A small thought or two on reading David McWilliams April 29, 2010Posted by WorldbyStorm in Economy.
I was reading David McWilliams latest appeal in the Sunday Business Post to us to consider the notion of the Greek government defaulting on its debt (and the problems the Greek face, and by extension the euro and EU seem to increase almost hourly. Incidentally, there’s a quote in there by the head of the OECD, Angel Gurria, who likens the Greek situation to the Ebola virus, suggesting that when one has Ebola one’s only recourse is to chop off the affected leg. Er… not correct as far as I can make out given that Ebola is a systemic disease that affects blood vessels throughout the body and the ability of blood to coagulate, but I guess whatever works to justify what happens next – eh? Thank God he’s not a doctor, or that he has to talk about anything important like … er… er…) – and obviously by extension perhaps ourselves at some point soon, not least given the small but not insignificant fact that our own deficit is larger than theirs.
And I think he’s got a point. Indeed I’m intrigued reading the last but one issue of Prospect magazine to read a not dissimilar thesis…
The arithmetic is horrible. If Greece is to start paying interest on its debt – rather than rolling it into new loans – by 2011 the government would need to run a primary budget surplus (excluding interest payments) of nearly 10 per cent of GDP. This would require roughly another 14 per cent of GDP in spending cuts and revenue measures, ranking it among the largest fiscal adjustments ever attempted.
Worse still, these large interest payments will mostly be going to Germany and France, further removing income from the Greek economy. If Greece is ever to repay some of this debt it will need a drastic austerity programme lasting decades. This would cause its GDP to fall far more than Ireland’s. Moreover Greek public workers should expect huge pay cuts, which, in the country’s toxic political climate is a sure route to civil strife.
European leaders are wrong to think that greece can achieve a solution through a resumption of normal market lending. it cannot afford to repay its debt at rates that reflect the inherent risk. The only means to refinance its debt at an affordable level would be to grant long-term, subsidised loans that cover a large part of the liabilities due in the next three to five years.
The alternative being?
… for [it] to manage its default in an orderly manner. Reckless lending to the Greek state was based on European creditors terrible decision making. Default teaches creditors – and their governments – a lesson, just as it does the debtors: mistakes cost money, and your mistakes are your own.
The authors of this radical proposition? Well, one, Simon Johnson is a former chief economist at the IMF while Peter Boone is a principal in Salute Capital Management.
In our own situation the Sunday Business Post has taken in its editorial to calling for exemplary actions against bankers… and couched in quite similar language to the above when discussing pension top-ups and such like…
‘The flip-side of accepting massive payments in the good times must be taking responsibility when things go wrong’.
Or… here’s a thought, why not make those massive payments just a little bit – or quite a lot – smaller by taxing them more? After all, it is the SBP itself that argues that:
… taxpayers are being asked to pay for the failures and greed of bankers, in simple terms by sacrificing their standards of living.
And there’s the disconnect. A small number of individuals can through their own actions force a situation where they can immiserate many many others. What possible sanction is appropriate? Imprisonment seems to small, other punishments simply pointless. If any of us have ever wondered at the gulf between the actions of war criminals and the justice meted out to them, well, wonder no more.
All that can be done, bar the obvious recourse to law, is to ensure that this process can never happen again.
As it happens Richard Bruton makes the cogent point in the same edition of the SBP that Anglo should fall because… well… that’s what happens under capitalism. It’s an unusual day when I find myself agreeing with Bruton precisely because of his defence of capitalism, but there we have it.
And this is where I point you to a phrase of McWilliams…
As discussed two weeks ago in this column, history argues that the bailout will be unsuccessful, Greece will implode anyway and the bailout money will be wasted. The reason for this is that the financial markets need to believe that Greece has changed fundamentally. This means that it is not good enough to stump up sufficient to stem this crisis; the EU has to stump up enough money so that Greece never flirts with bankruptcy again – or at least in the foreseeable future.
Recapitalising a country is a bit like recapitalising a bank [shades of Swiss Tony there – wbs]. You need to make sure that you inject enough money into the bank – not so much to ensure that it doesn’t go bust now, but that it never goes bust again.
But how could we be sure that the situation in this state has changed – that all is being done to ensure we will not see a reprise of this, if not tomorrow then in ten or twenty years time? The pension fiasco suggests otherwise, suggests all too much – as noted by the SBP editorial – that it is business, and a highly profitable one for various individuals, as usual with government playing the role of bystander (and speaking of sleight of hand – notable how Maire Geoghegan Quinn had to take the bullet by proxy as it were for the sins of the government in not seeing through the Bank of Ireland mess with any conviction. I mean I hold no candle for the ludicrously inflated pension provision for Oireachtas members, but that seems to me to be a different discussion). And what happens if, or more likely when, this happens again? What’s going to be left for the state, or again more likely us, to fund a private sector that has comprehensively failed given the hill we all have to climb now to pay back that which others dumped upon us?