Dangerous Debt: Lessons From Greece
June 30, 2015 is the date that Greece finally defaulted on its debt burden. Technically, Greece is "in arrears", not default (yet). But this is a fine distinction. Greece cannot pay its bills. It is broke. Greek banks are closed, government controls have been imposed on the movement of capital, and ordinary people in Greece are restricted to a daily ATM withdrawal limit of 60 Euros, about $70. This date marks the end of a five year process in which the leaders of Greece and the European Union postponed, but could not find a solution to the simple fact that Greece has more debt than it can ever repay. Hopefully, July 1, 2015 will mark the start of a process to heal the economy of Greece, and reform institutions to make it less likely another country will end up in the same mess.
In this Greek drama there are no good guys, only bad guys. That has been part of the reason a solution to the debt problem has been so difficult to find. Each side has a partially legitimate reason why the other side is to blame for the current mess. Greek governments are certainly at fault. They borrowed and spent money they could not repay. They are accountable for such irresponsible governance. But even worse, the Greek government engaged in unethical and possibly criminal behavior. Greece (until 2009) had hidden from the world the true financial condition of its budget deficits, which were worse than previously acknowledged.
The banks who loaned Greece much more money than it could repay are also accountable for their own irresponsible behavior. Banks have a duty to perform "due diligence". In plain English, they have a duty to their shareholders to make sure that borrowers will use the loan for responsible purposes, and that the borrower is very likely to be able to repay the loan. Due diligence would have uncovered the financial trickery that Greece used to hide their true budget deficits. But banks were eager to look the other way, perhaps because bank regulations made it more profitable to loan money to the Greek government than to make commercial loans to an enterprising business.
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Bank regulators are to blame for rigging the regulations to favor loans to governments over loans to businesses. European Union officials are to blame for bailing out the negligent banks, and transferring the bad debt from the banks to the taxpayers of Europe. (The media makes it appear as if Greece was bailed out in 2010. Greece is far from bailed out. But the banks are free and clear of the Greek loans they foolishly made.) The market interventions of the International Monetary Fund, the European Central Bank and the European Union have prolonged the deep recession/depression in Greece without resolving the basic problem that Greece has an unbearable debt burden.
Are there any lessons to be learned from this modern Greek tragedy (and the similar situation in Puerto Rico)? Most definitely. Here are three lessons I propose we all take to heart:
Lesson One. Politicians are not to be trusted with the authority to put the country into debt, except in the existential situation of a declared total war. In a democracy it is always in the short term interest of politicians to borrow and spend. There needs to be a high institutional barrier to prevent deficits. At a minimum there should be a balanced budget requirement with teeth. Our own American politicians have already borrowed $18 trillion, not counting the off budget debt represented by the unfunded promises of Social Security and Medicare. Prison sentences for mal-governance might be too drastic, but it is worth pondering. As it is, our American government faces a future with two bad possibilities. One possible future is there will be a higher and higher interest cost to service the National Debt, which will eat up available revenue on a non-inflated basis, crowding out other government priorities. The other possible future is an extended period of serious inflation to dilute the debt burden, which will unleash damaging effects on the economy.
Lesson Two. Stop bailing out banks!! The lender has a responsibility for the decision it makes. Banks need to suffer the consequences for their actions. Making banks bear their own consequences will not only spare the taxpayer the cost of the bailout, it will send a bracing message to all the other banks to perform due diligence. By bailing out the banks, government authorities are spreading the disease of irresponsible behavior, and risk a populist backlash which could result in long-lasting damage to society.
Lesson Three. When the dust finally settles in Greece (and in Puerto Rico), the government entity which emerges needs to be financially sound, with only a negligible amount of debt, and with no need or authority to borrow again to conduct its normal government duties. This will have three favorable effects. First it allows the people of Greece to recover their lives, and the economy of Greece to be restored to health. There must be a future in Greece. Second, a commitment to a positive outcome for Greece will encourage other heavily indebted countries to renegotiate their debt, to put their own future on a better path. This might benefit many people in Spain, Portugal, Italy, France, as well as the United States. Finally, a positive outcome for Greece will scare banks away from lending to governments who are serial borrowers. This will have long-term benefits for everyone.
Some readers may initially think Lesson Three is misguided. Why should the reckless borrower go free and clear? I respectfully remind you of the Biblical concept of the year of Jubilee, in which debts were cancelled and the land returned free and clear to the family for whom it was their inheritance. The primary purpose of the Jubilee may very well have been to send a clear message to the banks of ancient Israel to avoid lending to reckless borrowers.
