When 'debt relief' becomes 'stealing'

Kicking Greece's debt bomb can down the road again, the EU and Athens have agreed to a four month extension of the terms of their bailout. This is a big climb down by Greece, who insisted the terms be changed. But it hardly solves anything and raises a fundamental question being faced by all debtor nations.

When does sovereign debt relief become outright stealing?

At issue is Greek insistence that it should be granted special terms that allow it to avoid paying back the money it owes, and be freed from the rigid austerity measures imposed on them when they borrowed $280 billion to keep from defaulting on it's debt. They want the conditions of the loans lifted so they can massively increase their spending.

As Nobel Prize wining economist Joseph Stiglitz points out, creditors also have a responsibility:

Debts are contracts -- that is, voluntary agreements -- so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements... Every (advanced) country has realised that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the 19th century were a failure -- inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.

But sovereign debt is different. A government can simply seize the debt and impoverish its creditors, as England did to the Jews in the 12th century. In the case of Greece, the far left has mounted an effective demonization campaign of its creditors, including making Germany look like fascists for insisting that Greece pay back what it owes.

Leonid Bershidsky writing in Bloomberg:

Those creditors who resist and go to court to chase the sovereign's property and funds to ensure repayment are condemned as vultures. The polite, reasonable thing to do is to make a deal and slink away with one's tail between one's legs. Greece's private creditors have already done that, accepting a more than 50 percent haircut on the bonds they owned.

When a deadbeat country is seen as the hero and its creditors as villains, the only consideration that deters more countries from defaulting -- the threat of financial ostracism -- loses its power. A country that has successfully done a restructuring deal knows it can be welcomed back to the debt market with open arms. Lenders, apparently suffering from a strange form of masochism induced by all the editorial ink shaming them, prepare to take out their wallets again.

If Greece gets its way, more countries will be tempted to declare responsibility a dirty word. The International Monetary Fund predicts that this year, only 6 out of 34 advanced economies -- Germany, Hong Kong, Korea, Norway, Singapore and Switzerland -- will have a positive fiscal balance. Nations are hardly deleveraging: The average debt level of a G20 nation in 2014 was 113.5 percent economic output, the same as a year before and only slightly lower than the record of 115.3 percent reached in 2012. So why pay all that money back?

I would argue that, if Greece's new government succeeds, it should result in a fundamental repricing of all public debt in line with the realization that any government's creditors are as powerless as the Jews in Edward I's England.

Stiglitz has long called for a universal mechanism for sovereign bankruptcies that would make the risks of non-payment transparent to all lenders and borrowers. In the absence of such a framework, Germany is doing the right thing by making sure no other government is tempted to go down the Greek path just because it wants to spend more than its debt burden allows.

An old joke: If you owe the bank $10,000, you're in trouble. If you owe the bank $10 million, the bank is in trouble. Germany and the rest of the euro zone is on the hook for tens of billions of dollars in Greek debt. But Germany, who is resisting any renegotiations on the terms of the Greek bailout, sees far more trouble in allowing Greece to get away with their massive theft than in standing firm and watching as Greece exits the euro.

In the long run, Germany is almost certainly correct, as other debtor nations would follow the lead of Greece and avoid paying its debtors the money they owe. Better to allow the Grexit rather than continually pay the price in the years ahead.

Kicking Greece's debt bomb can down the road again, the EU and Athens have agreed to a four month extension of the terms of their bailout. This is a big climb down by Greece, who insisted the terms be changed. But it hardly solves anything and raises a fundamental question being faced by all debtor nations.

When does sovereign debt relief become outright stealing?

At issue is Greek insistence that it should be granted special terms that allow it to avoid paying back the money it owes, and be freed from the rigid austerity measures imposed on them when they borrowed $280 billion to keep from defaulting on it's debt. They want the conditions of the loans lifted so they can massively increase their spending.

As Nobel Prize wining economist Joseph Stiglitz points out, creditors also have a responsibility:

Debts are contracts -- that is, voluntary agreements -- so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements... Every (advanced) country has realised that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the 19th century were a failure -- inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.

But sovereign debt is different. A government can simply seize the debt and impoverish its creditors, as England did to the Jews in the 12th century. In the case of Greece, the far left has mounted an effective demonization campaign of its creditors, including making Germany look like fascists for insisting that Greece pay back what it owes.

Leonid Bershidsky writing in Bloomberg:

Those creditors who resist and go to court to chase the sovereign's property and funds to ensure repayment are condemned as vultures. The polite, reasonable thing to do is to make a deal and slink away with one's tail between one's legs. Greece's private creditors have already done that, accepting a more than 50 percent haircut on the bonds they owned.

When a deadbeat country is seen as the hero and its creditors as villains, the only consideration that deters more countries from defaulting -- the threat of financial ostracism -- loses its power. A country that has successfully done a restructuring deal knows it can be welcomed back to the debt market with open arms. Lenders, apparently suffering from a strange form of masochism induced by all the editorial ink shaming them, prepare to take out their wallets again.

If Greece gets its way, more countries will be tempted to declare responsibility a dirty word. The International Monetary Fund predicts that this year, only 6 out of 34 advanced economies -- Germany, Hong Kong, Korea, Norway, Singapore and Switzerland -- will have a positive fiscal balance. Nations are hardly deleveraging: The average debt level of a G20 nation in 2014 was 113.5 percent economic output, the same as a year before and only slightly lower than the record of 115.3 percent reached in 2012. So why pay all that money back?

I would argue that, if Greece's new government succeeds, it should result in a fundamental repricing of all public debt in line with the realization that any government's creditors are as powerless as the Jews in Edward I's England.

Stiglitz has long called for a universal mechanism for sovereign bankruptcies that would make the risks of non-payment transparent to all lenders and borrowers. In the absence of such a framework, Germany is doing the right thing by making sure no other government is tempted to go down the Greek path just because it wants to spend more than its debt burden allows.

An old joke: If you owe the bank $10,000, you're in trouble. If you owe the bank $10 million, the bank is in trouble. Germany and the rest of the euro zone is on the hook for tens of billions of dollars in Greek debt. But Germany, who is resisting any renegotiations on the terms of the Greek bailout, sees far more trouble in allowing Greece to get away with their massive theft than in standing firm and watching as Greece exits the euro.

In the long run, Germany is almost certainly correct, as other debtor nations would follow the lead of Greece and avoid paying its debtors the money they owe. Better to allow the Grexit rather than continually pay the price in the years ahead.