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Greece's Debt Must Be Restructured
As the African experience shows, there is no alternative to a major restructuring of the Greek debt. Why is this being ignored?
It is now clear that the problems of the Greek economy - and the eurozone - have not been and cannot be solved by the large infusion of emergency finance from the ECB and the IMF. The Greek government is being asked to implement austerity measures that will cause a major decline in incomes and employment not just now but in the foreseeable future, and which will not correct the existing imbalances but actually worsen them.
The heavily-indebted poor countries (HIPCs) of Africa could tell the Greeks a thing or two about this process. They could tell them how the deflationary measures that are imposed on governments cause economic activity to go into a downward spiral that destroys existing capacities and prospects for future growth, and pushes large sections of the population into a fragile and insecure material existence. They could tell them about how it is fundamentally unsustainable, because the downslide in GDP makes it ever harder to service the debt, which in turn keep not only piling up, but even expanding, because of the unpaid interest that keeps getting added to the principal and then compounded, so that the country's debt just keeps rising even with no fresh inflows. They could tell them how ultimately there will be no alternative to restructuring the debt, because the problem will only grow in magnitude even with (and partly because of) the most stringently applied austerity measures. They could tell them about their own experience of several lost decades of economic retrogression, which could have been avoided had the debt restructuring taken place much earlier and a different set of policies for economic recovery been pursued.
This experience should point to the obvious lesson: that there is no alternative to a major restructuring of the Greek debt, involving a loss taken by the international lenders who did not exercise due diligence in the act of lending in the first place. If it does not happen now, it will in any case have to happen at some time in the future, after creating a great deal of material distress in Greece.
Why is such an obvious conclusion not even being talked about? A restructuring of the Greek debt would involve quite a large haircut for the German and French banks who lent extensively during the boom, and helped to create the imbalances that have made the Greek economy less competitive than that of Germany, for example. This cannot be allowed to happen, so the burden of adjustment is placed entirely on the Greek people, for several generations, in what will clearly be an unsustainable process.
It gets worse. Other countries that are seen to have potential problems like Greece are already moving towards austerity measures and contractionary macroeconomic policies that are bound to threaten the frail economic recovery and engender or intensify the next recession. Spain has just announced not only tightening of monetary policies, but fiscal contraction involving cuts in public sector pay and pensions and much else. This is particularly remarkable, because until two years ago Spain ran a fiscal surplus (the deficit was because of the private sector) and its recent deficits are entirely a result of the crisis.
Ireland is already undergoing the most extreme deflationary package involving significant decline in GDP and slashing of public expenditure in all sorts of areas from physical infrastructure to education. The Baltic countries, not only Latvia, which has an IMF programme, but Estonia where the pain is self-inflicted, are experiencing dramatic declines in incomes, employment and wages because of their severe austerity packages. In Romania, there was the remarkable spectacle of the police taking to the streets to protest against their wage decreases. In Britain, the new government is already talking about measures to cut the deficit by slashing spending and raising indirect taxes.
All these countries are hoping that they can export their way out of this mess, but that is simply not feasible as the numbers do not add up. So these countries - and by association, the rest of Europe - are effectively condemning themselves to a period of stagnation or declining incomes, with all the economic and social problems that will generate.
How can such an illogical set of policies be taken so seriously? The problem is that the power of finance - in politics, in media and in determining national and international economic policies - remains undiminished despite its recent excesses and failures. That is why the restructuring of public debts is not on the agenda; that is why talk of fiscal balancing so rarely even mentions taxes on capital, and much less on the same financial sectors that benefited from large publicly funded bailouts and are now holding to ransom the hands that have fed them.
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32 Comments so far
Show All"How can such an illogical set of policies be taken so seriously?"
Because they have no choice is the short answer Professor. They have simply come face to face with reality.
The easiest way to help Greece out of debt is to first give them and the rest of the European nations their own economic sovereignty back and abolish the Euro dollar. What the heck was the EU thinking they would gain trying to merge all European currencies into a Euro Dollar? It should be obvious by now if not then that the Euro dollar is the failure that allowed hostile and predatory takeovers and bullying. By now, there will be blame on socialism and regulated capitalism as each and every nation in Europe falls apart and that is wrong. The blame rests on not only the EU going Euro dollar but also Washington and Wall $treet that made it happen. I would add that Washington and Wall $treet should butt out and allow Europe to take care of itself.
Europe is taking care of itself. The EU is in the early stages of reality and we have little to do with the value of the Euro. Our states animosities do not affect the dollar while the EU's do. The EU "states" are far different than ours.
"Europe is taking care of itself. The EU is in the early stages of reality and we have little to do with the value of the Euro."
Look closer. Europe has depended somewhat on the US military a little though I must say that for the most part they are getting by independently. Then there are also those "free" trade deals.
"The EU is in the early stages of reality and we have little to do with the value of the Euro."
Wall $treet has a lot to do with the Euro along with the corrupt pols in Greece who allowed Goldman Sachs to ruin Greece's economy. Without the Euro, most of Europe wouldn't be falling apart as badly by now. People do want economic sovereignty because they know that Wall $treet is out to do to Europe what they did to Main Street USA. I say let the countries have their own currencies back. I sure wish each state in the US could do the same and put Washington under balanced control.
"Europe has depended somewhat on the US military a little though I must say that for the most part they are getting by independently. Then there are also those "free" trade deals."
That is true. Although Europe depends entirely on our military umbrella. There isn't a military in Europe that the Texas National Guard couldn't whip by sundown. The "free trade" deals have favored Europe, not us. The best deal we have is with GB and their VAT dictates a 15% advantage before we even start the trade.
The European bankers were up to their necks in the financial boondoggle, it did start here and began to unravel here first, but these banks are interdependent in many ways. Europe is no ones victim.
If the countries had their own currencies they would have an easier time of dealing with these problems. I wouldn't be surprised if the EU broke down, these problems are going to put their differences in a spotlight.
You remind of someone I met last year on this site who predicted that Europe was not bound to hold out forever. If I could see him again, I could only tell him that yes it is true though we might have some differences on why. I believe that was Thomas More (aka Henry8) or was it maxpayne? The two of them love America and the military so much that they'll make fun of Europe. One of them was from TX and the other from VA so that would figure. Oh well, back to playing catch up with the archives later this evening and into the days ahead.
P.S.: In the meantime, could you please "steal" Europe's socialism and bring it to the USA for a little blending in? Prometheus stole fire from Mt Olympus for the people so I am sure he would have no trouble with this chore. And don't worry. You won't be tied to the mountains. Pretty please. ;-)
Sioux
Yep. Thomas More it is. Texas as reference and a nod to the military are the DEAD give-aways.
Who?
Thank you Sioux. I don't know what he has been like while I was away but I remember him being with us on single payer and he used to discuss about local farming and capitalism where I could find common ground. I wished he would just acknowledge that Texas, while not totally bad, isn't great either. I remember good Texans on this forum such as kivals, aussidawg, Bliss Doubt, and JWVerez. I hope to see a Texas where more Texans are like them.
I have come to realize that the USA is a lost soul after having traveled once again to the Far East. Thomas and I were discussing how the military alone cannot be blamed. Politicians are the ones who control it. I may have pointed out a few flaws in Europe and had some concern about their economy getting fragile but I never badmouthed it.
Well the guy's were right, whoever they were.
Though I'd say that looking at Europe and defining their lapses and failures is not laughing at Europe.
I don't love the military, its simply a tool and certainly a misused one at the moment. But I will join them in love for America.
Europe has simply been held up as a model, everything they did was better was the constant mantra. From sudsidized mass transit to "soft power" diplomacy Europe had the answer.
It was of course smoke and mirrors with tricky accounting thrown in. It was self evident I thought that on the key questions of demography and immigration, the future of the EU was bleak.
I also thought that a withdrawal of our military umbrella (or at least a portion of it) was imminent. Say, within the next 5 years. A crushing blow for the European economies, so it might be held off, but I doubt it.
I'd be happy to import some of Europes good socialist policies. Very happy indeed. Single Payer health care. Maternity leave. Apprentice style education in higher grades as Germany has.....
Not happening though, Obama has finished any chance of reform like that.
I appreciate your not tying me to the mountain though! :)
How bout we leave them alone? Anyone in favor of that 'radical' solution?
How about they default and we just deal with it? Is that ok?
"that there is no alternative to a major restructuring of the Greek debt,
involving a loss taken by the international lenders who did not exercise due diligence in the act of lending in the first place"
thats the point, all the comments have so far missed this
its like in 3rd world countries, we come, pillage, we lend, and then keep then in poverty with the oppressive debt burden
and of course, debt is the modern form of slavery
Debt is not exactly slavery, but close. It's not full-fledged slavery because individuals (as opposed to governments like Greece and California) can choose to walk away from it, although the negative consequences of skipping out are steep. It's the old "owe my soul to the company store" trick that Euro-American Southern landowners used with such effectiveness to accomplish a de facto re-enslavement of the black freedmen by creating an economic system that paid wages but had a monopoly on the things those wages could purchase and a willing to let them "run up tab."
The American Way of Life, wherever on earth it exists even as a social aspiration, has run up a huge tab, unpayable. Yet the commercials luring people to get more stuff, take on even more debt, are still on the air (and cable) waves in between the "happy talk" news about how the "recession" is showing "good signs" of "turning around".
That "lend and keep them in poverty with the oppressive debt burden" worked so well on low-budget countries that the financial "services" industry devised ways to do it to individuals to the point where even someone like me, who is retired but has no more debt, has to fear that a financial collapse will cause pension plans and Social Security to "have no choice due to lower than expected revenues" but to default.
djb, excellent comment
"involving a loss taken by the international lenders who did not exercise due diligence in the act of lending in the first place"
Therefore their "risk" (notice how often capitalists like to throw that one as an excuse for raking in exponentially) BACKFIRED big time, and THEY should be the gambling losers. Forgive the debt and then go find honest work.
First off: "The heavily-indebted poor countries (HIPCs) of Africa could tell the Greeks a thing or two about this process."
The country's of Africa were so desperately impoverished by centuries of Western colonial bickering and imperialism. They were seen as little more than free resources and near slave labour.
Greece's 'economy' (if it can be called that) consists of tourism, tourism, and tourism. With a faint leavening of cheese and alcohol making.
When your GNP consists of "Come look at our ruins and dead guys, eat our stinky cheese and get whacked on ouzo", you have a problem.
We have to admit that when the world's economy is openly admitted to be powered by the profits of drug money, we have a real problem.
"It should be obvious by now if not then that the Euro dollar is the failure that allowed hostile and predatory takeovers and bullying."
The Euro, with all its faults, is certainly not to blame for predatory takeovers (leveraged buyouts)but the cult of the (free)"market", and specifically the "liberalization" of financial markets.
"I would add that Washington and Wall $treet should butt out and allow Europe to take care of itself."
NO WAY. Thanks to financial liberalization and an explosion of trading in derivatives, the "debtonation" is now a global problem and Wall Street "innovation" has played the role of incendiary bomb (with consinderable input by the arsonists in chief, Goldman Sachs [formerly known as the US treasury & the Fed] with their unrelenting commitment to predatory finance:
"U.S. banks held a total of $236.8 billion of exposure to the five [PIIGS] nations, including $18.1 billion to Greece, Wells Fargo said. European banks have claims totaling $193.1 billion on Greece, according to the Bank for International Settlements, with another $832.2 billion of claims on Spain."
http://www.bloomberg.com/apps/news?sid=a7h1lGnar8Gg&pid=20601087
Michael Hudson has got it right when he comments:
"...Europe doesn’t seem to have much of a policy. It under-taxes real estate, overtaxes labor. And it looks to the US market more than to building up its internal domestic markets. Perhaps the most urgent crisis facing Europe is the imminent collapse of the post-Soviet economies.
... Since the early 1990s their neoliberal regimes have financed a structural trade deficit by foreign-currency borrowing to load down real estate with debt. The result has been to create a property bubble without putting in place the means of balancing their foreign trade."
The Euro would not be such a bad idea (as it actually makes it harder for currency speculators to attack) but the problem is, that the national economies of Europe are far from being homogenous (their internal price and wage structures are different, as are their abilities to increase productivity and improve trade balances) so "chaining" them together with the Euro was a huge fallacy, but this happens when monetarism and a central bank have taken over and socio-economic policies have been subordinated to the "needs" of finance ...
Back to Hudson:
"The sanctity of debt sacrificing the economy to pay bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. But what is sanctity and religion, after all, without sacrifice. The question is, who is being sanctified, and to what god? In this case it seems to be Mammon, not Jesus.
... Meanwhile, the financial sector is to be enriched by the translation of junk economics into international policy. Living in the short run is the financial sector’s time frame while distracting the attention of indebted populations from calculations that Wall Street understands quite well: THE DEBTS CANNOT BE PAID IN THE END.
But they can be paid in the short run, with promises to pay someday as if any economies ever have been able to grow by imposing austerity! It is all junk economics, of course. But it buys time for the bankers to pay themselves yet more bonuses this year. ...
Bank lobbyists know that the financial game is over. They are playing for the short run. The financial sector’s aim is to take as much bailout money as it can and run, with large enough annual bonuses to lord it over the rest of society after the Clean Slate finally arrives. Less public spending on social programs will leave more bailout money to pay the banks for their exponentially rising bad debts that cannot possibly be paid in the end."
But the root cause of all this are the stupid economic theories (static, not dynamic models, ignoring the monetary and financial dimension and everything else that would have exposed the "model" as a fiction, e.g labour emigration) of the 18 and 19th centuries which are now taken for granted, although they fail to explain the economic realities. As Hudson explains:
" Either deliberately or unconsciously, free-trade models have served the economic interests of the most efficient nations [their "efficiency" being the result of decades of protectionism, often in connection with "captured markets" (earlier: colonies) which only changed to trade liberalism, when they had achieved a dominant trade position and could shape market forces to their own advantage] and adversely affected the production functions of less efficient countries.The aim of importing goods to take advantage of their lower prices in not an unalloyed benefit it it stifles domestic investment and employment."
The "competitive advantages" of advanced industrial nations are not the result of "intrinsic" superiority, but in most cases the consequence of military force, government policy (protectionism) and what passes as diplomacy or "foreign policy" (strong states - via "institutions like the IMF, the World Bank, the WTO - "shaping" the economic policies of the weaker states in favour of their own industries and financial oligarchy ...)
Germany is the elephant in the (Euro)-room ... its gigantic export "strength" (rising productivity with stagnant real wages) is achieved at the expense of countries like Greece, that cannot overcome their huge trade and payment deficits ...(systemic tax evasion by the self-employed Greeks and business class also does not help ....)
Sioux Rose
TOQUEVILLE: Great post! Thank you for posting it.
My, what 'interesting' times we live in.
"Goldman Sachs [formerly known as the US treasury & the Fed] with their unrelenting commitment to predatory finance:"
That was terrific!! Thanks!!!!
of course the fact that this is now showing up in europe...only really emphasizes the fact that it is also the dominance of the USA in global affairs for at least a century now that has driven the world to THIS result...even if europe had "wanted otherwise". it is part of the American Global "Dominance" credo...
even the "euro-zone" is a RESULT of the now-seemingly "failed" attempt to promote itself as some kind of "alternative" from what is actually the most predatory of ALL nations imposing its will on others, the USA.
as Henry CK Liu of asiatimesonline, long ago wrote:
the "USA is really the world's MAIN and biggest Protectionist Nation pretending to be free market".
what is happening to the europeans is merely the denouement of centuries of "prosperity" at the expense of those they colonized...same as that practiced by the USA.
as an Italian gentleman - at age 102 with very clear eyes to read several newspapers in different languages and clear memories of the TWO world wars told me in a conversation a few years ago :
"WE of the WEST have MUCh to be ashamed for. ...because for centuries we enriched ourselves at the expense of other lands and their peoples and then left them with nothing...and then we are surprised that their people come to our shores...since we had no real intentions of really helping them if we were more advanced --we should have left them alone if we had no intention to treat them fairly....I know history and cultures...it was my dream to travel the world to learn about people and cultures---so i became a Nautical engineer...i have seen both world wars and how fascism came about in my country, italy....I know about Empire..and about the Roman Empire...because I AM Roman..and today --= that empire is the USA".
it was one of the most honorable things I had ever heard from anyone.
i was really slack-jawed when I heard him say that , among other things, as he looked up from reading his newspapers...and that -- at age 102.
in a scarcity/competition economic paradigm, with exponentially increasing actual operational scarcity, the winners seek to continue winning more, leaving the losers to die...we are living not only in a situation of inverted fascism, but of constant, inverted War.
CAPITALISM is what it is.
Capitalist "austerity measures" as the price for "help" --- is like telling a person that is starved and without water in a landscape that the capitalist "rezoned" in its water and food to "behave" by learning how to swallow his saliva and not to consume all dried grass in order to live.
that's capitalism's real "climax" .
What if every country with a stock exchange had a hefty Robin Hood Tax? What if every indebted poor, struggling nation had its debt forgiven?
The simple fact of "Capitalism" and the Banking system as structured is this.
They are based upon the Growth model. Without growth neither can exist.
Growth is not just ECONOMIC growth. As more and more of this "wealth" is created via the issuance of debt, each of these loans requiring repayment with interest, the ONLY WAY it can conceivably ever be "recovered" is with a growth in population.
The major reason a Europe gives the appearances of being in more trouble then a USA is that their population is NOT growing therefore the ever growing debt becomes harder to service.
At the same time an ever growing population merely means more consumption, more debt and greater numbers of people sinking into poverty. In essence the only real advantage the US has over The EU here is that they can have a greater population of poor labor to MILK of their wages and productive capacity in order to repay debt.
"In essence the only real advantage the US has over The EU here is that they can have a greater population of poor labor to MILK of their wages and productive capacity in order to repay debt."
The EU may have debts but compared to the US, their governments manage the tax revenue rather well. Exploiting poor labor does nothing to repay debts and only fattens the corporate coffers whose only goal was profiteering in the first place.
I'm looking forward to the Greeks defaulting, leaving the E.U. and moving towards Russia, Turkey (Why not!), Syria and Iran. Let the bond holders in the West take it on the nose. They deserve it and the Greek people deserve better.
Thank you for this very important article. Any reasonable person also has to wonder "how ... such an illogical set of policies be taken so seriously." It is bizarre to watch. The bankers are driving the entire world into poverty.
Greece has clearly been living beyond its means. You can't blame the bankers for loaning the money, but those who took out the debts. Greece today is the USA's future one day as our "leaders" (that includes both parties) ignore reality and continue to spend us into bankruptcy.
Of course the Greek pols are corrupt but you still believe that Wall $treet is "clean" ? Right, it's Goldman Sachs fault is it? So how did those bailouts for the bankers work out? Some chump "change" to believe in I hear.
I think the facts vis-a'-vis Spain, and how they went from a "creditor nation" (No Debt Economy—should be the new "interrelationship economics" ) to a “debtor nation” in just two short years, tells the story of the scam derivative markets of CDS, CDO, there synthetic versions, and how a New Global Order (Derivative currency and markets) has arrived; like a ”Roman Imperial Adduction”(Wall Street, Privately Owned International Banks) of countries and economies.
I am not a historian on the Roman era, but I'm sure on the "economics of debt" (Rome), debt economies, and even partial "austerity measures," it's the sound of the "death knell" (Literally the Extermination) of the "classes" of working class, middle class people. I could make a "class" argument (and it's always about class!) vis-a'-vis the Debt Peonage issue, but it’s too long for this space, but just to say on "class" (Jewish People, Gypsies, Albanians) it's 1928-1933 in pre-Nazi Germany (and perhaps Nazi Germany's invasion of Greece in 1942, etc.).
Greece should literally default on the entire debt (some 280 billion dollars), as the PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations (total of 3.8 trillion dollars) should as well to a new "DEBT-FREE INTERRELATIONSHIP ECONOMICS". The “EURO” should collapse, and the "loses" are (not the population of people in the PIIGS nations) just the cult of Privately Owned International Banks.