I do not purport to be an economist nor would I ever want to be. Theirs is a world of implicit assumptions and pseudoscience that only a brave few have challenged from within. However, theirs is also a discipline that in theory and practice can shape the fate of millions, which is why I pay more than casual attention to them. Thus it is that I came to ponder the financial situation in Greece, a place that I lived in in 2010 at the start of its downward slope towards the current moment (my wife has researched and written on matters of Greek political economy and I have an interest in Greek civil-military relations, so our stay was mutually beneficial). Here is my non-expert view of things.
When lenders charge interest on principal loaned, they prefer to have the interest paid rather than the principal. This loan repayment rationale, which is true for states, firms and individuals, keeps the debtor beholden to the lender so long as the principal remains unpaid. Over time, the interest accrued can well exceed the amount lent, which is perfectly fine from the lenders point of view but keeps the debtor permanently saddled in a cycle of interest payment unless the debtor earns additional income (revenue) that can be directed towards paying down the principal. Short of a lottery win, a pay raise or new sources of revenue, debtors on relatively fixed incomes are locked into the cycle of debt.
Greece is in that situation. Until 2008 it was servicing the interest payments on its debt to international lenders (mostly the European Central Bank, various national banks and private investors). Then the international financial crisis of 2008-09 hit, which had nothing to do with Greece per se but which drove up interest rates. With a stagnant economy and flat tax revenues, Greece quickly found itself unable to make interest payments and, in a dramatic revelation, announced in 2010 that it had been systematically underestimating its fiscal deficit in order to maintain interest payments on its debt at a sustainable rate. At that point many private investors dumped their Greek debt holdings and the IMF assumed a significant portion of them as well as some of that accrued by European public banks.
The Greeks were subsequently offered two “bailout” loans that allowed them to continue to pay the interest on their debt, which together with the principal now amounts to nearly 250 billion Euros. With interest set at approximately 4 percent annually, the figure is set to reach the half trillion euro mark in a few years.Â Even if interest rates were capped at zero, it is estimated that it would take Greece 81 years to repay the amount currently owed.
There are several questions arising from the Greek debt. Why, since the interest paid is now more than the principal borrowed, does not the ECB and IMF put a cap on the debt? Why did investors continue to offer loans to Greece when it turned out that the Greeks were fiddling the books, and that neither the principal or the repayment loans ever trickled down to the general public in terms of public goods and services? Why does it expect the Greek population to pay via austerity for the risky borrowing of Greek elites and the even riskier lending of European banks?
Asking the Greek people to shoulder the burden of austerity–in a country with 30 percent general unemployment and 50 percent unemployment for those under 30, with a massive brain drain of educated professionals, porous borders and deep cuts to public sector salaries, pensions and basic services–is akin to forcing the children of crack addicts to starve and swab floors in order to pay for the rehab treatment of their parents. And the outcome is just as uncertain.
Let’s look at it this way. Capitalism is about assuming risk for higher reward. In the financial world, the riskier the investment the higher the interest paid on it. And just like quick finance and pawn shops are located in poor rather than rich neighbourhoods, high interest bonds are issued on “risky” countries with poor credit ratings and histories of financial instability. For “courageous” investors riding the line between high interest and junk bonds, the rewards for so-called bailouts are great. But the downside of a default is that they will have to wear losses, just as many ill-advised investors have to.
Greece is one such high risk place and those who lent to it knew this from the beginning.
With that in mind is is easy to see that the behaviour of the “troika” (the European Commission, European Central Bank and IMF) can be (and has been) likened to loansharking and needs to be treated as such. When people seek debt relief from loansharks, banks or credit card providers, they arrange to repay a capped sum and a payment schedule is established. The alternative is bankruptcy, which leaves the creditor with nothing. Although suboptimal from the lender’s point of view, the capped payment alternative is better than nothing.
When it comes to states, the decision to cap debt is a political decision, not a financial one. That is because the stability of states is more important than the returns on risky investment, especially when ample returns have already been received, many creditors are no longer at risk and demands for future returns put state stability at peril. In the case of Greece there is a twist, in that the referendum on whether to accept austerity was the first political iteration in a multi-step process. Now that the Greeks have refused more austerity, it is the turn of the EC to make a political decision of its own.
Let’s be clear: this is not a Greek crisis; it is a crisis of European finance capital. The demand for more Greek austerity is not about servicing the debt but about humiliation, punishment and deterrence of others who might dare to do the same.
The people who should seek answers are those who invested in the agencies that undertook the high risk lending strategies that have brought us to this moment. The people who are responsible for the crisis are not average Greeks but suits sitting in fancy offices in Athens, Brussels, Frankfurt and London. They are the ones who took the risk on Greece and they are the ones who need to be held to account.
This does not absolve Greeks from their own mistakes. Certainly the culture of entitlement and the pervasive corruption in Greek society needs to be addressed. But here again, this was well known to foreign creditors at the time they lent money to Greece, and for all the everyday petty corruption in Greece involving phantom war veterans and people faking disabilities, it is the Greek political-economic elite who elevated institutional corruption to an art form. Syriza proposes to confront them as well as the lower-level scams but in order to do so it must show that it can negotiate a debt payment agreement that puts the interests of average Greeks first.
There is a way out of the imbroglio that can leave Greece in the EU without undergoing more austerity punishment. In international law there is a concept known as “odious debt.” Odious debts are those that are incurred by governments that do not go to their stated purposes or are ill-gotten from the onset. Under international law, odious debts are the responsibility of the incurring parties and are not the responsibility of their successors. As such, they do not have to be serviced by others if the responsible parties cannot be made to pay.
One can argue that the debt incurred by pre-Syriza governments from 1999-2008 fall into the odious debt category and should be forgiven as such. If anything the political parties in government during the time the debts were incurred can be sued for repayment (these being the Panhellenic Socialist Party (PASOK) and New Democracy (ND)). Whatever happens, it is clear that Greece has not seen the purported benefits of the loans incurred by previous governments (to include the now abandoned or derelict Olympic facilities) but it has paid more than its fair share of interest on them. By any reasonable measure the remaining debt is now odious.
In the end this is a cautionary tale with minor and major sub-plots. The minor plot is about sustainable debt and the limits of debt relief. The major plot is about the perils of political union. The EU needs to understand that how it addresses the minor plot will determine the conclusion of the major one.
Bonus read: Although I do not agree with some of his observations, Brian Easton has a nice short piece on the Greek situation here.
Another great commentary there Pablo. Liked the children of crack additions example.
thanks, nice read.
The fact that all the EU leaders (Merkel, Hollande etc) seem to be unwilling to compromise on austerity makes me wonder how much autonomy they actually have from international financial elite. Or are they part of it? I say this because the EU’s approach to Greece doesn’t make sense on so many levels, first for all the reasons you’ve pointed out, but also geopolitical ones re: Russia too. And yet the EU won’t change course.
Yes, Seb, there are larger geopolitical issues at play and that is what I was alluding to in my last paragraph. But I was also alluding to the differences between bankers and politicians on financial management issues with the political union that is the EU. Bankers focus on maximising profit and the technical details of investment and debt payment. Beyond their own fortunes, European politicians focus on regional stability and closer integration of standards, procedures and regulations (the so-called and once vaunted process of “Europeanization”).
This includes immigration. which is a cloud on the Grexit horizon. If Greece allows African and Central Asian migrants to travel freely through Greece on their way elsewhere as part of its response to being strangled by the troika, then the payback will be very high in terms of social costs etc in destination nations.
For example, there are over 40,000 migrant arrivals this year in the Greek islands nearest to Turkey, especially Kos, Lesbos, and Samos (an average of 300 migrants arrive daily on Lesbos alone). Even as tourist destinations, the islands are not equipped to handle such numbers and the arrival of migrants is scaring away tourists to boot. Although the Greek parliament is debating a bill that would allow 100,000 migrants to gain residency if they “normalise” their status, that leaves many others with nowhere to go but north. All Greece has to do is open safe transit corridors and exit points on its northern border in order for them to do so. The EU needs to think about that even if the bankers do not want to.
As for Russia. Its ploy is a bluff. It has enough internal problems of its own, is grossly resource export dependent and is in the midst of an arms spending spree that includes but goes beyond its incursion into Ukraine, so it really cannot offer Greece more than anti-status quo support. Were it to provide alternative financing to Greece it runs the risk of becoming like Venezuela in the sense that Chavez (no so much Maduro) funded all sorts of grandiose projects in Latin America out of his petro revenues at the expense of projects at home. Now those foreign projects have pretty much failed and the situation at home is dire. The Russians know this because they are selling weapons to the Maduro government and can see how precarious his rule is.
I am reminded of a comment I heard during the Mexican financial crisis of the mid 1990s and the panic that spread throughout Latin American markets at the time: Companies may go bankrupt but states do not. They may teeter and suffer hyper inflation, currency devaluations etc., but they remain as political entities with physical borders etc. Thus the solution to the financial crisis of a state is a political, not an economic one, and it is for politicians to pull the plug and order bankers to cap their profit-seeking once and for all. The bankers will continue to demand blood from a stone until that time. When it comes to the Greek crisis, that time has now come.
Geopolitical reasons are not the problem. Simple domestic politics. The reason Merkel is not agreeing to debt relief is she will not get it past her Finance Minister or parliament. Germany and the other Euro nations must take any debt restructuring now on the chin. Better to sacrifice the Greeks than herself. Her taxpayers would revolt. The same applies to a lesser degree to all of the other Euro creditors.
That could be the case and a major contributing factor, but as I said in the post, those domestic constituencies need to ask hard questions of their leaders who authorised the continued loans to Greece–to include those that helped finance the Olympics–rather than demand more sacrifice from the Greek people who had nothing to do with the issuance of those loans and saw precious little benefit from them.
on a personal note, I sure as heck would not want to be a German living or visiting in Greece these days. in 2010 my wife and I spent a wonderful holiday in Samos at a resort that catered to Germans. The views were spectacular even if the food was not, but what impressed me the most was the disdain of the locals on the part of their German guests. Something tells me that the feeling is mutual.
So you are going on the record that economics is a “pseudoscience”?
The debt is a lever to make the Greeks reform their economy. Default, pay stretch the debt out unless the Greeks reform their corrupt, spendthrift economy then the consequences will follow.