens.  On one side is the European Union (EU), sixteen members strong and holding a 130 billion euro bailout package. On the other side is Greece, desperate for cash but unable to adhere to the bailout’s austerity terms and for good reason:  implementing harsh austerity measures on an already weak economy doesn’t work.

It’s a showdown for U.S. and European banks, too, banks that have massive Greek debt on their books.  How much debt are the banks holding?  According to the Bank for International Settlements, IMF, World Bank, Greece owes American banks approximately 4.46 billion dollars.  From documents filed with the SEC, Bank of America (NYSE: BAC) holds $477 million of that debt.  Citibank (NYSE: C) holds both Greek and Spanish debt but is unclear as to the dollar amount.  Jamie Diamond of JP Morgan Chase (NYSE: JPM) recently stated that his bank’s exposure was nearly zero, but mind you this comes from a President and CEO who wasn’t even aware his London office was trading in CDOs that resulted in a $3+ billion dollar loss a few weeks ago.

European banks have tremendous exposure to Greek debt and are facing a credit rating downgrade in advance of a possible Greek default.  Moody’s recently placed the three main French banks, including Credit Agricole SA, on notice that their long-term debt may be downgraded in the very near future.

So what can EU and U.S. banks do to prevent losing awesome amounts of money and possibly triggering a worldwide recession?  The bailout and austerity measures missed the mark by addressing the symptoms of the problem and not the cause.  The unemployment rate spiked to 21.9% this past March and therein lays the crux of the problem.  If the Greek government, EU and U.S. banks are serious about saving the country and themselves, then solving the high unemployment problem must be immediately addressed.

But how?

The first step is to assist the Greek government in creating more jobs that cover a wide range of fields and industries, especially those that are in demand.  Government must take the lead and make it easy for small businesses to start up by eliminating red tape and offering low interest business development loans.  In other words make it worthwhile and easy for employers to hire new workers.

Next is expanding the educational and training opportunities to meet employer needs. EU and U.S. banks can offer debt forgiveness incentives that the Greek government can pass on in the form of tax breaks to Greek employers providing apprenticeship training programs.  Low interest educational loans and grants can help the unemployed take advantage of educational programs.  The government can determine which industries face employee shortfalls and work with those businesses to develop programs designed to attract potential employees.

Finally, the IMF, EU banks and U.S. banks must work with the Greek government to restructure this debt if these lenders ever want to be repaid. The EU and U.S. banks, joined by the IMF, must restructure the massive principal and interest payments to give Greece breathing room to tackle their unemployment problem, and the chart below, courtesy of Bloomberg, shows why:

The only way for the banks and the Greeks to survive the crisis is to work together to solve the unemployment problem.  They’re all in it together and the only way they’ll save themselves is to save each other first.     

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