What does Greece have in common with New Jersey?

BY ROY NERSESIAN

COMMENTARY

Let's take what's not in common with New Jersey. First Greece got involved with Goldman Sachs and other top of the line investment banking houses to hide the true nature of its debt through "sophisticated" off-balance sheet financing shenanigans that fooled Enron shareholders and bankrupted the company. For both Greece and Enron, the financial curmudgeons made a lot of money in fees (hence bonuses) leaving others to reap the weeds that they sowed. Now that the financial "hide the debt and go seek if you can find it" has been exposed, Greece's credibility is on the line. New Jersey has not hid its debt from public scrutiny.

Another item not in common with New Jersey is that some financial houses have been foolish enough to issue credit default swaps on Greece's junk bonds. Credit default swaps is like a guarantee, but unlike a traditional guarantee in that there is nothing backing credit default swaps in the form of financial reserves other than the good name of the issuer (this is what brought AIG to its knees). Financial powerhouse players (George Soros and his hedge fund buddies) are shorting credit default swaps on Greek debt and the Euro in hopes of bringing the whole house of cards down for their personal gain. George Soros does not appear interested in shorting New Jersey debt.

Now let's look at the similarities. Both Greece and New Jersey are heavily in debt and are having difficulty attracting new investors. Debt is great when there is a willing buyer. As so many Americans have learned, acquiring debt allows for a higher standard of living. For Greece and New Jersey, this meant that politicians did not have to disappoint their constituencies, thus ensuring their reelection. But there is another side to debt — what if it actually has to be repaid as so many American families discovered when they could no longer borrow against the declining equity in their homes nor sign up for unsolicited credit cards. A whole new dynamic sets in — money has to be set aside to repay debt, which cuts discretionary spending emptying malls and automobile showrooms of customers.

The Greek government, although voted in to support a bloated government and favor union demands, was forced to inaugurate a severe cutback in expenditures in state pensions, government worker salaries and increase revenue by slapping more taxes on cigarettes, alcohol, gems, and VAT (similar to a state sales tax). This reduced the near-term government deficit sufficiently to allow Greece to market bonds for cash to cover the near-term deficit, but this debt was short-term and expensive. The bond issue is merely palliative; a sounder foundation from Greece's perspective is aid from the European Union. Their pleas are falling on deaf ears in Paris and Berlin.

New Jersey government is also weighed down by a humongous pile of debt increasingly difficult to refinance. A large number of state workers and pensioners will take to the streets of Trenton if any threat is made to their livelihood as Governor Corzine learned. The most painless way for the state government to cut expenditures is to focus on state aid to municipalities and schools. This way, shortfalls will end up as property tax increases imposed by municipal and county officials, not by those entrenched in Trenton. As in Greece, a population who sees cuts in pay and increases in taxes is not in a good position to spend their way back to prosperity. Appeals by New Jersey to Washington for a permanent solution will probably receive the same reception as appeals by Greece to the European Union.

This financial quagmire is not over - Italy, Spain, Portugal, Ireland and who knows who else will have to copy Greece just as many states in the U.S. will have to do. There is no way for the economy to improve if state and municipal governments and most of the nation's citizenry are paying off debt. Everyone is going to experience the other side of the debt coin - this can no longer be postponed for another generation. Not even the Federal government can entirely escape putting its fiscal house in order as foreigners demand some semblance of fiscal responsibility to lend U.S. dollars back to the United States. (Interestingly, our friends in OPEC and China are no longer talking about making the Euro an international reserve currency in place of the dollar!) For Greece and other European nations, and for New Jersey and other states, they have to deal with the other side of the debt coin whether they like it or not. As income falls and taxes rise to repay debt and the economy slowly grinds to a halt (the sinking of the Titanic is a good simile), someone is going to seize the opportunity and propose the abrogation of all debt and start over again.

Now that's "Change We Can Believe In" and "Change We Need" all rolled into one!

Roy Nersesian, a resident of Maplewood, teaches at the Leon Hess School of Business at Monmouth University in West Long Branch and also at the Center for Energy and Marine Transportation at Columbia University. He has authored several books, the last on Energy for the 21st Century published by M.E. Sharpe.

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