Tuesday, September 13, 2011 ... Deutsch/Español/Related posts from blogosphere

How to save Greece

Some of the current Western European leaders try to pretend that they're very important and very creative but they haven't really solved anything. The comparison with those who had to defeat the Soviet bloc or unify Germany seems truly pathetic.

Despite its being a small and irrelevant country, Greece continues to make the global capitalism nervous all the time. The frequency of the hysteria used to be "once per year". We just learned that it has been raised to "once per 3 months": Greece will run out of money in October.

It's becoming really annoying. At the same moment, there doesn't seem to be a consensus yet that a full-fledged old-fashioned bankruptcy is what should be encouraged. So let me propose a new restructuralization policy that could be interpreted as a "non-bankruptcy". The basic ideas are:

  1. Greece will get rid of all debt – all Greek bonds issued before the end of August 2011 will be dealt with by someone else – under certain conditions.

  2. A group of saviors ("saviors" for short) will create a new entity that will take the responsibility of the old Greek government to pay the installments including the interest rates as they arrive.
  3. Greece's debt will thus be set to zero. The Greek government will become a new entity with new ratings, the so-called new Greek government.
  4. The saviors will only repay X percent of what they should where X will continuously change from 100 percent on September 1st, 2011 to 60 percent on September 1st, 2015, according to the maturity day, and will be 60 percent after September 1st, 2015. I think that X should be lower than 100 percent because it's crazy to imagine that those who lent their money to Greece in a risky way (for high interest rates) shouldn't pay anything.
  5. Consequently, the saviors' new daughter institution which would be the legal successor of the old Greek government will be declared bankrupt by the rating agencies.
  6. The new Greek government will be able to acquire a reasonably good rating and issue new bonds.
  7. The critical point: the new Greek government will however pay 25 percent of their internal public expenses (which is 20 percent of all expenses including this payment to the saviors; now it is over 10 percent of the GDP) to the saviors every year until the year 2050. Between 2050 and 2075, the percentage will drop from 25 percent to 0 percent (2075 will be the first year without this fee).
  8. The EU countries will agree not to save the new Greek government until 2075 included in the case that the new Greek government creates a new unsustainable debt.
Advantages and justification:
  1. The recipe balances the contributions of the Greek government, the Greek public, and the creditors.
  2. It eliminates the uncertainty about whether Greece will be saved again or not.
  3. For Greece, the interest rates and repayments would no longer be an abstract number that can grow arbitrarily; it would be a fixed percentage of their public expenses that they could comprehend and consider as a fair deal. The Greek nation could gradually re-learn the rules of the market economy and the meaning of the money – things they have completely forgotten.
  4. Greece would have many years to adapt to the new conditions and to lower the expenses.
  5. The new Greek government would be stimulated to reduce its own size and make the Greek economy less redistributive because this would reduce the fee paid to the saviors.
  6. The nations outside Greece wouldn't care so much about the bloated Greek government because they would be getting money proportional to its size.
  7. All current holders of the Greek debt could be treated in the same way.
  8. The "saviors" could be any powerful enough group – e.g. just the combination of the German and French government – and there would be nothing unfair about it because  they wouldn't be losing money; they would just make a deal with the new Greek government that could turn out to be good business for both sides. The plan doesn't depend on any painful consensus-making.
If I were the bound state of Merkel and Sarkozy, I would just hire a few lawyers who would sit down, write a more detailed version of this blog entry, and the proposal would be given to Papandreou with the comment that if he doesn't accept, Greece will be driven to uncontrolled bankruptcy next time it is in problems which is pretty much immediately. ;-)

Under this scenario, the new Greek government could acquire new debt – issue bonds worth something like 50 percent of the new Greek GDP – but make this figure sustainable. During the next decade, they could also shrink the public expenses from 50 percent to something like 30 percent of the GDP. That would still bring about 30/4 = 7.5 percent of the Greek GDP during the next 40-65 years to the saviors' wallets which could be a good deal for the saviors. At the same moment, Greece could spend those 7.5 percent of GDP as well because many other countries have to do the same thing.

Do you see some trouble with the plan above?

You can see that I was inspired by selling Greece to slavery – which would be a natural approach that used to work well during the good old times, e.g. during the glorious years of ancient Greece. However, I had to frame the partial slavery in a politically correct way.

One more comment. What I find irritating is that the politically correct politicians such as Merkel and Sarkozy are never trying to find a deal that could actually be good for both sides. What they are constantly doing is to spread a suffocating politically correct atmosphere that de facto forces individuals and whole nations to do many things that are not good for any of them, and sometimes even pretend that everything is fine with them. And this is just bad management and bad politics.

The proposed fee to the saviors was based on the new Greek government's expenses. It has the advantage that this figure is the key entity that Greece should be pushed to lower, in order not to be a troublemaker in the future. Of course, some people would have to verify that Greece doesn't fake their data about the budget.

One could also introduce different sorts of fees to the saviors, for example one based on the Greek imports (to discourage Greek imports as well), or their combination. It's a matter of details. The important point is that one could easily sketch real plans that just send this problem to the history books. I needed half an hour to think about it and write it down: why Sarkozys and Merkels aren't capable of doing such things in whole years (there isn't any readable proposal anywhere), despite having thousands of overpaid bureaucrats working for them?

Well, let me answer: because they're the heads of parasitic governments who just consume the taxpayer money without doing any useful work.

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snail feedback (4) :

reader Kamil said...

"the new Greek government will however pay 25 percent of their internal public expenses to the saviors every year until the year 2050."

Do you really think that this is acceptable for the Greek people? Rather there will come a hard core right winger and simply cancel the current Greek debt to 0. The lenders might put Greece to court, but without violence they can't get money out of Greece if that would be the case.

reader Luboš Motl said...

I have already answered this thing. Of course that if a dictator comes who has no respect for international agreements and common sense, he has to be dealt with by violence. How else? If you suggest that just electing a populist Nazi asshole should be enough for others to say: it's OK, Greek sweethearts, you don't have to pay that half a trillion dollars if you don't feel to, and you don't have to do or sacrifice anything else, either, please feel no pressure, then you are a lunatic.

reader Kamil said...

Let us see, that Greece owes to banks and maybe funds or private investors. The lenders simply don't have military power to capture Greece (with strong enough army). States like France and the UK have the military power, but don't have the political power (citizens won't let them) to attack Greece. The USA can do it, but have little interest in it.

Invadling Greece is a costy operation, and I can't see a state doing it. So Greece could in fact announce total default on the whole debt. And then nationalize it's banks of course.
Let me remind you Libya, where NATO countries are still fighting with the reminents of the old regime. I consider Greece much stronger than Libya was back then in march.

reader EH said...

I doubt such a dictator would be dealt with with violence. The cost of such a war would be far higher than the amount of money at stake, and not surprisingly, there are no examples in modern history of nations being invaded over defaulting on their sovereign debt.

The real deterrent for greece to default is the fact that all their lavish benefits arnt suddenly going to pay for themselves once they renounce their debt. Democratic states have an insatiable appetite to offload costs on the voters that dont get to vote in the current election (future ones, for instance), so the prospect of not being able to borrow any longer simply isnt a politically appealing one.

Besides, the disruptions to the economy due to such a breach of trust will fall largely on their shoulders, and will likely far exceed the cost of their debt payment as well.

Im affraid the typical greek doesnt really realize any of these things though; ive had the displeasure of talking to a few, and they can not get their heads around the idea that the joke would be on them in case of a default. The easy solution would just be for them to suck up the few percent reductions in their benefits; but there is no way to reconcile that idea with the populist marxist nonsense they like to shout about.

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