Greece and Euroland’s Crumbling McMansion of Debt
All the gimmicks lenders press on borrowers to maintain the artifice that the loan is being serviced are financial frauds.
Sometimes the best way to summarize a complex situation is with an analogy. The Greek debt crisis, for example, is very much like the subprime mortgage crisis of 2007-08.
As you might recall, service workers earning $25,000 annually got $500,000 mortgages to buy McMansions in subprime’s go-go days. The applicant fudged a bit here and there on income and creditworthiness, and lenders reaping huge profits from originating and selling mortgages were delighted to ignore prudent underwriting standards and stamp “low-risk” on the mortgage because it was quickly sold to credulous investors.
The bank made its money in transaction and origination fees, and passed the risk of default on to investors who accepted the fraud that the loan was low-risk.
The loan was fundamentally imprudent and risky because the borrower was not qualified for a loan of such magnitude. But since the risk was distributed to others, the banks ignored the 100% probability of eventual default and skimmed the profits upfront.
Greece was the subprime borrower, and its membership in the euro gave the banks permission to enter the credit rating of Germany on Greece’s loan application. Though anyone with the slightest knowledge of Greece’s economy knew it did not qualify for loans of such magnitude, lenders were happy to offer the loans at interest rates close to those of Greece’s northern neighbors, and then sell them as low-risk sovereign debtinvestments.
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