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Tuesday, May 17, 2011

Greek lessons

Greece is a poor wretch economically these days. Capital flight; workers going on strike across the country; its banking system losing liquidity; credit ratings going down—no luck.

I think, if we analyze the reasons why this traditionally affluent country has found itself in a predicament like this, we will learn some valuable lessons, both macro- and microeconomic.

Lesson #1: as the saying goes, if you hang a rifle on a wall, be prepared for an eventual shot. If an economy bears a burdening ‘rifle’ of systemic problems, including lack of diversification and multibillion dollar image projects like the Athens Olympics a country can’t capitalize on as there’s no sane strategy, etc., the problems will erupt one day.

Lesson #2: spending cuts (government spending cuts in the Greek case) are hardly a focus of counter-crisis policy. This is relevant for companies as well as countries.

Lesson #3: be honest. The Greeks once chose to falsify its stats to qualify for the longed-for Euro zone; now they have to pay the price as national currency devaluation—an effective tool to combat debt crisis—is beyond their reach.

Last but not the least: something has to be implemented to keep in check rating agencies that exacerbate the calamity. For example, S&P has recently degraded Greece’s sovereign rating further—a fourth straight such move in just one year, this time by two grades. This is a potential threat to not only countries but companies as well. People pay for a service that undermines their future—isn’t it strange?

I myself run a small rating agency, and we keep emphasizing that no matter what a rating level, the very fact of a company’s willingness to be scrutinized by external experts adds to more credibility—in contrast to companies that opt not to do so. And this works; in a contemporary business, whichever it is, upholding the interests of your clients is key.

A bit more on honesty and confidence. In my perception, when Greece was faking its data its creditworthiness was much lower than it is today. No wonder to me: the Latin word “credit” means “trust.”