“Jove does not give all men their heart’s desire.” – Homer, The Iliad
The Measures Are Killing Us
Last week, after a few rounds of ouzo, crowds of Greeks gathered in Athens. In their efforts to encircle Parliament, they faced a stern response from riot police armed with clubs and tear gas, leading to clashes.
A significant bailout for Greece is urgently needed, or the nation risks defaulting on its debt. However, this bailout will come with harsh austerity measures that demand the Greek people take responsibility for their financial situation. The current climate has led to protests that are turning violent, with many expressing frustration over the perceived unfairness of needing bailouts without shouldering the costs associated with them. Reuters reports…
“Approximately 5,000 protesters from the Communist group PAME marched into Athens’ central Syntagma Square [on Saturday] — the site of violent demonstrations earlier in the week — chanting ‘the measures are killing us!’”
“We have no intention of leaving unless they retract the measures,” stated Costas, a 22-year-old student who has been camping in the square since the start of the month.
With a debt projected to reach 170 percent of GDP by 2013, it seems unlikely that Greece will ever be able to repay what it owes, even with a bailout and austerity measures. So, why attempt it at all?
More on this shortly, but first…
The Ugly Side of Debt
When interest rates experience a prolonged decline, like U.S. Treasuries have over the past 30 years, managing debt becomes accessible, and those who engage in reckless spending may appear financially astute. As rates drop, debts can be refinanced more affordably.
However, interest rates do not always fall; they can also rise. This is the unfortunate truth of debt management.
On June 13th, Standard and Poor’s downgraded Greece’s credit rating from B to CCC. Just last Thursday, yields on Greece’s two-year notes soared to a staggering 30.32 percent, prompting Alan Greenspan to declare that a Greek default was “almost certain.” In contrast, the yield on two-year U.S. Treasury notes is merely around 0.38 percent.
Clearly, Greece cannot sustain paying 30 percent interest on a two-year loan for long. With such an overwhelming debt burden, it is only a matter of time before the country defaults on its obligations. Nevertheless, the European Union and the International Monetary Fund are pressing forward with plans to support Greece.
Over the weekend, discussions were underway regarding a new $170 billion bailout to assist Greece through 2014. However, by Monday, the plan had shifted to offering just 12 billion euros in emergency loans. Greece has two weeks to approve austerity measures in exchange for this financial assistance.
This raises an intriguing question: Why go through this process? Such moves only serve to postpone the inevitable. Additionally, regardless of whether Greece can somehow stabilize itself, it seems profoundly unjust for future generations to be burdened with the excessive debts incurred by previous administrations. Below we suggest a modest alternative…
Give Default A Chance
When central banks, whether the European Central Bank or the Federal Reserve, provide cash bailouts to struggling nations, they are not aiding the populace; they are, in fact, perpetuating a cycle of reliance and financial bondage for both current and future generations.
By masking the debts of nations, governments avoid the consequences of their financial mismanagement. Rather than being removed from office for reckless spending, officials who promise unrealistic financial solutions remain in power, while those advocating for prudent fiscal policy often find themselves ousted.
Today’s governments appear to be engaged in a perpetual game of postponing responsibility. They prefer to defer issues faced today for others to handle tomorrow. However, after years of this practice, the mounting issues have gained significant momentum, endangering the entire global financial system. Yet, the prevailing solution seems to be accumulating even more debt, exacerbating the problem.
While the European Central Bank hasn’t solicited our opinions, in the spirit of constructive discussion, we propose a simple yet bold idea: Give default a chance.
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” were the infamous words of then Treasury Secretary Andrew Mellon at the onset of the Great Depression.
Mellon’s harsh advice was largely ignored as the government attempted to subsidize the economy, ultimately transforming a normal downturn into a decade-long depression. Today, Europe, along with the United States, appears to be repeating those mistakes, compounding their issues and risking an even graver crisis in the future.
Tough love, rather than further enabling, is what is needed now. The EU and the IMF should firmly tell the Greeks to manage without assistance. This would ultimately benefit them. In contrast, bailing them out only serves to harm.
Sincerely,
MN Gordon
for Economic Prism
