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.