Some clarity on Greek debt

Published by marco on

As with so many other macroeconomic topics, Dean Baker at CEPR is a good source of information on this one as well. There is a lot of FUD about Greek debt:

  • That it will bankrupt Europe (whatever happens to the EU, they’re doing it to themselves),
  • That Europe continues to pay out (no payments for over a year now)
  • That the Greeks are trying to get out of paying (they’re actually trying to pay interest at a slower rate).

Let’s take a look at some details below.

Interest Rates are too low

The article Higher Interest Rates Will Quickly Alleviate That Debt Burden by Dean Baker (CEPR) points out that Germany’s obsession with low inflation and low interest rates handcuffs Greece, preventing it—and other nations in trouble, like Italy, Spain and Ireland—from either alleviating their own pain or paying back their debts.

“The same story applies to private debt. if interest rates were to rise and companies were troubled by the amount of debt they had outstanding they could just issue new bonds and buy up the existing debt at large discounts, thereby reducing their debt burden.”

This is just what most countries do when they can control their own currency: they raise interest rates, accept a modest amount of inflation and reduce the overall value of their debt vis à vis their creditors’s currencies. Greece cannot do this and Germany keeps both the inflation and interest rates so low that there is no room to breathe.

Germany != Private Banks

What if Greece were to default on its debts? Germany wouldn’t get all of the money back that it had invested in Greece, right? Is that what we’re really talking about? Or are we talking instead about getting the EU populace to support policies that bail out private investors first? The article Debt Forgiveness in Greece: It’s Easier Than the NYT Leads Readers to Believe by Dean Baker (CEPR) points out that,

“[…] over 80 percent of Greece’s debt is held by the I.M.F., European Central Bank, and other official institutions. Concessions made by these entities could hugely reduce Greece’s debt burden while leaving private debt holders unaffected. These concessions need not cost taxpayers a euro, since the European Central Bank knows how to print euros, which it can and is doing.”

Both the aid packages for Greece as well as the strong-arm austerity tactics exercised by Europe are in the interests of “incompetent bankers who made bad loans to Greece” who were “effectively bailed out” by Europe. The cruel measures serve no-one except them—getting them their money back more quickly. Europe, on the other hand, has no benefit. Far better to take its boot off of Greece’s neck—and let Greece return to at-least-partial financial health. Then they’ll be better able to contribute to the EU economy.

Austerity won’t help

The article Greek Austerity Does Not Protect Europe’s Taxpayers by Dean Baker (CEPR) points out another hypocrisy in the standard story of Greece vs. EU.

“Most of the debt is owed to official lenders who have no need to make demands on Germany’s taxpayers to get funding. (The European Central Bank prints its money.)

“Furthermore, more rapid growth in the euro zone will both allow Greece to repay a larger portion of its debt and also improve Germany’s budget situation as well. For this reason, it is hard to see how German taxpayers will derive any benefit from austerity in Greece.”

And Dean’s not alone: the article Ending the Creditor’s Paradise by Mark Blyth (Jacobin) backs him up by pointing out that the people of Europe, their economy, their well-being, their democratically expressed desires—they’re all beside the point to the unelected financial elite that runs things.

“What we have done over the past thirty years is to build a creditor’s paradise of positive real interest rates, low inflation, open markets, beaten-down unions, and a retreating state — all policed by unelected economic officials in central banks and other unelected institutions that have only one target: to keep such a creditor’s paradise going.”

As it stands, Greece has reduced its budgets massively and there is no more they could be reasonably asked to do. It’s a testament to the power of this financial elite that they can get the German government to work so much against its own best interests. It’s a dangerous game to play and is all-too-likely to be a game of short-term gains for very few before it all blows up for everyone else.