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Ethics & Morality

Greek debt: the immorality of perpetual bailouts and broken promises

 

Here we go again: Greek debt and a nation “on the brink” / “at the edge” / “judgment day” / “endgame” / “apocalypse”.. Another round of “crisis” / “emergency” / “make or break” meetings between Greek Prime Minister Alexis Tsipras and other EU leaders to “break the deadlock” / “reach a compromise” / “do a deal” over the country’s debt crisis. And if no compromise is made or deal done, Greece will default on its IMF/ECB loans and risks “crashing out of the euro”.

If a deal is done, however, it will unlock €7.2bn of further bailout funds. That is €7.2bn of further bailout funds to help repay the previous €48.2 billion bailout funds plus interest. Six months hence, this will require a further round of “on the brink” / “at the edge” / “judgment day” / “endgame” / “apocalypse” meetings to agree further €billions of bailout funds to repay the bailout funds that helped repay the previous bailout funds, plus interest. And so we arrive at the perpetual circulation of debt, locked in a never-ending cycle of fiscal delusion and moral hazard.

It was Mervyn King, former Governor of the Bank of England, who referred to ‘moral hazard’ when he vowed that he would not step in to bail out England’s banks for their irresponsible lending. The concept originally referred to the prospect that insurance distorts behaviour: for example, when holders of fire insurance take less precaution with respect to avoiding fire or when holders of health insurance use more healthcare than they would if they were not insured. Thus it is that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.

If a bank lends money to a customer it believes will not be able to repay, the bank is irresponsible. It is also immoral insofar as it induces the customer into making a promise that cannot be kept. When the ECB/IMF lend money to Greece, they know full well that Greece will never be able to repay it and default is ultimately inevitable, if long delayed. That is irresponsible. It is also immoral, for it damages society and causes torment and misery for millions of people.

Without wishing to repeat the point (though perhaps it merits reiteration), when we do not bear the consequences of our actions, we create of a false sense of security. If abortion is available on-tap, why not indulge in endless irresponsible sex? And so it is that the ECB/IMF are granting Greece endless financial abortions, because the consequences of delivering the children conceived during their age of irresponsibility are too frightening to contemplate.

Of course, banks are in the business of lending money, and the risks of doing so are offset by the potential for making high returns. But moral hazard arises when those banks enjoy all the fruits of the good years but are bailed out in the lean years. Shareholders appoint boards of directors who make decisions on risky loans, and they all profit when the investment turns out well. But why should other EU nations (ie the people) subsidise Greece’s lean years (ie generous and badly-funded pensions system; chronic tax evasion and endemic indolence)? It is a perverse financial morality when the humble and oppressed of fiscally-prudent nations are forced to bear part of the burden of fiscally-profligate nations. Greece is a democracy, after all. Should they not be as free to bear the consequences of their governments’ policies as they are free to elect the politicians who create and sustain those policies?

The whole ‘banking crisis’ was inevitable precisely because it wasn’t so much built on sand, but on thin air. Each lender in a very long chain raked in profits while believing they were absolving themselves of risk. The brokers exposed the lenders to loans not only above the value of the asset, but beyond the means of the borrower to repay. The lenders sold these risky mortgages on to investment banks, who in turn fragmented the securities into high, medium or low risk. And another tier of investors bought these securities, hedging (and praying) against the risk of default, and pushing those risks even further along.

And so it will be with Greek debt. As it was with Irish debt, and will yet be with Italian debt, Spanish debt and Portuguese debt. And to sustain the EU illusion of monetary and economic union, democracy will be suspended and national sovereignty subsumed to ever closer political union. And within the ensuing moral hazard, the love of Euro-Mammon may indeed be the root of all evil.

  • Anton

    One part of the problem – for both sides – is the quandary of whether to throw good money after bad. The other part is the heinousness of unbacked fiat currency, which magnifies all financial problems – magnifies boom unsustainably and magnifies bust bringing greater misery.

    • CliveM

      This has to end in either default or write off. Until this is faced, these crises will keep re-accuring.

  • The Explorer

    We’ll lend you the money to pay the interest on the last lot of money we lent you.
    But if you can’t even afford to pay the interest, there’s no way you’ll ever afford to pay off the debt that’s generating the interest.

    Let’s cancel the debt, and stop lending you any more money. Work out your problems for yourself and how to live within your means rather than ours.

    That’s the only solution in a rational world. In an irrational world, if the current farce continues, it’s all the worst and most degrading features of the Welfare State extended to the level of lunacy.

    • Graham Wood

      If it was not so deeply tragic for the Greek people, and particularly the rising new generation then we could view the situation as a never ending farce.
      How ironic that the cradle of democracy which was Greece should now deny it’s founding principles resulting in a form of slavery to an unelected and undemocratic claque of corrupt EU power hungry politicians.
      There is no alternative. Greece must leave the EU, return to the Drachma and endure the relative short lived pain rather than long term deeper and recurring crisis under EU hegemony.

      • magnolia

        The EU doesn’t like Greece looking East. Nor do the US like anyone relating to the BRICS bank.

    • CliveM

      It’s like a benefits recipient with a £100 grand worth of debt, being told to accept more debt, but not to eat to enable them to pay it off.

      In that situation, whatever the promises, the brutal reality says the debts won’t be paid and food will still have to be bought.

  • Orwell Ian

    Greece won’t default because it can’t be allowed to default, let alone decouple. The Euro is fundamental to the progress of federal integration. What’s a few billion between colleagues when power, political reputations and careers with gold plated pensions are at stake. Besides, the creditors don’t hold all the cards. Tsipras has a new buddy, the big brown bogeybear who would be delighted to assist the cause of world peace by prising Greece from the clutches of NATO in return for the odd naval base and control of the Med.

    Money is created from thin air, a commodity of which there is no shortage. Morality and misery have nothing to do with it. The object of power is power, the purpose of empire is empire. History warns us that it’s all unsustainable. One day and one way or another, the EU will overreach itself and collapse. The bigger the intervening bubble the greater the ultimate crash.

  • elizabeth sadler

    So many are living beyond their means;an over simplification I know ,but am no economist. I do know that many in Greece were allowed to retire early and on large pensions,and that in today’s society we are encouraged to borrow, borrow ,borrow,from the little man to the large country ;I recently had to tell my bank not to offer me more loans;I was brought up in a post war society where we were encouraged to make do and mend, to save whatever you had,and only borrow in an emergency.Money has to come from somewhere;there is no limitless pit that the little man or the big country can go to when you need to repay. I admire George Osborne for the stand he is making against the National Debt,now numbering some Trillions;successive governments have continued to add to this ,and somewhere it has to stop.Humankind is greedy,wanting more and more;witness the vast cruise liners like sky scrapers at sea;we all want many holidays,cars,fine houses and masses of electronic gadgetry. It has to stop.We have become used to a society that churns out benefits as if there is no tomorrow and flinches at the post war austerity which was normal for me. We and Greece have to tighten our belts and make do and mend.

  • carl jacobs

    I suspect your typical average Greek didn’t think beyond “I’ll get paid in Euros? Sweet!” They didn’t stop to think that being paid in Euros meant that their economic output would be judged in Euros. That unfortunate fact would expose all the distortions in the Greek market – the fat pensions, the restrictive labor laws, the cronyism, the tax evasion, the bloated public service sector. If you want to be paid like Germans, you have to work like Germans.

    If the Greeks couldn’t deflate themselves back to prosperity, then they would be made to increase their productivity. The lenders thought to make the Greeks work like Germans as a condition of debt. What that did was expose the living standard of all those people whose economic well-being depended upon the current system being maintained. And that is what Tsipras is defending. Those are the issues that have deadlocked the negotiations. The Greeks don’t want their pension system reformed. They don’t want their labor laws reformed. They don’t want to pay more in taxes. They want to live like they have been living except they want to be paid in Euros. And, no, they don’t want to hear they can’t afford it.

    Their (predictable) solution to this contradiction is of course income transfer “debt relief” followed by more borrowing. The Greeks essentially want the German gov’t to collect money from the German taxpayer and give it to Greece to fund the Greek welfare state. That way the Greeks don’t have to pay taxes to fund it themselves. And they can retire in their mid-50s on full pension and enjoy their days at a Mediterranean seaside cafe. This was the mandate that Syriza received in January. “Make them pay for us!”

    Democracy had its say in Greece. But democracy is having its say in Germany as well. They won’t pay for it. And this is the real lesson for the EU. Germans are Germans before they are Europeans. They feel no sense of national obligation for Greece. The nation of Europe isn’t emerging in the wake of the shared economy. The whole Euro exercise is just a fixed exchange rate mechanism on steroids. And so where does this end?

    • Anton

      The Germans aren’t actually too unhappy about it either because although it costs them to subsidise Greece the presence of such lousy economies in the Eurozone keeps the exchange rate of the Euro down in world markets and makes German exports more competitive…

      • Uncle Brian

        That’s an interesting point. If it’s true that giving away yet more hard-earned German money to spendthrift Greeks should actually turn out to be beneficial to the German taxpayer, then yes, why not do it. But you’d have to be very sure that the conjuring trick is really going to work.

        • James60498 .

          It is very true. Anton is correct.

          Of course there is a point where the amount of cash handed to Greece exceeds the value of the lower currency, and not many people (if any) will know where that is, but until that point is reached, it is in Germany’s interest as well as Greece’s to continue.

          And let’s not forget too, that the Greeks aren’t behaving any differently now than when they were allowed to join the Euro. They haven’t just suddenly stopped paying their taxes. They haven’t just started retiring earlier. They have done this for a long time. They were allowed to join. They did not have an automatic right.

          Most countries, not just Greece,would have failed the “tests” but were allowed to join anyway. Whether this was because of the effect of improving the currency situation for Germany or because it’s someone’s vanity project I don’t know. Possibly a mix of the two.

          • Anton

            The Greek government paid Goldman Sachs for advice on how to make it look like they met the criteria for joining the Euro when in fact they didn’t. Although I suspect that the Germans were well aware of that and kept shtumm.

          • Uncle Brian

            Christine Lagarde seems to be taking a tougher line tnan the Germans, but I don’t know whether that’s because she’s looking at it from the French angle or from the IMF angle. Both at once, perhaps.

          • bluedog

            Lagarde acts from an EU perspective. Imagine the IMF permitting similar theatre with any other borrower.

          • Uncle Brian

            Hello again, Bluedog. I have the impression you haven’t been spending as much time here at Cranmer’s as you used to. Everything okay, I hope?

            Lagarde acts from an EU perspective.
            Does that mean, then, that Angela Merkel is not acting from an EU perspective?

            Regards
            Brian

          • bluedog

            One is touched to learn that you have missed the canine presence, UB. All is well, but travels here and there in the course of business are time consuming, and other issues intrude.

            Angela Merkel acts for Germany.

          • James60498 .

            Thanks Anton

            I wasn’t aware of Goldman Sachs. However your final sentence backs up both your original comments and mine too. The Germans let them in knowing that they shouldn’t have.

          • magnolia

            Goldman Sachs!! Is that the bank referred to as the verminous squid or suchlike? Whatever they and the Greek government of the time and the Mighty Unelected Rulers of the EU stitched Greece, oh, and all the Eurozone for that matter, up no end by this immoral and untruthful action.

          • Anton

            Matt Taibbi memorably described GS in Rolling Stone magazine in 2010 as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

          • magnolia

            Thanks for the correct reference. They have a lot to answer for but I doubt that they will be called to account. In Iceland now,,,,

          • magnolia

            Sheila Patel from Goldman Sachs is featured on the US version of Yahoo finance now saying “Greece is holding back Europe”. The irony and hypocrisy is not lost on many, if any, commentators on the story!

          • Uncle Brian

            They were allowed to join. They did not have an automatic right.
            A lot of insistent wheedling eventually paid off, as I remember. The cradle of democracy and all that. Let’s not be nasty to the poor little Greeks. They’re a special case, deserving of our something or other.
            Do they have anyone to blame for the mess they’re in, other than their own crooked politicians? You could add in the Greek electorate as a whole, I suppose, who were responsible for giving the politicians the power to do all that damage. But that’s where the buck stops, as far as I can I see.

          • James60498 .

            The Greeks weren’t the only ones who didn’t meet the criteria. Equally the present desire to ensure that all banks meet their criteria is the only reason that the vast majority of them are calculated to have met them.

            The politicians and Eurocrats are desperate to hold it all together.

            Of course it is the Greek government’s fault that it is in a mess.

            But it is no different than a company taking out a loan on an asset that it can’t possibly use to pay back the bank. The bank knows that it is unlikely to be able to pay its debts but it’s desperate to get money out on loan. Then the company defaults but the bank doesn’t withdraw the loan as it is still earning something and there are lots of other defaults going on too and it doesn’t want to damage its market. It will withdraw the loans when it’s the right time for the bank.

            There is so much of this in the UK market at the moment never mind the Greek one

            The company is at fault, but so is the bank. The company is Greece. The bank is Germany.

    • True and we all know how wonderfully efficient the Germans are in getting their mits on the sun lounger next to the pool…. but I digress: the monies were lent by northern European banks, that and Euro fanatics were afraid it would blow the whole idea of the USA of Europe asunder . Which is why the logical solution of a Greek bankruptcy didn’t occur in 2010. Those same hard working Germans and dare I say it the French , had lend what couldn’t be paid back to Greece, via their banks , which stood to loose a hefty sum if Greece hadn’t paid . So the bailout of these northern European banks wasn’t by the German or Dutch taxpayers but the greek one (I mean literally the one Greek taxpayer ). Germany at present hasn’t lost a Euro. It may if there’s a decision by the Greeks to remove the pin from the grenade.

  • If there is any hope for the Greek economy (and I’m not sure there is), then Greece needs to come out of the Euro and devalue so that its agriculture, holiday and other industries can become competitive. Merely imposing more austerity and shrinking the economy even further will not work. It needs the chance to grow.
    .
    It will be devilishly difficult to manage as the new currency is likely to slide straight through the floor, so the IMF and Eurobanks will have to give support, but it’s the only hope.
    .
    Unfortunately, so much vanity is tied in with the Euro that even Greek politicians are reluctant to accept this.

    • Dominic Stockford

      Yes, sort of. Though rather than this obsession with growth which everyone seems to think is necessary, it needs the room to get on with what it needs to get on with – which is looking after the people of Greece. If that means in absolute terms it gets smaller or bigger, but people are better cared for, that is good.

  • IanCad

    Only two major players involved here. Greece and Germany. The former, laid back and excellent cooks, the later uptight and likely to kill when they have the upper hand.

    Greece suffered terribly in WW2 and got but a pittance in compensation. Germany caused the suffering and got off lightly.

    Oh Yes! The sins of the fathers should not be borne by the children, but in this case those sins have scarcely been acknowledged by the Germans. They all knew nothing about them – just a few fanatics – we were good Germans. And we did so love those Jews and Gipsies and we all cross the road only where permitted. None of us teach our kids at home – what do we have a state for?

    After the war came the Marshall Plan, not the far more appropriate Morgenthau Plan.

    Germany was helped back on its feet through the generosity of the allies – primarily the Americans.

    As they were helped then, so should they now pay off Greece’s debts.

    • Anton

      Don’t mention the…

      • sarky

        Nearly choked on my ‘colditz salad’ !!

    • Ivan M

      The Germans were helped only to the extent that the Allies did not want riots and mass starvation . They rebuilt their country all by themselves. The Marshall Plan only got going when it was realised that the Soviet Union under Josef Stalin, was ever prepared to offer generous terms to keep the Germans out of any impending East-West conflict. The famous Stalin note of 1952 attest to this. Total neutrality in return for reunification and territorial reintegration. More generous terms than were offered to Finland, since Uncle Joe was a Germanophile at heart.

    • Ivan M

      Oww I was too obtuse to detect the sarcasm IanCad.

  • len

    There is an air of unreality that seems to hover over the entire financial world.
    There was a solid back up when the world was on the gold standard but the whole financial scene today is like the story of’ the Emperors clothes’ no one wants to pronounce the Emperor’ naked’ but everyone can see that he is so the illusion continues as long as no one actually dares speak the truth….
    When the banks were given the ability to create money out of ‘nothing’ the seeds were sown of the impending disaster…….

  • preacher

    The problem that the EU faces is if Greece leaves, the door will be open for others to follow. If they lend more, in a comparatively short time, history will repeat itself & the debt will be even larger. But the means to pay it back non existent.

    I’ve always seen the Euro as a trap, the bait is juicy, but the hook is set & ready. When all is said & done, it’s not real money, just IOU’s printed or cast by the billions, it’s all on paper so the Eurocrats used it in the belief that if there was a problem they could juggle the figures & squirm out of it.
    Thank God we never ditched sterling. We have a dual financial system, we can accept Euros, or any other currency, but are not bound by a single currency, except the pound sterling.
    Fluctuations in exchange rates don’t destabilise us as much as the Euro would, & is doing to those that embraced it with both arms, surely it would have been wiser to float it alongside the Drachma, Franc & Deutsch Mark etcetera until those currencies proved stable. Even then it could have continued as a dual choice.
    IMO it was the result of a greedy land snatch, an attempt to seize power & those greedy of it must now face the consequences of that greed.

    We should stop listening to all the propaganda & resign from this comedy club. You can’t renegotiate with a bankrupt Bank !!!.

    • ‘A lady while dining in Crewe
      found an elephant’s **** in her stew.
      Said the waiter ‘Don’t shout
      and don’t wave it about
      OR THE OTHERS WILL ALL WANT ONE TOO.’

  • Well said YG.

  • Inspector General

    One recalls a documentary team travelling to Greece to see how things were, about a year ago. Several individuals were asked if they wanted the Drachma back or to keep the Euro. Every single person said they wanted the Euro. One grinned and said it was where the future lay. Couldn’t help thinking then that the country is living in a fiscal dream. Still do. They want to be Greek and at the same time expect the rest of us to foot the bill these accomplished tax dodgers run up for their existence. Yes, how very Greek, a people of apparent indigence.

    • Bernard from Bucks

      Mmm, I remember that. Produced by the BBC, clips selected by the BBC and presented by Portillo. No bias there then?

  • To add to this feeling of Greek drama apparently Mr Tsipras has been told by his (rather attractive) better half of 30 years , good communist that she is, “it’s me or the Euro”. If I were a greek pm and if it were a choice between the Euro and my babe, I’d have ditched the euro by now.

    • bluedog

      But if you’re a black leather-jacketed motorcycle-riding forty-something Greek PM, the Greek (and Euro) babes are probably falling over themselves for a piece of the action. Where does that leave Red Betty?

  • maybe off topic but……..”when holders of health insurance use more healthcare than they would if they were not insured.”……just as with the free at the point of use NHS, which is breaking under the combined weights of unlimited entitlement driven demand with no brakes or limits, and the disastrous attempts by politicians to tinker with the system so that outputs exceed inputs.

    Socialism with OMOV usually does this, y’know, voting for unearned pay rises and perpetual free money. I am sick of hearing the word ‘austerity’ used endlessly by protagonists and commentators as if it were a calculated wickedness being sadistically inflicted on the helpless poor by the evil rich and not the belated application of the laws of simple arithmetic.

    Bring back Mister Mickawber.

    • sarky

      I think it’s because the ‘helpless poor’ seem to be hit the hardest, while the ‘evil rich’ walk away scot free.

      • Inspector General

        Helpless poor? Come down to Gloucester and the Inspector will show you the city centre bars the helpless poor are helpless in.

        • There aren’t any poor people in Gloucester Inspector. It’s one of the most affluent parts of the country didn’t you know?

        • sarky

          Can’t beat a sweeping generalisation can we?

  • Inspector General

    The Inspector is reminded of a would be independent quasi Marxist state that would bankrupt itself in another damn hurry, closer to home.

    You can bet your cat that the SNP are taking close notice of how Greece evades it’s fiscal responsibilities…

  • bluedog

    One reads of EMU concerns about a run on the Greek banks; hardly surprising. It will be interesting to see to what extent there are withdrawals from other banks within the PIGS group. The treatment being meted out to Greece doesn’t inspire confidence in the overall management of the EMU. After the PIGS banks, the next target in order of procession would be the ECB itself. If the ECB totters, and in the view of this communicant it’s only a matter of time, the ultimate guarantor will be assumed to be the Federal Republic of Germany. But what if the Germans simply walk? Not out of the question.

    There maybe no need for a referendum in 2016. It is inconceivable that the EMU and subsequently the EU will survive until 2017

    • Inspector General

      Bravo Blue!

      • bluedog

        Thank you, thank you, Mr Inspector. Praise from you is praise indeed.

        On the premise that the Euro is a political rather than a financial project, one suspects that the EU ruling elite are in fact looking for a political outcome. And what might that be? Well, the youthful Greek PM is clearly an upstart who must be crushed, along with his independently minded finance minister. It follows that no Greek offer will be acceptable to Greece’s creditors, only unconditional surrender to the EU’s terms can be entertained.

        The Greek government will be compelled to renege on their mandate from the Greek electorate, with the objective of forcing regime change. A compliant technocrat will then be parachuted into Greece to manage the EU’s somewhat unruly estate there. The EU has done this before, in both Greece and Italy in 2010. Indebtedness is of secondary importance to the imperative of political control. Indeed, indebtedness is a tool in the process of obtaining absolute political subservience.

        In the context of the UK’s renegotiation, it seems that Cameron has had a microchip inserted at some point while in Brussels. He will faithfully respond to commands until the EU command-post implodes, as it will under the weight of its own internal contradictions.

  • Phil R

    Since 2008, money seems to have lost meaning at least in the minds of many people. We no longer see it linked in anyway to a specific physical value at least for governments. I think that has been the case since the time it became widely known that both banks and then later on Governments could simply create more money simply by typing a 1 and a series of zeros into a computer and pressing return.

    People then across the EU start saying so why should we work so hard for our money and can we have some more free money please? People increasingly do not not see the need to suffer to pay back what, it seems, can be just created on a whim.

    I think they might be right.

    • Ivan M

      I can recall that when the S&L scandal hit the US, there was an immediate outcry and many people named Keating went to prison. The same when Enron folded, Ken Lay and others had to lose their shirt. And how much blather we had then about the integrity of the financial system and so on.

      But in the time of the greatest scandals since the Great Depression they managed to jail only people with names like

      Rajat Gupta https://en.wikipedia.org/wiki/Rajat_Gupta
      and
      Raj Rajaratnam https://en.wikipedia.org/wiki/Raj_Rajaratnam

      Anyone would think that Wall Street is run by people from the Indian subcontinent.

  • Mike Stallard

    What would Jesus, that very shrewd observer of business and its methods, have to say about all this I wonder.

  • John Thomas

    ” why should other EU nations (ie the people) subsidise Greece’s lean years ” I’ve heard it said that Germany was very keen to lend to Greece so that Greeks could buy lots of German products (Germany’s is an economy very dependent on export of manufactures, apparently). Thus, many Germans got good jobs out of this, and good salaries. Is it not therefore fair that German people should “subsidise” the “lean years”, and re-payments? It’s just a pity that the rest of us will have to fork out as well …