What happens when one democracy is a creditor to another democracy?
By Buttonwood
AS THE Greek deal was being hammered out on Sunday, and the harsh details leaked out, the hashtag #thisisacoup trended on Twitter. The people of Greece had voted against austerity a week previously, but austerity (and overseas monitoring of their economic policies) was being foisted upon them.
But this is an oversimplification of the forces at work, regardless of whether Greece manages to meet all the conditions of the deal (probably not) or whether the Greeks handled the negotiations well (definitely not). The narrative is that Greece is being penalised to bail out "the banks". But if only the banks were the creditors, the whole issue might be easier to deal with. Go back to the 2012 deal; the private sector creditors (the banks) were made to take a 50% write-off (equivalent to €100 billion or $110 billion; €10,000 per Greek citizen) and the official creditors stepped in, in a package that involved extended debt maturities, lower interest rates on existing debt and holidays for interest payments. (All this explains why Greek government interest payments, as a proportion of GDP, have fallen despite the debt burden).
The effect of this deal was that Greece owed the bulk of its debt to official creditors; the International Monetary Fund, the European Central Bank and European governments, either individually or collectively via the European Financial Stability Facility and its successor, the European Stability Mechanism. The private sector owns just 17% of the total.
In other words, the debt is owed to the taxpayers of other nations, most of which are democracies. So any write-off of Greek debt can be represented as a loss to voters in other countries. One can argue, of course, that such losses would be notional; experience suggests, for example, that central banks can manage quite well with a hole in their balance sheet. But that is not how such schemes have been sold to voters. German voters were told that the creation of the euro would not involve bail-outs of other countries; that explains why the country's leaders are so reluctant to let Greece off the hook.
The problem is that allowing a write-off in one bail-out would reduce the support for future deals. The IMF, for example, has always insisted on being a senior creditor to governments. Were it to have the reputation as an easy touch for such debtors, and a sinkhole for capital, it would struggle to get the money it needs from its shareholders. Even so, the IMF faces fewer democratic pressures than the EU; that is why it is more willing to argue that Greece needs a write-off. Even here, however, the IMF report mentions that:
The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM.
But it does not say anything about the IMF itself needing to take a hit.
So the Greek deal is not about pitting the voters of one country against bankers, but about pitting the voters of one country against the voters of others. No one has suggested having a referendum in other countries about bailing out the Greeks, for the very good reason that they know what the answer will be. The same would have applied to the American bail-out of Mexico in 1994 or indeed the bail-out of its own banks in 2008. In an ideal world, voters would feel solidarity with those of other countries; generally, they don't. There are lots of English-speaking economists berating the Germans for what they have done to the Greeks; the American and British governments have also been insistent that the EU reach a deal. When it comes to practical help, however, the answer is rather different; Britain has just turned down the idea of using EU-wide funds to help Greece. Why? Because such a suggestion would be politically toxic in Britain. That's democracy in action for you.
In short, if countries were fully democratic, bail-outs would hardly ever happen. But this is not an argument that those calling for the democratic wishes of the Greek people to be respected are willing to take on board. In such circumstances, the experts (which means economists) know better. The people are not wise enough to understand that a short-term stimulus will boost their long-term wealth; better to go ahead with it now, and have results prove the experts right. Of course, this argument (dubbed output legitimacy) is how the EU let too many countries into the euro, and ended up in this mess in the first place.
