July 6, 2015
Greek crisis: Debt forgiveness must be part of the healing processPosted in Sunday Business Post · 96 comments ·
It is difficult to overestimate the seriousness of the Greek crisis, not just for Greece, but for Ireland too. Let us be very clear, the choice being presented is between amputation or recuperation.
The German plan, which is what the rest of the eurozone governments are supporting, sometimes gleefully, is to kick Greece out of the euro if it defaults. This is the amputation solution.
The other choice is the recuperation approach favoured by the IMF – and you would expect most reasonable people. This revolves around more debt relief and a plan to keep Greece in the euro and give the country time to try to turn the economy around.
The cold financial fact is that the Greeks don’t have the money to pay, so they will default again. In reality, the credibility problem for Greece is not that it has already defaulted – as argued by mainstream European politicians – but that it hasn’t defaulted enough.
The IMF has already said that Greece needs another €50 billion of debt relief. The US is privately supporting that view, not least because the US has seen these default crises before, notably in Mexico, and understands that debt forgiveness is part of the economic healing process.
But Germany is digging its heels in and is behaving as if only the reckless debtor is responsible – rather than the reckless creditor too. Unfortunately, this narrative is not only false, but for a country like Ireland – with, let us not forget, the highest total debt-to-income ratio in the world – very dangerous. If interest rates were to rise sharply, for example, do you think the 400,000 people on tracker mortgages would be able to pay? Where would we stand on debt deals then?
As has been the case in Ireland, getting into too much debt didn’t happen overnight. It took years of appalling government, here and in Greece, to go bust. We have only managed to grow because Ireland isn’t really a European economy at all. We are part of the Anglo-American economy – that’s where we trade, that’s where investment comes from and that’s where our people go to in an economic crisis.
Because Britain and the US and the likes of Canada and Australia grew strongly from 2012 onwards, they dragged us with them.
Our big bet is that the English-speaking world continues to grow and we will be okay, more or less, because we earn revenues by exporting to these countries and some of that revenue can be used to pay down debt.
If you don’t have revenue from the growing Anglo-American world, you are snookered – which brings us nicely to the European continent.
On the continent, things are much more complicated. Greece has been going slowly bust for years and German political opinion has been slowly becoming more unforgiving towards its debtors.
Ironically, because there is always a surplus for a deficit and a creditor for a debtor, the extent of Germany’s foreign debts is a reflection of its own massive current account surplus. It really is a victim of its own success.
As the German surplus got bigger and bigger, the amount of money available to German banks to lend also got bigger and bigger and they lent more and more to countries that were not getting stronger, but actually getting weaker and weaker.
Then suddenly, echoing Hemingway’s observation that you go bust two ways – “gradually, then suddenly” – Greece went bust. However, it is important to appreciate that the process took years of bad decisions on both sides. The Greeks are doubtless culpable, but so too is the EU for allowing this debt spiral to happen.
Now we have a stand-off between a bankrupt country and a German political elite, which has backed itself into a corner by promising the German people that Germany will not tolerate a default. In essence, Merkel has promised the German people that she will get all their money back, but now she is realising that there is no money.
As a consequence, the only way she can win politically is to turn Greece’s Great Depression-style catastrophe into an easily digestible morality tale for her electorate. So we end up with a piece of theatre pitting the feckless, lazy Greeks against the stoic, efficient Germans. Like all theatre there is an element of truth to the yarn, but a yarn it is.
For the German electorate, hard-working Germany must be seen to punish indolent Greece if it votes today to default. But how can Frau Merkel do this?
The only way Germany can be seen to win politically is if it pushes Greece out of the euro. At least then, Merkel can sell a “don’t fuck with us” story to her electorate. (Sorry I couldn’t put it more politely.)
Unfortunately for the Germans, they don’t seem to want to admit that it is actually illegal to force Greece out of the euro and Germany, much as it would like to be rid of Greece, has a small issue of democracy and legally binding treaties to get around.
For a country that was destroyed by a strange little man with an odd moustache who stated that treaties were “nothing more than pieces of paper”, such a high-handed approach to international law might appear, at best, forgetful.
When you stand back, you can see that if the Greeks can’t be forced legally to leave the euro, they won’t. This means that the IMF view should prevail, but in the next few days, the Germans have the Greeks by the short and curlies and the pressure is being felt in the collapsing Greek banking system.
The Germans know they have only one chance to force the Greeks to leave, which is by collapsing the Greek banking system with rumours that a No vote means leaving the euro – which it doesn’t.
Doesn’t it strike you as distasteful that the richest country in Europe should try to destroy the poorest country in the eurozone by actively encouraging a bank run which would eviscerate Greek people’s meager savings?
And furthermore, doesn’t it make you a bit queasy to know that our government has become Europe’s most vocal pom-pom girl, cheerleading this grisly spectacle?
In addition, doesn’t this approach strike you as particularly odd when the entire strategy upon which this government was elected was to get “retrospective bank debt relief” for Ireland?
Ireland has most to gain from the IMF view that, in countries where there is far too much debt – personal and governmental – the only way out of a crisis is co-responsibility, where debtors and creditors do deals.
Quite why we are taking up the German cause with such gusto when it’s not in our interest is beyond me. Can you figure it out?