NEW YORK (BBH FX Strategy) -- Greece's economic mess has understandably dominated investors' concerns. News from the European Central Bank earlier Wednesday that Greek bank deposits fell 2.7% in February and now stand at the lowest level since October 2006 reflects the ongoing bank run. The fact that Greece's new 10-year bond is yielding around 20% reflects ongoing concerns that the Private Sector Initiative has not put closure on this chapter of Greece's tragedy.The International Monetary Fund's mission to Greece warns that the pace of reforms remains insufficient and it highlighted the efforts to fight tax evasion to underscore its conclusion that "the rescue has a high risk of going awry."
Perhaps it is more comprehensible if we looked at it from another angle. Consider that Greece is the world's third largest arms importer after the behemoths of China and India. The arms imports contribute to the trade and current account deficits. This leads us to look at where Greece is buying its weapons from. In the five years to 2010, Greece was Germany's number one customer for munitions, accounting for 15% of Germany's arms sales. Greece is also France's third largest customer, though the largest in Europe. Incidentally, but not unrelated, Portugal is Germany's second largest arms purchaser. This may help understand why the creditor nations have been less insistent on Greece cutting back more on arms spending. In 2010, the last year data is available, Greece actually increased defense spending by about 900 million euros as it cut social spending by 1.8 billion euros. It also reinforces the sense, which we suggested before, that the creditor nations were essentially engaged in producer financing. Loans from countries such as Germany and France were used to buy a significant part to buy their goods. While we are all aware of how the debtor countries, like Greece, need to make more adjustments, there continues to be a reluctance to consider the implications for creditor countries. Germany appears to have redirected some of its exports away from the periphery in Europe toward Asia, including China. Other creditors like France and the Netherlands seems somewhat less successful.
Among the strategic assets Greece has are its ports and infrastructure. China has recently secured a 35-year concession to operate the Greek port of Piraeus. Ian Bremmer, the head of the Eurasia Group, recently noted that down the road, Russia might be interested in securing basing rights there, especially if its current access or ability to project power in the Mediterranean through Syria, is at risk. Separately, Gazprom is reportedly interested in the privatization of Greece's gas company Depa and electric grid operator Desfa. By simply looking at the ongoing run on Greek banks in the form of falling deposits, or its slow pace of structural reforms, or Target 2 imbalances, one misses some of the more important linkages between Greece and the eurozone creditor nations as well as its significant geostrategic assets.