As I understand it, Greece is very heavily in debt but is currently running a “primary budget surplus”, meaning that other than payments on past debt they are taking in more money than they are paying out (see e.g. here). So suppose they decide OK, they are declaring all government debt null and void and cease all payments to all creditors. Obviously they will find it difficult to impossible to borrow more money. But why would they need to? Why not just fund the government out of current revenue?
There seems to be widespread agreement that defaulting will be disastrous for Greece, but I’m wondering why this is the case. (This leaves aside issues of whether or not it’s better for them to remain in the Euro.)
The Greek government still has to buy things from outside of Greece. Having to pay for everything in cash or gold, because no other nations trust you to pay your debts, would be problematic at best for Greece. I’m not sure it would rise to the level of ‘disastrous’, but that might depend on how much stuff Greece imports from the rest of the world… like oil for instance.
I can’t follow your link (paywall?) but here’s another current story: Greece needs to seize 'last opportunity' for deal - BBC News
A default doesn’t have to take the form of “all debts are null and void.” It can take the form of a missed payment, or of a payment of insufficient size made on time.
Should Greece default, though, it will be very unlikely to be able to borrow money (unlike other goverments, Greece and the other Euro countries cannot print currency on their own, so their budgets more at the mercy of the credit/bond markets, much like US states as opposed to national governments.) Large governments and corporations don’t really pay for everything from a bank account as they go - a certain amount of borrowing for various time periods is necessary for operations, and the Greek government will probably have to cut spending even further in order to keep operations going without access to credit.
Even if the Greeks are running a surplus (there’s a lot of suspicion of Greek numbers since they were caught cooking the books,) not all tax revenue comes in evenly disbursed across the year, so access to credit is needed to even out the inflowing cash vs. the outgoing cash. A tiny annual surplus might not translate into sufficient funds to operate the government this month… which could lead to interruptions of services and benefits.
There’s been considerable turmoil in Greece over the crisis - unemployment is persistently above 25%, and further budget cuts are likely to drive it higher. There has also been civil unrest over the crisis and the perception that average people are getting screwed over by bankers and politicians, both foreign and domestic.
It’s likely there would be more turmoil in the event of a Greek default.
There’s also the problem of “getting away with it”. try not paying your debts and see what happens. To some extent, the same applies to Greece or any other country.
A classic example was where the Allende government nationalized the copper mines in Chile. The American company that objected to this claimed they had not been paid a fair price, essentially that the mines were stolen. They tied up a few shiploads of copper ore in European ports with lawsuits claiming the cargo was “stolen”. They may or may not have won, but meanwhile they destroyed a major revenue source for the government, nobody would touch the ore for fear of litigation.
Similarly I recall a few cases back when where national airlines, being a creature of the government, would be seized if a third world government was relying on the concept that a foreign company could not force it to pay debts.
If the Greeks decided to repudiate their debts, they better be careful there’s nothing of theirs floating around in foreign lands available to be seized. The same would apply to anyone paying the Greek government funds from abroad - those funds could be seized. Companies doing business with the Greek government might be wary of whether their payments could be seized by the banks. And so on…
Not sure whether embassies are liable for seizure, but how are you going to give the ambassador his wages?
These things all seem minor in comparison to Greece’s problems in paying their debts.
I’m not sure I get the issue of imports altogether - these would be mostly done by private companies anyway, I would assume, and wouldn’t involve issuing public debt in any event.
If the Greeks run intermittent imbalances, they could probably just issue IOWs here and there, especially if they exit the Euro.
And while they presumably have something that can be seized elsewhere, this pales in comparison to the debt that they have and their troubles in meeting it.
Note that this is not to say that I think the Greeks should do this or that it’s morally right to do so. (Really ISTM that they most need to fix up their tax collection system and to raise the retirement age.) But the LW government currently in power doesn’t view creditors the same way that I do, and in thinking of what they will do I’ve been wondering about what they can do.
Paying people with worthless IOUs is pretty much the same as not paying people. Why would an employee of the government continue to work and provide services if the IOUs they’re getting paid can’t be used to pay the rent or buy groceries?
Eventually the employee either starts taking bribes in order to pay the rent or buy groceries, pissing off everyone because now the things your taxes are supposed to pay for have to be paid for with bribes on top of the taxes - or the employee stops being an employee and looks for another job, hustles on the street, or emigrates.
Or possibly you get what a lot of Soviet-era people did - a sort of anti-work in which the person is there, but certainly not for the benefit of anyone else.
That seems like a bit of a flippant statement to make without any evidence. What makes you think it’s true?
There are a few thousand articles and broadcasts from people much closer and (no offense, but how many international bankers do we have here?) better able to speculate.
I Greece has a surplus, it is probably by smoke and mirrors - and they owe their (rather pampered) pensioners and unemployed a buttload at the end of the month.
Greece is run and owned by a few very wealthy families who don’t like to pay taxes or share thier toys.
Why a Left Wing government is not going after such a large cash cow is another of those questions being asked.
When your creditors start saying things like, ummm… how much is your airport worth? You are pretty much out of good will.
However it breaks, one thing I can predict with confidence: the Greek poor are going to get a lot poorer. Maybe they can eat the rich…
There is no mystery to what happens in a default. We have seen it happen elsewhere.
The simple answer is you become deemed a bad credit risk. In the future, if you need a loan, creditors will make it a lot harder to get one.
We have seen this in South America (Argentina I think). They have defaulted a few times so now, if they want a loan, creditors demand FAR more onerus sureties to do it. It makes doing business there and pretty much everything there more expensive.
In short, any country can tell their creditors to fuck off and go pound sand but they will find doing international business after that so expensive that pretty much everyone else can out compete them and their economy goes in the shitter.
Greece is a bit different - as a part of the EU, its collapse will strain the Union and give the folks in the UK who want out of the EU (or at least a radical re-design of the union) a huge boost.
Remember: PIIGS - Portugal, Italy, Ireland, Greece, Spain - all are in the same leaky boat - it two of them default, the EU is going to be is trouble.
Which may make it imperative to “make an example” if Greece decides to default.
It’s also important to keep in mind the differences between the Eurozone and the EU. Greece is a member of both, but a default will likely kick it out of the Eurozone - but not the EU. Several EU nations didn’t sign up for the Euro project and never have:
The UK, Sweden, Poland, Czech Republic, Romania, etc.
It might also make it worse - nations that see how the ECB responds to crises (or doesn’t respond really) may be unwilling to see the same response visited on a different nation in crisis - it’s telling to see the difference between Florida’s example since 2008, where a level of government representing both Florida and other areas continued to support unemployment and retiree benefits, and a central bank with a long history and experience of acting as a lender of last resort, and Greece’s example since 2008.
It’s not clear at all that Greece kicked out of the Euro would be an example of successful policy by the Eurogroup (which manages the Eurozone currency union) rather than an example of failed policy by the Eurogroup.
Paying people with worthless IOUs is the same as not paying people. But in this case the IOUs are not worthless. Remember, the Greek government has the ability to pay its bills on a yearly basis. You were arguing that they might have temporary imbalances, and I suggested that they could bridge those periods with IOUs. Those IOUs would not be worthless, as the government would have the ability to repay them.
Greece is a poor country, and their debt is about 1.75 times their GDP. I can’t imagine the government has assets outside the country worth anything close to 1.75 times their GDP.
Actually a big part of the impasse results from the fact that the pensioners are not pampered, and are actually pretty poor for the most part. This makes it hard to cut their benefits. The real problem appears to be not the level of pension benefits, but the number of them - Greece has a very low retirement age.
Part of the problem is that the banks that lent to Greece were just as greedy as the civil servants, pensioners, and tax cheats - they poured money into Greece on the assumption (so far, rightly) that the rest of Europe would help make up any shortfall. Now that the fan has been hit, the primarily German bankers and their government are more interested in ensuring the German banks get paid than that pensioners do. Similarly the Greek people care more about their own income than paying the banks.
At some point, Greece will have to pass a law converting all debts, assets, and bank balances from Euros to Greek Non Euros (GNU’s). I assume this would for simplicity start as 1:1 but quickly deteriorate to the appropriate level. What that level is, depends on how well this is managed and whether the Greek governments starts wildly printing GNUs. The adjustment will be painful - gas, foreign imports, etc. will be in short supply until an exchange rate is worked out. There will likely be arguments when some outside companies refuse to deal until the old debt is settled in Euros, and court cases (slow) over whether the debt conversion applies to this or that debt. Necessity will dictate settlement terms. Whether the banks’ debt can be converted - depends on the terms of the contract. I suspect default and debt repudiation will be the order fo the day.
Of course there will be money to be made dealing with the new Greece, so I suspect a few banks will break ranks to get a foot in the door for the future, making life even more interesting. Remember, Greece has a lot of good vacation sites, so that will be a ready source of income, once the problem of how to supply the resorts with things like food are sorted out.
Meanwhile, we’ll see the phenomenon where savings suddenly count for nothing, pensions will become the equivalent of $US 25 a month, etc. GNU’s would be pretty close to IOU’s. Eventually they would have to re-issue the currency to get rid of the 1,000,000-GNU bills.
Yes, the poor will get a lot poorer. I bet a lot will move to the rest of Europe, especially Germany, looking for jobs.
I for one have very little confidence in what Greece says about its public finances, and therefore on its ability to repay anything. And if they default, even less confidence in their willingness to repay anything.
If they default, it will not be a fresh start for them. It would be a clear declaration that the full faith and credit of the Greek government means nothing, and anyone who loans them a lepta is going to have to consider it a gift sooner or later.
Why do you think this would continue if Greece defaulted? All indications are that the economy would enter a depression. That would greatly slash that revenues. Poof. That surplus you keep talking about is now a deficit.
Of course. I’m not suggesting that Greece is going to be able to borrow money based on IOUs after defaulting on its debt. My suggestion is that they would no longer need to. The IOUs were only offered up in response to someone suggesting they would face temporary cash flow imbalances. In that case they can offer IOUs for some of their expenses - e.g. salaries, pensions - to bridge the gap.
This seems kind of circular. The crux of my question was: why would they go into a depression?
I don’t think anyone would accept the IOUs for short term imbalances.
The idea of the loans was to assist Greece in revamping their economy so that they would become self-sustaining. By and large, they haven’t spent the money that way. So, even if they are telling the truth about their current finances (they likely are not), they still need money to revamp their economy. If they can’t borrow it, they will have that much more difficulty and suffering revamping, which they could have reduced if they had revamped with the loan money they already got (about half of which they have defaulted already).