No Longer Quiet on the Eastern Front (Part 1)
View on Acropolis, Athens, Greece

In the first of a three-part series, Kevin Virgil reviews the ongoing economic standoff in Greece and the Ukrainian civil war, and how these events are converging to launch what will be known as the Second Cold War.



Europe – or at least the European Union – is facing enormous challenges these days. Greece threatens to become the union’s first failed state, potentially acting as the first domino that could topple many of its neighbors.  Further to the East, Ukraine has been torn apart by pro-Russian separatists and a bloody civil war is now raging.

I’ve gained a relatively unique perspective on these events because I have lived in both Athens and Moscow within the past ten years.  I can’t claim to be a renowned expert on the culture of either country, but I’ve seen enough to understand the cultural and political similarities.  Much attention is now being paid to Greece’s emerging status as an important pawn in the West-vs-Russia struggle, and how Greece can manipulate the voting process for further anti-Putin sanctions as a negotiating tactic.  Everyone is talking about what Greece stands to lose if they leave the Euro.  But I don’t think sufficient focus has been made toward what they can gain by tilting toward the Russian sphere of influence, or how much their negotiations are influenced by historical experience.  I am of the opinion that Ukraine is the opening skirmish of what will eventually be known as the Second Cold War, and that Greece is about to become an even more important place on the global chessboard.

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Last week I sat down for lunch with some private bankers from a large American firm.  The conversation inevitably turned to Greece, and my dining partners effectively shrugged off the consequences of a ‘Grexit’, with something to the effect of “it’s a country that is 0.30% of global GDP – the world will barely notice the emergence of another economic basket case.”  This was a smart and well-informed group, however I think they’re giving short shrift to the Greek debt standoff because the worst-case scenario is too troubling.

If we observe geopolitics as a series of discrete and unconnected events, then it’s easy to adopt this approach – but we should know by now that this is not how geopolitics work.  The world is an insanely complicated place, and seemingly trivial actions always have third- and fourth-order consequences that we could never fathom when they occur.  What about the €315 billion in Greek sovereign debt that is now held by the European Central Bank (ECB) and European Financial Stabilization Facility (EFSF), among others? If that is written off or restructured, what expectations will arise in Rome and Madrid?  A major writedown could be the domino that tips Europe back into chaos that not even Mario Draghi can resolve.  We continue to price 10Y Italian and Spanish bonds at a discount to those from Hong Kong and Singapore – even though their debt ratios are approaching levels where full repayment is impossible – because, hey, it’s Europe after all, and we assume that the central bankers and finance ministers will ultimately do what it takes to maintain order and calm.  But what happens when a proper rabble-rouser like Alexis Tsipras comes into power — the most left-wing head of state that Europe has seen in a generation?

When I moved to Athens in the summer of 2013 I heard a lot about how the ongoing austerity measures had pushed most Greeks into abject poverty  I read stories like this one in the New York Times that reported how Athenians were furiously chopping down trees in the city’s parks for firewood.  This turned out to be complete nonsense, but it’s certainly true that the average Greek is much more morose, bitter and downtrodden than when I first traveled there in 2007.  The city is much dirtier too; I struggled to find a surface in the city that had been unmarked by graffiti, like New York in the 1980s.

As is the case in most countries I visit, my best source of local knowledge is with street-level service employees.  You will learn more about a country’s consumer confidence level from 20 minutes with a jaded taxi driver than you ever will from the local state-sanctioned news outlet.  Last year an Athens cab driver explained Greek populist anger to me perfectly.  “You’re from America,” he said. “Everyone in America is angry with the 1%.  But in America, the 1% at least pay most of the taxes.  Here in Greece, the 1% pay nothing. There are 300 families that control everything, and the rest of us are left with the bill.”  Which is largely true; since 2011 Greeks have gone from paying no taxes to paying absolutely punitive levels of taxes. The country now has a 23% value-added tax.  I looked into the possibility of importing a car while I was there, until I discovered that the import duties would run approximately 125% of the car’s blue-book value.

Given the history of far-left (and far-right) violence in Greece, I’m amazed that the average Athenian is content to spend their days sulking in a Kolonaki sidewalk cafe, and is not throwing Molotov cocktails every night.  Though there is a fair amount of that – as you can see from the below photos that I took in September 2013 when I was unlucky enough to walk into the midst of a 5,000-strong protest against the ultra-nationalist political party Golden Dawn.


Current media coverage is filled with images of German finance minister Wolfgang Schäuble and his hard-line position against Greece – whom the vast majority of Germans consider to be undisciplined tax cheats. Schäuble masterfully plays the role of cantankerous old bank officer — he recently refused to provide Greek finance minister Alexis Varounakis with his personal mobile number.  From the German perspective, Greece is just another bankrupt client of the ECB and needs to be subjected to a rigorous ‘workout agreement’ through years of austerity and pain.


As of this writing it appears that the ECB is going to agree to a six-month extension of its €60 billion borrowing facility to the Greeks — a can-kicking exercise if there ever was one.  This all seems perfectly reasonable until you realize that there are two reasons that Greece’s debts will never be repaid.

Here is reason number one — a quick overview of today’s Greek economy, courtesy of the OECD:

Population: 11.1 million

2013 GDP: US$ 242 billion (year-on-year change of -3.7%)

2013 GDP per capita: US$ 21,800 (year-on-year change of -10%)

Unemployment rate: 26%

Government debt: 175% (as of 2013)

Household debt: 110% of disposable income

Even though the maturity on Greece’s debt has been pushed as far out as credibility will allow – with durations over twice as long as fellow debtor nations Italy and Spain – its nominal interest payments (note this does not include pay-down of principal) are over 4% of GDP.  This is a country where (a) government spending is nearly 60% of GDP; (b) GDP has contracted every year since 2008; and (c) consumer confidence has been negative since statistics were first recorded.

The fundamental numbers of Greece’s debt burden are bad enough.  However the second, and in my opinion primary, reason that the ECB — and particularly Germany — stand absolutely no chance of success with their hardball tactics is because the Greeks have long memories, and they have been on the wrong side of history for the past 70 years.  There is one particular story that stands out, which you will almost certainly never read about in a Western (and especially a British) textbook.


You already know the man on the left; that’s new Greek Prime Minister Alexis Tsipras. Let me introduce you to the old guy on the right — the 92-year-old who looks like he can still dish out a beating if he has to-Meet Manolis Glezos, a literal living legend in modern Greek history.

Glezos is a classic fire-breathing leftist, and now a member of the European parliament who recently won his seat with the highest margin of any candidate elected from Greece.  He first achieved the status of national hero in May 1941 when the German army rolled into Athens.  Glezos risked execution to climb onto the Acropolis in the dark of night and tear down the Nazi flag that had been placed atop the monument, inspiring millions and motivating the Greek resistance for years to come.  Over the next few years he was captured three times and sentenced to death on three occasions.  He escaped death – many, including his brother, faced German firing squads.

The Nazi occupation of Greece, and the atrocities that were committed by the invading Germans, are well-known; I visited several war memorials while traveling through Crete a few years ago and there were plenty of withered old Greeks who regaled me with stories of how the Nazis would summarily execute resistors in front of their villagers and families, often in the most gruesome ways.  The Germans also forced the National Bank of Greece to make a “loan” of 476 million Reichsmarks to fund their occupation – which has never been repaid.  When adjusted for inflation this amount equals approximately €11 billion.  The Germans, and particularly Herr Schäuble, consider this matter to be closed and outside the scope of current negotiations.  It’s safe to say that the Greeks share a completely different opinion, as several Greek diplomats, businessmen (and yes, taxi drivers) have explained to me on numerous occasions.  I’m not taking sides as to the validity of this argument, but it’s important to understand why there is such populist anger in Greece right now against perceptions of German coercion.

The Nazi occupation was bad enough; however while most of Europe got back to rebuilding after the German surrender in 1945, the trouble for Greece was just beginning.  Most Westerners know little or nothing about the Greek civil war of 1946-1949, and this is no accident.  It remains a stain on the conscience of not just the Germans, but the British and even the American governments.

Near the end of World War II, when momentum had swung firmly into the Allies’ favor, Churchill became concerned with the strength of Communist influence within the Greek resistance that had been conducting guerrilla warfare against the Nazis since the 1941 invasion.  British troops had fought alongside left-wing partisans because they were the natural ally – not just against the Germans, but Greek collaborators who supported and fought alongside the German occupiers.  But when victory against the Third Reich became apparent, Churchill suddenly switched sides and ordered the resistance to disarm.

A British occupying force arrived in Athens in December 1944 to ensure that the left-wing resistance would not take control of the city.  Huge protests ensued and on 3 December British troops opened fire on civilians who supported their former allies, killing 28.  This day is widely remembered in Greece as a turning point in their civil war, in which thousands more died over the next few years – many at prison camps that were supervised and staffed by the British.  Glezos recalls that the British even set up sniper positions on the Acropolis – an affront that not even the Germans committed. The bitterness created in that war is widely credited with leading to the creation of ultra-nationalist movements like Golden Dawn that still plague Greece today.

Glezos has been calling for German war reparations for decades now and has once again captured the hearts of the Greek people since their financial crisis began.  Syriza, and PM Tsipras, have very astutely embraced him and placed him in the heart of the European Parliament where perhaps only Nigel Farage of the UK Independence Party makes for more uncomfortable company amongst the Euro-crats.  The past six years of austerity have humiliated the Greeks and set the conditions for Syriza to come to power.  In a way this showdown that we are now seeing is a consequence of events that happened over 70 years ago.

There is no doubt that Greece will suffer if it chooses (or is forced) to leave the EU. The abandonment of the Euro would result in issuance of some form of ’new drachma’, which would almost certainly be printed at high rates of speed as the Greeks seek to devalue their own currency (Hellenic QE!) and deflate their debt. This, of course, would create the uncivilized realization amongst southern Europe that being a sovereign currency issuer has its benefits – an observation that Brussels very much wants to suppress.

Meanwhile, however, high inflation and even hyperinflation would devastate any savers left in the country while the government worked to minimize its burdens. Insolvency of the Greek banks and a likely ‘bail-in’, Cyprus-style, would be almost guaranteed.  To be fair, if you still hold deposits in a Greek bank amidst all of the ongoing uncertainty then you’re an idiot and you deserve whatever happens to you.  The lessons learned in Cyprus will be repeated for those who failed to pay attention last time.

I should point out that the Greeks are far from blameless in their current predicament. If you want to understand the extent to which every single Greek – from their head of state down to dear old Mrs Papadopoulos down the street – willfully took part in the systemic fleecing of the Euro economy through tax evasion, financial chicanery and outright fraud, then I can’t recommend a better summary than what you’ll find in Michael Lewis’ excellent book Boomerang. Ken Lay, the disgraced and deceased CEO of Enron, is probably looking up from whichever corner of hell he currently is, and burning (heh) with envy at the sheer magnitude of the scam that has been perpetuated since Greece entered the Eurozone in 2001.

Nor am I naive enough to think that Syriza’s accession to power will end up being a positive for Greece.  In time, Tsipras is more likely to resemble Hugo Chavez than Lech Walesa.  This is a neo-Marxist party and they won not because of their fresh economic ideas, but because they are willing to extend a gigantic middle finger toward Berlin, Brussels and Frankfurt.  I see no catalysts that will spark the Greek economy in the near-term, and Syriza has no plan to create growth beyond its current intent to write down (or write off) what it owes to the European troika.  In short, they will need to find another benefactor.

Conveniently, this drama seems to be gaining momentum just as another conflict is rising to the northeast, where the Russian government is staring down the West and searching for leverage in what will soon become known as the Second Cold War.  There is no doubt that Vladimir Putin is watching events in Greece very closely.

The rise of Syriza is the next step in a long-term tilt toward wider support of socialism and hostility toward Brussels, and Europe in general.  Will Greece leave the Euro?  My opinion is absolutely, definitely yes.  As with stock-picking, it’s incredibly difficult to get the timing right; I will simply say that if Greece is still in the Eurozone in two years’ time then I will be highly surprised.

I’m going to split this article into three parts.  Tune in next time when we dig deeper into the history of Ukraine, and particularly Donetsk and Crimea, to understand why the pro-Western government in Kiev is doomed to failure.  I’ll then wrap it up with a third part that explores what I consider to be a possible convergence of these two events.

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