The truth about Greek debt and German generosity
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Today, and for a long time now, there’s been a lot of intentional misinformation about the size of Greek debt. From what I can tell, it’s miles less than the commonly reported and terribly ominous 175 percent of Greek’s 240 billion euro GDP.
Here’s what’s really going on, described by way of a stark analogy.
Suppose you owe me 420 billion euros, which just happens to equal 1.75 times Greece’s GDP. Unfortunately, you’re broke and can’t repay the money you borrowed. You’re so broke, in fact, that you can’t even pay back any interest, let alone principal. Being a generous fellow, I tell you:
Not to worry. You don’t have to pay back a single euro, ever. We’ll just make your IOU an interest-only bond with no date for repaying the principal and set the interest rate to zero. But here’s the thing. My wife will kill me if I tell her I just lost 420 billion euro. So, if you don’t mind, I’m going to keep reporting that you owe me 420 billion and you are going to keep claiming you’re indebted to the tune of 420 billion. In other words, we’re going to keep your debt on the books at full value, instead of what it’s really worth on the open market that trades IOUs and we’ll both keep mum about the actual repayment terms.
Deal? This way I can tell my wife that you’re a bum who won’t repay what you owe, and you can tell your wife that I’m a bum who won’t give you a break. My wife won’t come after me with a cleaver, and yours won’t ask you to take that vacation you can’t afford. Plus, we can keep meeting in luxury hotels, far from our nagging wives, to negotiate your LOL “repayment terms.”
Leave aside the silly sexism, or just swap the words “husbands” and “wives.” Also, don’t take me too literally when it comes to the Germans’ treatment of Greek debt. The Germans, to my knowledge, haven’t swapped any short, medium, or long-term Greek debt for interest-only bonds. Nor has the repayment on any of their bonds been formally set to zero.
But what we’re seeing is mostly theater — yes, a Greek tragedy starring supposedly evil Germans and supposedly defenseless Greeks. In the show, which is restaged every six months or so, the Germans force the Greeks to attend emergency late night meetings, and the Greeks pretend to beg for debt relief, while the Germans burn the midnight oil and pretend they’ll do no such thing. By dawn, the Germans announce they have provided temporary relief because the Greeks have agreed to fix their economy. The German voters are placated. The Greek voters are placated. But the fable that Greek debt is crazy high is preserved.
This show keeps the German public from hearing three truths. First, the Germans have been giving and will continue to give debt payment relief on a permanent basis. Second, because this debt relief, whether formally acknowledged or not, will be permanent, Germans have lost a ton of money to the Greeks — money German taxpayers will never recover. Third, under the guise of keeping Greek banks liquid, the European Central Bank, underpinned by the German economy, is handing the Greeks a ton of money each day, which, by the way, it’s printing out of thin air. Moreover, the debt follies are keeping the Greeks from seeing that it’s their own government, not the Germans’, imposing long-needed economic reforms, albeit far too slowly.
One obsessive (and self-interested) number cruncher on Wall Street estimates that if you consider the formal debt forgiveness and interest reductions Greece has received in its past three bailouts (not including the most recent), the real value of Greek debt is about 75 percent or less of Greek GDP, not 175 percent. This 75 percent figure is within shouting distance of the U.S. debt-to-GDP ratio.
The Germans and the Greeks are actually paying a price for their ongoing charade. The Germans are being made out to be monsters that are forcing “austerity” down the Greeks’ throats. The Greeks are blaming their economic woes, which are truly terrible, on the Germans rather than fix things them on their own. Moreover, the euro is being blamed for the problem by the IMF, top economists like Princeton’s Alan Blinder and even the German Finance Minister.
The IMF says Greece needs debt relief, which, according to New York Times writer Josh Barro, will require Greece to quit the euro. This sounds to me like the IMF has finally realized that it’s time to acknowledge reality and mark to market Greek debt; that is, to honestly value the debt relief that Germany and other creditors have long provided. But, Josh, it doesn’t mean Greece needs to exit the eurozone. Panama has had plenty of help from America over the years and is still using the dollar. And poorer states within our own currency union, aka “the United States of America,” are still being subsidized by richer ones, as you pointed out in the Times a few days ago.
Princeton economist Alan Blinder is pushing the Greeks to exit the euro as well. He’s claiming that’s the only way Greek wages will fall far enough for Greek workers to compete with those Übermenschen German workers.
I love Alan. He’s a great economist and a close friend. But this is just silly. The Greeks can cut their wages any time they want — this minute, in fact. If they aren’t cutting them now, they won’t cut them in real terms under the Greek drachma. Yes, the currency, if introduced at par with the euro, would instantly depreciate. But those Greek labor unions and politicians who are keeping real wages far too high will simply raise wages, paid in drachmas, high enough to keep their real value, measured in euros, unchanged. In the lingo of economists, if the problem is real, not nominal wage stickiness, devaluation can’t help.
German Finance Minister Schäuble also thinks Greek exit, also known as Grexit, is needed. But he should worry, as the ECB is, that the failure to pay Greek bank creditors their euro deposits and other bank loans will lead to bank runs throughout the eurozone — in highly indebted countries like Italy, Spain and Portugal, for example.
(I, myself, have proposed one alternative: have Greeks reopen their banks as 100 percent equity-financed mutual funds — the Limited Purpose Banking that I’ve discussed on Making Sen$e and in my book, Jimmy Stewart Is Dead.)
In short, it’s time to stop the lying and come clean. Greek debt needs to be marked to market. The Greeks need to then thank the Germans for providing enormous help and adopt reasonable economic policies. Eventually, they will have to.