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For some reason, people think a sovereign default, and a subsequent
debt restructuring such as Greece’s government faces, is something that
is conceivable – the proverbial asteroid hitting the earth – but which
has never actually happened.
Sometimes, raw data says more than words. According to a dataset from
the National Bureau of Economic Research, there have been at least 153 sovereign debt
restructurings since 1980.
Ideally, Greece’s government will be able to reduce the overall debt
load, now around 192%, to something manageable, perhaps around 50% of
GDP. This process is rife with danger, alas, and I suggest consulting
with Russia (which had a default and debt restructuring in 1998-2000
that reduced the net present value of the outstanding debt by about
50%) to avoid some of the potentially bad outcomes, such as widespread
asset stripping by foreign entities (which is already going on), or the
loss of domestic sovereignity and the installation of some unelected
EU-controlled autocrat, as arguably happened in Italy under Mario
Monti. It also happened in Greece, under unelected technocrat prime
minister Lucas Papademos, who was previously the governor of the Bank
of Greece, and then afterwards became the Vice President of the
European Central Bank. Papademos argued against a eurozone deal to
write off half of Greece’s debts. He wanted a far smaller “haircut,”
because a 50% writeoff would hurt banks.
Since Papademos’ stay of execution for the bankers, there have been a
long series of “bailouts” by various official entities beginning May
2010, funded by directly or indirectly by taxpayers outside of Greece,
notably Germany and France. None of this has helped Greece’s situation
in any way. The Greek government’s debt/GDP was 130% at the end of
2010. A 50% writeoff would have reduced this to about 65%. The
eurozone’s official
government debt-to-GDP ratio limit is 60%.
But didn’t the bailouts help Greek government provide important
services to its citizens? Or, at minimum, to pay some vastly
overgenerous pensions to some real Greek people? Actually, the Greek
government ran a primary surplus of an estimated 1.5% of GDP in 2013
and 0.3% in 2014. The “bailouts” were mostly to pay interest and
principal on maturing debt.
None of this helped either the people of Greece, nor the Greek
government. So who was getting “bailed out”? It was mostly foreign
banks. Over time, as the Greek debt matured (instead of a default and
50% writedown), holders of the debt were paid in full, and the Greek
government’s debt was gradually transferred to the “troika” lenders,
and indirectly the bag-holding taxpayers of Europe. Not surprisingly,
some members of the Greek parliament are now arguing that at least some
of the Greek government’s debt constitutes “odious debt,” a legal term
which justified the government of Ecuador’s debt default in 2009.
(Watch the Greek-produced
documentary Debtocracy —
which advocates discharging the debt as “odious debt” — for details.)
In addition, the Greek government in 2012 conducted
a recapitalization of Greek banks, totaling €48.2 billion, or 24.8%
of GDP. The Greek government did get some equity in trade for its €48
billion (which it obtained in the form of troika “bailout” loan),
although this equity is likely to go to zero if the Greek government
defaults on its bonds, likely resulting in terminal insolvency among
Greek banks, if existing insolvency and deposit flight doesn’t kill
them first. Who was bailed out? Where did the €48 billion go? To the
banks’ creditors, including foreign banks. (The recent increase in
foreign bank exposure to Greek banks might be “bailout”-related.)
Odious? I have to hold my nose just to write this stuff down. None of
it is new either; you would find most of the same elements in the Latin
American sovereign debt crises of the 1980s.
The end result of all this is that the Greek government’s debt today,
totaling €313
billion, consists of €64 billion of domestically-issued bonds, €15
billion of short-term notes, €2.7 billion of foreign-issued bonds and
securitizations, €212 billion of “bailout” loans, and €5.0 billion of
other external loans. In short, the total foreign exposure by private
entities (banks) to the Greek government is, today, about €7.6 billion.
Thus, if this swelling pile of debt is eventually written down by 70%,
the €220 billion loss will get eaten by the innocent taxpayers of
Europe, rather than the privately-owned banks. Actually, the money has
already been lost, as the only way to avoid a default at this point is
for the taxpayers of Europe to continue to loan Greece’s government
more money.
There’s some talk that a default by the Greek government would require
“leaving the eurozone,” whatever that means, and perhaps not using the
euro. This is mostly just globalist propaganda, along with the notion
that a Greek default would also require future “federalization” of
Europe. Just look at that NBER list of 153 debt restructurings, none of
which required, or was followed by, any “federalization.” There is no
reason that Greece
can’t continue to use euros as the basis of commerce, just as
dollarized Ecuador continued to use dollars as the basis of commerce
after the government’s 2009 default.
Ideally, a default by the Greek government should be the first step of
a wonderful
era of recovery and prosperity, just as was the case in Russia
after its default in 1998. By following the Magic
Formula (Low Taxes, Stable Money) after the default, along with
other reforms, Greeks can become wealthier
than Germans in less than twenty years.
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