Israel's Greek Crisis

You can't save a company, or a nation, by eternally recycling its debt.

History is again being rewritten. Six months ago, as the global banking system trembled on the brink of the abyss, the world's bankers, economists and politicians had to rewrite the history of the preceding decade. The "golden era" of shares, and of bankers and CEOs, was suddenly revealed as fool's gold. "Value creation" morphed into "value transfers," from the many to the few. Alan Greenspan, the maestro of a 15-year era of prosperity, was forced to admit before the U.S. Congress that he had been wrong to think that the markets could regulate themselves.

Yet one year after the financial system's collapse, it seemed that the financial community could set aside its bitter memories of 2008-2009. Central banks and governments printed trillions of dollars to stabilize their financial systems, and the world's economies began to gradually recover. And then came last week, when bankers, economists and politicians realized that the meltdown of 2008 wasn't just a cringe-inducing memory. It's still here.

The plagues of over-borrowing, asset inflation and cover-ups that raged in the private financing sector have infected the public systems. The cash injections, the debts and the deficits that the governments had to undertaken in order to save the financial system and stimulate their economies are extracting a very high price.

As last week began, the financial markets were applauding the rescue plan that the European Union sewed up. The bloc's leaders pledged to inject up to a trillion dollars into the system if the Greek crisis spread to the weaker bloc economies, such as Spain, Portugal and Ireland. At first investors breathed a sigh of relief, but then they remembered a certain fundamental rule of economics: You can't save a failing firm by eternally rolling over its debts, and you can't save a sick economy by refinancing its debt. The rescue program that was cobbled together Sunday of last week did not solve a single one of Greece's problems: All it did was defer them.


2 Just another crisis? Two months ago, when Greek government bonds began to collapse, I flew to Athens for a quick visit. The businessmen and politicians and reporters I met with were surprised at my interest in the Greek economy. When I asked if they didn't think that the Greek crisis could trigger another global meltdown because of the huge debts of the government and banks to foreign investors, they smiled in pity, shrugged their shoulders and said that Greece always has "crises," one shouldn't take the rhetoric of the headlines too seriously.

When I asked Spain's ambassador to Athens if Madrid would be next in line, he laughed and said that Spain's national debt was low, its economy was robust, and that it's only getting bad press because of the high unemployment rate.

The participants at an economic conference that I attended, "Greece at the Crossroads: Will Reforms Bring Competitiveness and Investments?," included the country's finance minister and two of his predecessors, as well as many politicians, bankers and businessmen. I found the conference, which was organized by the International Herald Tribune and billed as an "investment summit," fascinating. Neither the local nor the international press concurred, apparently, as it received little coverage. In any case, the mood there was relaxed.

After my return, on March 24, I wrote: "The crisis in Greece may prove to be just a small example, a prologue to much worse trouble in the other euro-bloc nations and in the monetary union itself. The great difficulty in finding a consensus solution to the Greek liquidity crisis and the gaps in competitive status between the EU members create greater than ever doubt about the EU's ability to continue functioning as is.

"It isn't only the euro bloc, of course. The entire global village stands before harsh conflicts and hard tests. It won't be just unions against taxpayers in countries such as Greece, or battles between bankers and taxpayers in countries like Britain, or belligerent statements about exchange rate policies in superpowers such as the United States or China," I wrote: Interests will collide broadly. "The precipitous drop in the price of Greek bonds could trigger a crisis in Spain or hasten ruthless cutbacks in Britain. Elections in Germany could force countries like Greece into a frightening corner" - as did happen. "The gigantic debts of countries such as Japan, which have been largely ignored by the markets so far, could suddenly come to the fore of debate."

In Athens, I wrote, there was confidence that a financial and fiscal solution would be found, because a piddling little problem like Greece wouldn't be allowed to develop into a bigger problem. "But bond traders on Wall Street, in London and Tokyo know that if it isn't Greece, it could be another country. The financial crisis of 2008 of the banks and real estate isn't over. It could return in an even more frightening format, because this time the origin of the earthquake won't be the banks, but the governments that saved them."


What the visit to Athens taught me was less about the depth of Greece's political problems, or the vise-like grip of the country's labor unions, or corruption in its business sector. It was how quickly markets, economies and entire nations can spiral downward, yet how complacent the players can be, from bankers to investors, confident that they know what they're doing.

3 The frugal Israeli: As Greece spirals down and the EU catches its disease, Israel's economy yet again stands out in its robustness. But instead of merely applauding, one should understand what underlies its strength.

Stanley Fischer, as the governor of the Bank of Israel who steered the country's economy through the crisis in the United States, and Benjamin Netanyahu, who navigated the economy from 2003 to 2005 as finance minister, deserve great credit for Israel's current economic strength.

But among all the reasons for that strength, I'd actually like to begin with the point that eight years ago, Israel was Greece.

Since financial disaster was averted at the last moment, and in any event was diluted by dramatic events related to the country's security, most people have forgotten that in late 2002 Israel's economy was where Greece's is today. The effects of a bad economic policy in 2000-2002, the sudden and powerful eruption of the second intifada and the end of the Internet and technology bubbles combined to cause intense recession and the loss of faith among investors in Jerusalem's economic policy.

At the end of 2002, the budget deficit neared 10%. Israeli government bonds dived and returns rose to 10% and more, which is where Athens' bonds are today.

The financial crisis saved Israel. The government was forced to institute painful welfare and pension reforms as well as cutbacks in the public sector. Together with a $10 billion loan guarantee package from Washington and a drop in the risk premium of the Middle East in general after America's invasion of Iraq, these reforms laid the foundations for three years of conservative economic management.

Israel's "Greek crisis" of 2002 stopped Israel's leaders and businessmen from joining the borrowing extravaganza that spread a few years later throughout the United States and Europe. The scars of the local crisis had not yet healed, and Israel reached 2008, when the world economy began to implode, with a balance sheet that was stronger than ever.

The Israeli character also played a role in how we weathered the global storm. The conventional wisdom is that we are all in perpetual overdraft, but in fact the personal savings rate of Israeli households is among the highest in the world. German Chancellor Angela Merkel chided that the Greeks, Spanish and Italians should learn from the German hausfrau, who knows better than to spend more than she has coming in. Actually, to borrow her metaphor, the typical Israeli housewife is even more frugal than her German counterpart. The ratio of debt to disposable income in Israeli households is 60%, compared with 72% in Germany, 110% in the United States and 112% in Britain (although in Israel, uniquely, "disposable income" includes corporate profits, which skews the figures a tad ).


Last Monday Israel was admitted into the OECD, the club of the world's developed economies. Our leaders beamed and analysts predicted an influx of foreign investors.

The analysts need to get with the program. During the past decade Israel had a balance of payments surplus, negative external debt and huge foreign currency reserves. We had no need whatsoever for foreign investment. In fact, we should be accepting foreign investors despite their being foreign investors, not because of it.

The only economic reason to encourage foreign investment is when it comes with special knowledge, or connections with the global economy, on the part of the investor. We don't need his money.

The main benefit of joining the OECD is that from now on, when we get up in the morning and look in the mirror, we can see exactly how we look from an international perspective. On the financial side we should look terrific, given the crisis in Europe. But on the social side, we look pretty ugly. We are at the bottom of the ranking in terms of poverty, inequality and social services. It will do us good to face that mirror every morning. As Dr. Phil likes to say, you can't change what you don't acknowledge.