I despise truisms. When you spout a truism, it requires no thought or contemplation or flexibility. It is just lazy.
And actually, they’re not always true.
My biggest irritation this week (and for the last few weeks, and actually any time that I’ve read a right-wing opinion piece on Greece since the beginning of the decade) has been the phrase “live within one’s means.”
I’ve sort of written about this before (ECONOMIES ARE NOT HOUSEHOLDS. The bad paradigms must stop). But I wanted to say something specific about this particular sentiment.
Firstly, shame on these people:
If there is anything worse than a truism, it’s a truism that reflects a nigh-on-zero familiarity with the facts.
- Yes, Greece borrowed lots of cheap money in the 2000s.
- But Greece borrowed that money from private institutions (mainly, French and German banks).
- Those banks had whole credit risk departments dedicated to determining whether a bond was fairly priced relative to its default risk.
- Those banks then took those risks with German and French depositor funds, and purchased Greek bonds. And just to be clear: those funds belonged to German and French taxpayers.
- When it looked like those French and German banks had made some really bad investment decisions with their Greek credit assessments in the late 2000s, there was panic.
Germany and Francethe Eurozone stepped in to “bailout Greece”.
- And by “bailout Greece” – what they meant was “transfer the default risk from German and French depositors to the Eurozone governments”.
- And why was this the case? Because the bailout meant that Greece had to borrow money from the Eurozone governments to pay off those French and German banks.
- Doing this meant:
- The Eurozone financial sector remained intact, and none of those banks went bankrupt; and
- German and French taxpayers/depositors didn’t lose any money (all those haircuts weren’t losses for the depositors – they were losses for the banks, their investors, and a few other private institutions).
- That is, Greece was bailed out to save:
- German and French depositors; and
- The Eurozone Financial System.
- Greece, however, was punished for having sold the bonds that the German and French banks so willingly purchased.
- And Greek taxpayers were left with the bill.
This is an utter distortion of the relationship between debtor and creditor.
When you lend someone money, you take on the risk that they will not pay you back.
It may not be wise to borrow money beyond your means – but it is also the responsibility of the lender to make sure that they are lending money to creditworthy clients. ESPECIALLY when you are not lending your own money.
The main points:
- The German and French taxpayers took on risks by lending money to their banks.
- Those German and French taxpayers should have lost money when Greece defaulted, because their banks had made bad investment decisions.
- And Greece should have been allowed to default to a private institution WITHOUT their membership of the Eurozone being at stake.
- Default is an implicit part of the debtor-creditor arrangement – because who knows what the future may hold, and if you lend this money, then you must acknowledge that there is a chance that I will not be able to pay it back.
There was a market process at play that was not allowed to play out.
This crisis is not an issue of Greece living within her means. Greece lived entirely within her means at the time. Her means included all the German and French depositor money that was being thrown at her.
Greece still lives within her means today. If anything, Greece also lives well within the means that those twitter users are thinking of – because Greece has been running primary budget surpluses. At great cost.
I’m not saying that there is no need for reform for Greece. I’m not saying that Greece was innocent. But we do not live in the Dark Ages with debtor prisons. We have markets that are finely attuned to risk and the trade of risk. Markets where creditors are not blind, and where they know what they’re getting themselves into, unless they choose not to think about it too deeply.
So we need to stop living in the Dark Ages (in every way). And leave those truisms behind.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Anonymous July 13, 2015 at 04:40
Thank you for making the backstory clear! Before this post, it was pretty hard to understand what was going on. I resigned to just acknowledging that there was drama in Greece and the EU, and it was all just around debt.
I think I can actually ask a question now – why did the Eurozone governments not allow Greece to default, seeing as the bonds were purchased by private institutions? Was it fear that that might have sparked some kind of domino effect on debt default if those German and French banks could then not pay their creditors, and then those creditors could not pay their own creditors and so on… And that this could have spread throughout the EU and beyond?
What would you have allowed to happen if you had all the power?Reply