Greece: Odds and Ends
from Peter Radford
The deluge of news and opinions on the Greek crisis has surely exhausted all the options. I don’t intend to add much more. But I do want to say:
- Piling on more pain is useless. A default is both inevitable and desirable. Inevitable because austerity will push the Greek economy down and could easily create a volatile political situation which would overwhelm the limited sensibilities of traditional economics. That’s why it should be called “political economy” not just plain economics. Desirable because the sooner the debt is restructured to a sustainable level the sooner the Greeks can go about the task of recovery. And a recovering Greek economy is better for everyone. The current turmoil hurts everyone. This should not be difficult.
- I suspect one reason why the Europeans are so scared of default is that their banks are knee deep not just in Greek debt, but also in Greek debt related derivatives. We all remember how well the banks managed risk before – AIG anyone? – why should we believe they have improved. So once again, we see entire countries, and indeed continents, beholden to the weaknesses of banking. Why we didn’t cure this disease by cutting them down to size I don’t know. But here we are again. Maybe this time? Don’t hold your breath.
- There are plenty of people – some of you – who seem to think that the average Greek voter is blameless or is an innocent victim of some hidden bank led scam. No. The Greek economy is unsustainable as now configured. It bestows too many benefits it cannot pay for, and is riddled through with banana republic like cronyism, tax evasion, and rent seeking. It was a disaster waiting to happen. It needs cleaning up. That will affect the average Greek voter whether or not they participate in the variety of schemes that rob the economy of its vitality. I am not saying that the international community [i.e. the banks] are blameless. I am saying that the Greeks cannot foist this entirely on others. It is their political process that led them to this point. Greece is a democracy. Ultimately that means the voters must bear the blame and the cost of fixing the mess.
- Back to banking: I am sick and tired of bondholders thinking that restructuring debt is fatal. It isn’t. It is a time honored and ordinary aspect of lending money. It is part of risk. And risk is why creditors are compensated. Worse: bondholders who buy sovereign debt are supposed to be sophisticated lenders. Did they not understand the extent of the issues within the Greek economy? Shame on them if they didn’t.
- Lastly: this crisis exposes an aspect of the Euro I would like to see more explored. I suspect a lot of erstwhile “clever” investors imagined that they could buy Greek debt and get a high rate of return with the additional protection of the debt being underwritten – in name if not in fact – by German taxpayers. In other words these clever boys and girls were gaming the system. They were in arbitrage heaven. They thought they were buying high quality debt – essentially German debt because of that implicit underwriting – and getting a rate of return befitting a lower quality debt. Nice as long as it works. But they were actually buying rotten debt. They were under not over compensated. Whoops. But they still think they are smart. And now they want taxpayers to cover their losses. This is why I want to scream: fix the freaking banks someone. Please.
Meanwhile I feel bad for the average Greek suffering through this torment.
It’s unnecessary and cruel.