Too much ink has been shed on Greece, Portugal, Ireland and Spain. A friend had once told me that the philosopher-guru JK had said that progress was man’s innate ability to complicate simplicity. Perhaps, it has never been truer than in the case of the European debt problem. When some one borrows too much, either the borrowers seize the assets or they declare bankruptcy. Or, they are able to refinance their borrowings at much cheaper rates and continue to survive for some more time.
The question is who is willing to lend to them/help them refinance at cheaper rates? Is that enough? It might help the ‘flow’ (interest burden) problem but what about the stock of debt that they have? If the stock of debt is to be cut, it is some one else’ asset. What happens to their balance-sheets? The borrowings are made not just by the Greek and other sovereigns. Private sector entities – banks, corporations, etc., – too have borrowed from overseas.
Then, there is the contagion effect because investors are fraught and are living in a world where public and private men and women in authority have been parsimonious with truth. Once Greece does or is forced to do something that investors have not anticipated, they would not ask questions but shoot first. Moreover, how do we even know about how much we know about Spanish banks’ and saving banks’ asset quality? That is why unlike Stuart Staniford, I have no problem in believing that there will be a contagion effect if Greece engages in a unilateral act (default or restructuring of its debt obligations or leaving the Euro!).
Yes, there is the additional complication that Greece belongs to a club and if it chooses to leave the Club, no one knows what happens to the Club afterward. The Club has no rules for dealing with this. Second, if weak members of the Club leave, the strong members of the Club might become too strong for their own good!
Further, in the case of sovereigns is that they need to keep borrowing as they have obligations to fulfill. Of course, just as in the case of individuals, sovereigns cannot and should not endlessly (often, the same as ‘needlessly’) run fiscal deficits. That is why, a cyclically adjusted neutral fiscal policy makes sense. That is, the government runs surpluses in good times to use them in lean times.
The question is how to ensure good times for countries like Greece? Where is growth going to come from? Savings? Investment via lower interest rates? Competitive manufacturing and services via lower wages and a cheaper currency? Who will ensure that the Euro climbs down from 1.43 to 1.13 or 0.93 vs. US dollar? What does America do in that case? Will the Greeks accept a lower standard of living and for how long, to restore economic growth and to sustain it?
Now that I have listed down all the questions that are pertinent (in my view, of course!), any Op-ed that deals with the subject should be deemed useless unless it sheds light on these questions. Clever solutions that would legally allow Greece (and others) to default without defaulting and that would allow banks to carry the loans on their books as if they are good and current are not necessarily useful and do not put a closure to the issue.
This post originally appeared at The Gold Standard and is reproduced here with permission.
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