Greece needs cold-turkey withdrawal from foreign-debt addiction

Jake van der Kamp PUBLISHED : Sunday, 15 February, 2015, 6:59am

Greece needs cold-turkey withdrawal from foreign-debt addiction

Greece's new leftist government and its international creditors have failed to agree on a way forward on the country's unpopular bailout and will try again on Monday, with time running out for a financing deal.

SCMP, February 8

I don't know why they bother. Argentina walks away from its debts on a regular 50-year cycle and the world has never stopped turning as a result.

But why look to Argentina for an example when the better one is right at home? On three occasions in the 1820s, big loans were raised in London for the aid of an independent Greek government and never did a farthing come back.

I believe it also happened in the late 1800s, and there was definitely a Greek default again at the time of the Great Depression. This is a road well travelled. Why then such cries of utter doom because the cart is on the track once more?

I understand why Greek bureaucrats should want to pretend a little longer. Their jobs are on the line. When the music stops they will find no seats. The money to pay them will simply vanish and their lot will be the beggar's bowl.

Thus they must keep talking in hope that their creditors will forgive yet more of the debt and the pretence can continue.

But it will only be the prelude to yet another round of debt forgiveness later and the end result will be the same. Only secured creditors will get any money back.

On the creditor side, the pretence gets around the difficulty of having to write off more than €100 billion (HK$885 billion) of assets at a time when European regulators are again talking of raising capital asset ratios. Shareholders will balk at this call on their money but it can be put off if talks continue and official default is delayed a little longer.

For the sake of the people of Greece, however, I think immediate repudiation of debt would be the best course to take.

It will, of course, mean an end for a number of years to foreign borrowings. Yet this is also just what the doctor ordered. Addicts sometimes need the needle taken away from them when they won't turn away from it on their own.

It should have been done much earlier. The withdrawal symptoms will be less painful than they might otherwise have been, however, as Greece will almost certainly have to leave the euro zone and adopt the drachma again.

It should do so anyway, even if not forced. The drachma will be cheap, Greece will be forced to rely on its own resources, tourism will boom, Greek olive oil will compete at great advantage and even Greek wine may find a market. I actually developed a taste for it years ago when I did Europe on the cheap.

This has all happened before in different places and the results of the cold-turkey cure for economies that borrow excessively to fund operating expenses are proven. They work.

Most of all, it will be a salutary experience for the creditors. It will demonstrate once again that sovereign lending is not risk-free, that guarantees can be worthless and that the creditor also has a role to play in determining whether the borrower can repay.

The German Landesbanks, for instance, are notable for holding the bag at the end in credit failures. They have done it over and over again in Asian financial crises. Berlin should really pass a law saying that Germans who think everyone behaves as Germans do may lend to Germans only.

It's simple. If I ask my bank for a mega-loan to go on holiday or otherwise whoop it up, and I have no collateral left to pledge for that loan or income to support even interest payments on it, the bank manager will call the security guard to see me off the premises.

But that's what the Greek government did and, strange to say, its bank manager agreed. That's the bank manager's own fault then, say I, and let it be a lesson to all others.

This article appeared in the South China Morning Post print edition as Only rational cure for Greek debt addiction is cold turkey

Greece needs cold-turkey withdrawal from foreign-debt addiction | South China Morning Post