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Greece: the mouse that roared

In the first of a two-part special on the future of the eurozone, Robert Kyprianou examines whether a run on banks could be around the corner.

 

Working capital shortage

This is what is happening in Greece. Deposits in Greek banks have fallen from €240 billion in 2009 to around €170 billion today. Greece’s economy is collapsing not only because of the lack of competitiveness and bailout funds to pay wages and pensions, but also from a chronic lack of working capital.

The loss of deposits has left the Greek banks on ECB life support. They are awaiting a €48 billion recapitalisation as part of the bailout programme to make up for the losses they suffered on the ill-thought-out PSI 'solution' to the Greek government bond crisis. This recapitalisation is now at risk following the 6 May elections.

And to rub it in, the ECB has stopped providing normal liquidity to Greek banks because of concerns over collateral quality given the outcome of the election. This has forced the local banks to take out Emergency Loan Assistance (ELA) from the Greek central bank estimated at €100 billion.

What ELA means

What difference does it make if the liquidity comes from the Greek central bank or the ECB, you might ask. Liquidity provided directly by the ECB is backed by all members, and the risks shared by all member states. With the ELA, the risks fall fully on the local central bank.

Think about what this says as a statement of confidence by the ECB in your local banks. Think about what this says about the risk of keeping your money in your local bank. No measures – not one – aimed at restoring some hope for the Greek economy or its people will have any chance of succeeding while its banks' balance sheets continue to shrink, and while capital is used up by deposit flight.

This banking squeeze extends beyond Greece. Overnight deposits in Ireland, Portugal and Spain have also declined since mid 2010; Belgium has witnessed deposit flight, especially around the Dexia problems; so too has France. With banks finding it extremely difficult to raise fresh capital, contraction of bank lending and recession follow.

Amazingly, there is little evidence that policymakers in Europe have recognised that the eurozone banking system needs to be rescued first. Instead, a great deal of political energy is now spent in debating growth compacts, or whether to permit a renegotiation of  bailout terms, or whether the austerity chicken comes before the bailout egg.

A squabble over austerity is not the real risk to Greece’s membership of the euro. A bank panic may take this out of the politicians' hands. And the real risk of a Greek exit – forced or voluntary – is not to Greece. It is that deposit flight spreads to other member countries with troubled banks.

Could a run on the banks spread?

It might not even require a Greek exit to trigger this contagion. If the deposit flight in Greece were to turn into a panic run on Greek banks, depositors in other countries that are seen as being at risk might also take flight. It may be a small country, but Greece could well be the mouse that roared.

This is why the anti-bailout rhetoric from the radical left in Greece, the main winners from the election, and the threats from German politicians in response are worrying. If Greek households panic and start shoving cash into mattresses, the 17 June election may prove an irrelevance, and those who think this crisis can be ring fenced may be in for a rude awakening.

To save the euro policymakers need to move to shore up the banking system. This requires recapitalising the banks with public funds and making the ECB play the role of lender of last resort. Then maybe, just maybe, fiscal and structural policies together with infrastructure investing will have a chance of restoring growth and public finance solvency to the troubled periphery of Europe.

But as luck would have it, just when strong political leadership is required to steer Europe through its worst post-war crisis, the political edifice is crumbling.

Read the second part of Robert Kyprianou's eurozone feature tomorrow

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38 comments so far. Why not have your say?

barry slater

May 28, 2012 at 12:28

I liked that.......a good bit of analysis

And unfortunately..............it might be spot on .

barry

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Reader61

May 28, 2012 at 12:56

I liked it too, succinct and to the point, makes the situation very clear. A good dose of common sense.

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Hotrod

May 28, 2012 at 13:17

Rob's pieces are always insightful. He gets above the trees for a better view of the forest.

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P Williams

May 28, 2012 at 13:20

Good synopsis of the problem, well written and unfortuately is probably correct.

Very worrying

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William Phillips

May 28, 2012 at 13:22

The same old combination of Keynesianism and the advocacy of Euro-dictatorship from Kyprianou, Took him longer than usual, but he got there in the end:

"To save the euro policymakers need to move to shore up the banking system. This requires recapitalising the banks with public funds."

We don't want to save the euro, We don't give a stuff about the euro, We're BRITISH,

Too big to fail. Save the banksters' skins first, Use the wealth of countries which have not got into a mess to save crooked institutions in a country which has been a byword for dishonesty and self-indulgence ever since Goldman Sachs finagled it into the EUSSR.

In fact there has been remarkably little panic around banks, in Grexitland or elsewhere, because the public are ahead of the pols. They sense the institutions have already written off the sacred euro and are getting ready for the restoration of national currencies pegged to the prospects of real economic entities, not the rob-Helmut-to-pay-Alexis eurofantasy confederation. The presses are working day and night to welcome back the Deutschemark.

But Rob cannot imagine life without the European Disunion permanently giving his countrymen a standard of living they never earned. So he calls for 'leadership', which being translated means Frau Reichskanzler Merkel telling 27 formerly sovereign nations what to do to 'stimulate' the Eurozone to one more spasm of credit-fuelled growth (i.e. pollution, materialism, imports from Asia, phoney jobs, nest-feathering by the politico-financial axis) before the exhausted, decadent system and the pompous, corrupt federastic tyranny erected on it finally collapse.

Not with my money. Not with my country. And there are strong enough folk memories of Weimar wheelbarrows for the Germans to refuse to be benevolent too,

Don't buy all that last-ditch scaremongering about how if Greece goes down it will take us and America with it. It won't. It's a pimple.

"Oh but we can't let the poor Greeks starve..."

Can't we? Just watch me.

OK then, they can have the overseas aid we finally stopped paying India.

Better off out! Rule Britannia!

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David Harvey

May 28, 2012 at 13:26

I wonder if I will finally be right about austerity. I could never see how it would bring about confidence for growth. We are essentially putting customers out of work. All this about Greek debt seems odd too. I understand their debt to be €350 bn, that being the case, are we making too much noise about it. Here in the UK alone we give that amount away in tax loopholes annually. While impoverishing the majority of people who actually do pay tax, or would if they had a job.

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Jeff of Sidcup

May 28, 2012 at 13:35

How I agree with the last comment, particularly the sentence on the Greeks never having earned the standard of living they have recently enjoyed..They may have been the cradle of democracy, but ,nowadays, the country belongs to the Balkans, not Europe

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Jeff of Sidcup

May 28, 2012 at 13:37

I was, of course referring to William Phillips' comment.

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Clive B

May 28, 2012 at 13:48

The reason the Eurozone countries get nowhere is that everytime they look at it they come to the same two possible outcomes

a) Germany bails out Greece, Spain, Portugal,....OR

b) Greece (and maybe others) leave the Euro

Germany rightly doesn't want to foot the bill for those countries who've been taking the mickey, overpaying themselves.

Greece (and others) is unacceptable because of the "great Eurozone dream"

Doesn't matter how long they delay, it IS going to fall apart.

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Westwinds3

May 28, 2012 at 13:54

I don't think I am convinced by Robert's analysis. If the problem were liquidity, then better emergency funding for banks might well be the answer. But surely the problem is solvency? The loans are already bad. In which case it is pointless buying bad debts with good money. The optimum strategy must be to encourage growth to minimise the losses. Growth depends on the rate of movement of money. Propping up banks seems to me an extremely inefficient way of doing this. Other approaches, paying welfare to people who will have to spend it to survive, infrastructure, even employing tax collectors should be far more efficient.

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Martin Drew

May 28, 2012 at 14:33

The problem with the EU as Westwinds3 says is solvency. Because a few years ago most of northern Europe could afford a not unreasonable welfare system most of the other countries in the EU thought they could afford one too. They couldn't and now most of northern Europe can't either. The only way back to solvency is to cut government expenditure and for northern Europe that is proving quite painful, but for those countries in the EU who couldn't afford it in the first place the cuts are almost unbearable. How they vote when elections come along is a measure of the moral courage and willingness to face the facts of the voters. The French (not for the first time) have failed the test and are demanding that they are entitled to a standard of living for which they have not worked. The Greeks are undecided and may well surprise us by voting to face up to the facts and endure the hardship to make their country solvent (for the first time in its recent history). Looking at the last opinion poll I think the British are more likely to emulate the French, but time will tell.

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David Harvey

May 28, 2012 at 15:26

Martin Drew makes a good point, a good point for not going too far too quickly. Better to come out of the mess steadily than make the masses so angry that they would vote for anyone. I agree that the way people vote could be considered to be in line with their "moral courage" but the people we are talking about are only concerned with where the groceries or heating will come from next week. There is a serious lack of knowledge of what is the "real" reality, as apposed to the reality those who don't see it directly believe it is. As austerity deepens the effect has not been strictly beneficial to the economy, more, it has simply swelled the fortunes of a few in the view of the masses the very people who brought it about. It may be this that is equally unpalatable. If there was some sign that austerity is working for the people but it doesn't seem to be. So why should we expect the masses to vote for what appears to them to be a lame duck?

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Rose G

May 28, 2012 at 15:40

Its not just the banks but politicians who have created the problem - as both sectors earn loads of money if not in bonuses or creative accounting, why not let them shoulder the burden of the problem? Firstly, sack all the politicians, that should save them a penny!

Secondly, get rid of all the banks which cannot exist without government bailout, that should make the banking sector more realistic & competitive.

No point in going to ordinary people & expect them to face the austerity cuts, while both banks & politicians are living the life of Reilly!

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nicholas gold

May 28, 2012 at 15:49

I love the total removal from reality in this commentary. Recapitalize...with what? As for the USA solving its financial, fiscal and economic problems by increasing liquidity, it is another exit from reality. My field is history, not economics. Nonetheless, I can safely assure you that no political entity throughout all recorded history has been able to spend its way to prosperity. Pain is one thing to endure. Total disaster, on the other hand is enduring. As unpalatable as it may seem to some of the "intellectuals", an honest default though sharply painful is more to be preferred than the horrendous financial train wreck that is inevitable if the present policy of "liquidation" is continued.

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Martin Drew

May 28, 2012 at 16:06

No-one argues that the banks weren't irresponsible however they are not solely responsible for this crises. The crises was brought about by governments spending more than they levied in taxes, and they did that because they think that voters will only vote for the party that promises them the most in return for the lowest tax. One of the most dispiriting things I have learnt since this whole crises started was that middle class people earning many thousands a year get child benefits. OK so I am a single man in my late 60's and never needed to learn the complexity of child allowances, but never in a million years did I think my middle class neighbours got them, and are now outraged that they might lose them.

Incidentally memory seems to tell me that after the Franco Prussian war the French had to pay so much in reparation that it was thought it would take 100 years for them to recover their economy but in fact they did it in less than ten years. Nicholas Gold being a historian may be able to give more detail - but it does show that when a country is united and makes the effort amazing things can be achieved in economic recovery terms.

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Robert Kyprianou

May 28, 2012 at 16:38

Westwinds3

You are entirely correct - it is a solvency issue. That is why I argue for public funds to be used to recapitalise the banks.This is where the politicians come in. Liquidity is crucial too and this is where the ECB comes in, making sure that insolvent banks are given the lifeblood of cash while they go through the recapitalisation, maintaining confidence in the banking system.

The example I gave with the US and UK refers to liquidity only - trimming by the editor to crunch down a long article has seen my reference to the critical recapitalisations with public funds that took place in both countries at the same time edited out.

For those who argue that the banks should be left to suffer because of their irresponsible behaviour I make 2 points i) In recpitalisations using public funds the original shareholders lose their shirt and the management is typically booted out (remember Lloyds and RBS) ii) to leave the banks crippled to teach them a lesson is really cutting off your own nose to spite your face. Crippled banks mean a crippled economy which means our pensions suffer, our children suffer, our homes are at risk, our wealth erodes. Suicides are up in Greece as I wrote by 22% - very few of those I suspect were bankers.

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Andrew Diggens

May 28, 2012 at 16:46

The other elephant in the room not mentioned so far is competitiveness. Even if the banks were put on an even keel it would do nothing to solve the fundamental problem of the lack of competitiveness between north and south. A problem made worse by the by the inability of the effected countries to devalue or print money, the normal recipe for regaining competitiveness.

In addition we have the destructive effects of the 'one size fits all interest rate' Its worth noting that Spain actually produced a budget surplus for much of the time leading of to the crash and was praised by the EU for doing so.

What undid them was the easy availability of credit encouraged by low interest rates not appropriate for a developing economy. Their banks went on a crazy lending spree and the Spanish, having lost the ability to set their own interest rates, were unable to stop a huge housing bubble developing with 3 times the number of new homes being built than buyers available.

Again, this problem will still persist even if the banks can be re-capitalised it is just a question of who will get clobbered next.

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Franco

May 28, 2012 at 17:38

The best thing Greece can do is wipe out its debt by simply defaulting. The penalty will be that no one will lend her money again soon, but so what? She will have to live within her means again, a perfectly good thing.

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Franco

May 28, 2012 at 17:42

Incidentally, where was the mouse?

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Jeff of Sidcup

May 28, 2012 at 17:51

The problem with Greece is that they have not truly lived within their means for so long that the vast majority cannot remember what it was like. for most, it would be a return to the dark ages.

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Drake

May 28, 2012 at 19:05

Perfect solution for Greece would be

1. default and start again

2. start to pay taxes

3. stop corruption.

Unfortunately, 1 is easy, but won't work without 2 and 3, for which Greece has no appetite.

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Chooglin'

May 28, 2012 at 23:08

Greece should look at Iceland and see how they dealt with their crises. They are coming good now.

Three links below to articles explaining how they did it, with the final one suggesting Greece may benefit from similar action.

http://crazyemailsandbackstories.wordpress.com/2012/05/12/icelands-amazing-peaceful-revolution-still-not-in-the-news-backstory/

http://www.bloomberg.com/news/2012-02-20/icelandic-anger-brings-record-debt-relief-in-best-crisis-recovery-story.html

http://www.theglobeandmail.com/globe-investor/investment-ideas/david-parkinson/icelands-recovery-offers-case-for-reviving-drachma/article2365056/

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William Phillips

May 28, 2012 at 23:42

Iceland is one of the most cohesive societies in the world, prized by geneticists for its homogeneity. Essentially it is one large extended family or clan.

Heredity is all: every surname ends in 'sson' or 'dottir', identifying parentage. Social soldarity is in the blood, and the experience of financial hardship strengthens the bonds that unite the Icelanders. Working together for the good of the country is instinctual because the country is the family.

Greece, however... let's just say that even before it became overrun with immigrants, you would not have selected it as the most cohesive nation-state in the EU, with the most disciplined, honest and co-operative people. It nearly fell to communism in a civil war and let itself be ruled by a cabal of fascistic colonels, both within the memory of any village elder. Since the return to democracy it has become a kleptocracy whose public accounts make Italy's look like Sweden's.

The shipowning plutocrats who pull the strings pride themselves on not paying taxes: the Greek fish stinks from the head, as Christine Lagarde must well know. The majority view within the country now seems to be that Greece has the right to remain in the EU with the euro, to have its debts so far deferred as to be effectively forgotten, with the standard of living it enjoyed after accession largely protected-- no matter how much that costs Germany.

Not, let's say, a totally realistic attitude.

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Leander

May 29, 2012 at 00:44

William Phillips - a man after my own heart. Good sense delivered with passion and articulation. If only our miserable, dissembling politicians were capable of thinking in straight lines and had the courage to assess critically where Britain's interests lie. As always on major issues, they need do nothing more than to do as the public tells them. A referendum now to exit the EU, and with it immense popularity. What are they afraid of? Evidently not the UK electorate!

Better off out

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Martin Drew

May 29, 2012 at 08:15

Dennis Healey in his autobiography describes travelling in Greece when he was at Oxford before the war. A personal experience he had of the corruption at that time "innoculated me for all my dealings with the Levant ever since".

I suspect a lot of politicians in the Euro area wish they had been innoculated too.

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DirtyHarry

May 29, 2012 at 09:36

It would appear that Greece has systems of administration that are too crude to actually collect the taxes effectively that it politicians legislate for. Unlike the UK where we have the Land Registry which effectively acts as a tax collection register in Greece they have no such central record to imposition of land charges would be a nonsense otherwise they could have made a once and for all property tax charge against each property and securitised that debt which would mature and be payable on the death of the owner - much lioke land charges applied in the UK.

Anyone got any idea what the combined value of real estate in Greece is?

As I see it this would effectively give the same result in property values as the more drastic course of exit from the euro.

Inevitably there would still be bank haircuts in the form of default on bank loans for property however this process should be much more controlled than a sudden default and exit.

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Drake

May 29, 2012 at 09:53

William Phillips, you are spot on. I wonder why the EU and the IMF never mention corruption in Greece? Is it considered rude?

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Martin Drew

May 29, 2012 at 12:10

Greek annual property taxes are collected by the electricity company, so if you don't pay your electrics get cut off.

There has been a lot of illegal building and extensions to houses over the years. There is currently an amnesty and you can get a surveyor to inspect your property and make a list of things that you have added and for which you don't have permission. You can then pay the necessary fee and get a certificate that indemnifies you for 30 years, in effect giving you retrospective planning permission.

The trouble with this system is that outside Athens, in the islands and country areas, by and large the Greeks pass their homes on from one generation to another and so they aren't bothering to get their houses legalised. The expats on the other hand are taking the pain and legalising because a house will be very difficult to sell if it still illegal.

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Maxwell Gower

May 29, 2012 at 13:16

If everyone is (rightly) convinced that Greece will exit the Euro (in a disorderly fashion, I suspect), the real question is how things are likely to play out across Europe and Britain then . I would think the ECB will then come rushing in (with German support?), as the consequences of contagion become too ghastly to contemplate. Come on Citywire, get some of the experts to do some scenario planning for us.

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Hotrod

May 29, 2012 at 13:56

@Maxwell Gower

Buy an acre of land, a pig and a goat. Stock up on tinned food, bows & arrows, and French letters.

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Rose G

May 29, 2012 at 14:42

Greece will be able to hold the others to ransome because they know that they are not the only ones who cooked their books to enable them to become members of the EU/eurozone.

Many of the other EU member nations were able to get their expenditure off their books, so were able to get away without any awkward questions.

We are dealing with a doomed to fail scenario where the chief protagonists are unable to accept the flaws with their baby - in this instance, its out with the baby & the bath water & start again from scratch if they are still so keen to have a single currency.

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Drake

May 29, 2012 at 15:16

Hotrod,

I'd be worried if I was your pig or goat.

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Hotrod

May 29, 2012 at 16:36

@Drake

Don't worry ducky, my advice was to Maxwell, I intend opening a soup kitchen myself.

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robert karder

May 29, 2012 at 17:48

banks , banks always looking for the solution in the cause . why is that ?? has everybody lost their very minds. the banking system is a relic of an economic system that has not been able to evolve itself . a dinosauric monsterous thing of the past . can't anybody see that all these wars and never ending crisis are brought about by the banking system itself. is it here internal to the banking system where the solutions to the worlds problems are to be found . the answer is no . just more wild swings of the worlds economies generating more wars and unending conflicts . clear as bell . history repeats itself over and over agian because of the financial banking system .

would the controllers of this current monstrousity rather take down the world than reliquish control and material priviledge . that is what is happening today.

who are these personages shrouded in cloaked darkness that control all things and nations fates through the devil of finance . why not ask the devils themselves for that is what in reality they are . the devil itself made manifest.

put me very much on the record . for if the worlds justice and regulatory agencies can' t , won' t , are unable to identify these personages and body politics they represent i myself have no such limitations.

robert karder usa email me at rjkarder@yahoo.com

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Rose G

May 30, 2012 at 09:06

Robert Karder

I am almost convinced that you probably are right - it is the work of the devil - someone somewhere higher up the food chain where the air is rare, & only the few of the ultra elite/priviliged there are meetings & discussions we are not aware of & the main topic is how to bankrupt individuals who will then be forced to work harder for lesser pay & longer till retirement, just so the wheels of finance can be kept rolling - at the end of this debacle, we will all be part of the downtrodden masses working for beans, while those who probably planned the whole mess are rubbing their hands with glee, as they now are, sitting on huge piles of money lent to them by the very governments they bankroll into power, just so the status quo is maintained.

The banking system is so corrupt nobody has the chutzpur to speak out against it, & when you do the meedjia just gives them a hard time.

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Drake

May 30, 2012 at 22:15

This is all terribly interesting, but....does it not affect YOU?

I'd be really interested to know (FTSE now 5293 and that's before the real panic sets in) what are you all planning to do to protect yourselves?

Buying?

Selling?

Panicking?

Having a glass of claret?

Planning a holiday on Skiathos?

Thinking up something interesting/controversial to say on this blog?

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Rose A.

May 31, 2012 at 20:16

Martin Drew wrote on may 29

"OK so I am a single man in my late 60's and never needed to learn the complexity of child allowances, but never in a million years did I think my middle class neighbours got them, and are now outraged that they might lose them."

The point I would like us to consider is

now we are older and might need medical treatment it is just as well some people had children, educated them and made sacrifices so that one day those children , might be doing our knee replacements , working to pay pensions or defending queen and country ?

PS. if you are all thinking,

what does this have to do with Greece? Don't ask me, I don't know

I had hoped that this article would make the topic easier to understand

but I only got as far as

"there was a lot of noise and myths in the air" must have been the feta cheese or the taramosalata

Oh and Franco

this must be the answer to your question

the mouse ate the feta cheese

which bankrupted Greece

which sank the euro

that brought down Europe.....

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Rose A.

May 31, 2012 at 20:50

The term ,The Levant, refers to a group of countries in the middle east but Greece is not part of the Levant.

So where did Dennis Healy actually have his' innoculation'?

I will be reading his autobiography , I really need to know what happened and where.

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