Debt and Hypocrisy

As the Greek Tragedy continues to unfold, whether to catharsis or catastrophe, it is worth bearing in mind that what is being faced is ultimately a question of state, not private solvency (leaving aside the specific problems of the Greek banking system). Not only is the Greek economy largely uncompetitive in terms of tradable goods and services, but it has been subjected to externally imposed constraints that have reduced GDP by at least 25% (i.e., by levels associated with the Great Depression); and thus the ability of that economy to generate revenues (taxes) to support both domestic services and the servicing of debt denominated in a currency over which the supposedly sovereign government has no control.

There is no doubt that the Syriza government has done a masterful job of alienating practically ever external decision-maker; while, remarkably, persuading a majority of its citizens to support an approach to dealing with its future that may “not necessarily turn out to its advantage”, because no-one trusts its intentions and commitments.

That said, while we at Awbury strongly believe that obligations incurred should be honoured when due, we do wonder at both the effectiveness and the hypocrisy of an approach, largely dictated by the German Federal Government, which runs the risk of subjecting an already distressed polity to being forced to burden future generations with servicing debts at a level that may well condemn them to diminished opportunities for decades to come. The “No” vote in the recent referendum is, therefore, not a surprise in emotional terms, even if it may have negative economic consequences.

What we find distasteful is the rather sanctimonious preaching about “morality” by a government that has previously blatantly manipulated the EU’s rules in its favour when it needed to, because it could (in effect, acting as a bully); and represents a state that has, historically, been a beneficiary of forbearance when it comes to servicing its own debts in full.

As famed French economist, Thomas Piketty, recently pointed out in an interview with German publication Die Zeit, after both the First and the Second World Wars, the German state did not service fully its obligations. In the former case, they were effectively restructured and then repudiated (accepting that exacting reparations is usually a rather bad idea); while in the latter case, the London Debt Agreement on 1953 cancelled over 50% of German foreign debt and restructured internal debts, thereby essentially freeing West Germany’s economy to enjoy the Wirtschaftswunder of the 1950s and 1960s. To be fair, that was in the context of West Germany assuming all the prior external debts and obligations of the predecessor Third Reich, so there was clearly a need to restructure. Of course, Professor Piketty also pointed out that the nascent German Empire made a point of enforcing fully French reparations in the 1870s after the end of Franco-Prussian War. Nevertheless, the current German government might also care to consider the direct economic costs to it from a disorderly default and “Grexit” by Greece, given its exposure through the ESM and EFSF mechanisms set up to deal with the aftermath of the Great Recession. As an aside, Greece was a party to the London Agreement; and was able to be generous to West Germany because it was itself being supported by the US through the anti-communist Truman Doctrine. History is, as always, replete with ironies!

We are not suggesting that the Greek state (which essentially forged its own books for years prior to being found out in 2009, and was abetted by interested parties in doing so) simply be allowed and enabled to repudiate its obligations, or to indulge in the brinkmanship and ad hominem attacks that have characterized its behaviour since the election of the Syriza government in the hope of avoiding the consequences of its own actions. However, we do believe that certain governments and supranational entities should equally refrain from moralizing; and from treating a sovereign state as a test for the effectiveness of policies which have created at best (and being charitable) little benefit.

As we wrote in a previous post: It is not a game.

 

– The Awbury team

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