Monday, July 7, 2014
Greek Default on Debt Solution: No More Credit and More Time to Pay
Greek Default on Debt Solution: No More Credit and More Time to Pay Lex Loeb Contributor Network . Greece has not defaulted yet. It may or it may not default on it's sovereign debt which is some 350 billion dollars apparently. No one ever should have lent money to Greece. The money may have built some fancy public works projects like iconic bridges, subway systems , rail links and highways linking the rest of the newly united states of Europe but much of the money was obviously wasted on payments to people who will produce nothing in the future to help pay back investor's principle and interest. A lot of people and banks lent money to Greece because they promised higher interest rates in an apparently stable currency that represents one of the largest integrated trade units in the world with over 400 million people in all involved European states. The idea of borrowing money to quickly modernize , build some flashy new public works projects including infrastructure for the show case Athens Olympics games may have seemed like one of those great pie in the sky ideas which it was. The idea that throwing money at wanted economic development does not create economic economic competitive advantages in industry , agriculture or other forms of production . Nor does it build summer house Mediterranean Sea condos for well to do German to spend more time. Greece borrowed the money and blew it. Having the ability to charge big tolls on new fancy roads, bridges , tunnels and on fancy new airport passage taxes does necessarily create any long term means of returning invested capital. Projects like those Greece involved itself end up creating teams of workers who only depend on finding the next big public works project once the first set of projects is built and ready. That can only mean borrowing more and more money to sustain that kind of work base. Unlike the American economy that go in trouble lending too much money to build houses ending up with a glut of houses and banks finding they have bad loans, The Greeks are not necessarily finding that they have the silver lining Americans are finding in the popped housing bubble which is a buyer;s market of cheap affordable homes for people who could not afford them before. The Greek people are getting suck with higher and higher food and energy prices and not because the Euro has depreciated against the US dollar but because Greece invested nothing of the 350 billion dollars they borrowed to find a domestic supply of energy nor to improve domestic agriculture. There is no discernible trace of mediterranean aqua culture like one finds in Chile or in Asia. Greece spent the money to build fancy new headquarters building to house public employees and to make sure all of the right people in this aristocracy were well compensated with appropriate benefits for such high office holders. A huge do nothing government found it's own self importance with the help of sovereign debt financing. When we hear about how great it is that Greece is now whipping itself with an "austerity" program one should laugh. Austerity? What Austerity? The money they borrowed is not entirely gone It had to go somewhere. Some of it went to companies around the world helping Greece put on its big show off of shows and some of it had to go into local hands of businesses. Money does not disappear into thin air it circulates. Raising taxes is no austerity measure but rather yet another way to slow down business and kill jobs in Greece. Selling off state assets like airports to private investors can raise money but it's unlikely that all of it or much of it will ever go back to pay down the debt because government puts itself and its people first. The cost of Greek government is not likely falling on really hard times after all that is what the debt was primarily used to build up which is why it is called sovereign debt. No one in their right mind in Europe or anywhere else should have ever loaned Greece money without a paper in their hands giving them access to collateral in case of default. The bankers and sophisticated investors should have known that relatively high Greek interest rates meant that they were putting their money at risk of loss. It is not just that interest rates being high signals this but the complete lack of underlying collateral that could be seized in case of default. Governments do not generally put up collateral at least not in this day and age they don't . Its like the Chinese or Japanese before them heavily investing in US Treasury notes that only give them the right to us dollars and the interest rate that pertains to these notes. The notes do not necessarily guarantee that their purchasing power keeps up with the value of the dollar as it compares to foreign currencies with inflation or deflation and these dollars denominated bills do not guarantee that foreigners should be allowed to take control of US companies just because they refuse to buy goods and services. Greek debt is even more hollow than US debt because Greek debt has to be paid back in Euros which the Greeks don't have the keys to run the printing presses required to produce them. That puts Greece in a bind having to find ways to get euros by selling stuff to the rest of Europe or beyond. The government made no investment in anything that help bring enough money in to retire the debt. Not a good situation but then not the end of the world. What needs to happen is that creditors owed money by Greece have to come to terms that the country has already practically defaulted already. It was a mistake ever lending money to the Greek government . In the future no more money should or probably would be loaned. As for getting principal and maybe some of the interest from the bonds back investors should first be willing to give Greece more time to pay. No new loans should be made to the sovereign funds there. If the loans are non performing for a while maybe that will change in the future. More time to pay is a real option often deployed by bankers. It would work with Greece not just to postpone any government default but give it's government time to put its house in order with the discipline of having no new money lent to them until adequate payments of what is due is paid or become payable as economic activity regenerates. All loans / debt are just contracts and contracts can be changed to allow more time for repayment. There is no need for fear and panic. And there should be no need for default. Greek government has no choice but to cut it's expenses especially if no new money is coming in from abroad to finance their fiasco programs. This could start to work out in a few years and debt payments can be resumed. What is all the fuss about? So what if Greece defaults? Or why does it have to default? Governments have much longer lives than people do. They have time to pay later especially after economic circumstances later improve. There are examples of sovereign defaults later made good on. Usually that is not the case. Mexico as an example, almost never pays back creditors when they default but when Mexico "defaults" usually they just massively devalue or replace the Peso with a new Peso. No creditor in their right mind would ever loan money to Mexico again with their credit history but they still do. They come back when the sun seems to be shining and then when the economy sours again they inevitably get shafted once again. Greece can't do that kind of default with the Euro as their common currency. The good thing for the idiot creditors is that they should be able to retain their claims , Maybe If I ran the Greek government finances I would suggest turning a couple of islands into lots for development similar to the way Dubai creates lots on land that never existed before out in the sea. Those development lots could be traded for creditor claims or options on other forms of potential development could be considered each project like that could erase a few billion dollars in claims at a time and the rest could remain on the books with more time to pay and a few months or years of skipped payments. Creditors need to have collateral in hand before ever doing any business with sovereign wealth funds. Banks should all know better than to loan to politicians. They never seem to learn their lessons. It pays to take collateral in advance like a pawn shop holding property for a loan because then the government won't play the game that Greece was playing they know the limitations and what they lose and how they take fault for losing it that way. Greek debt and other socialist debt across Europe is perhaps proverbial spilled milk already. You can cry all you want about spilled milk but if you want more you have to go back to the store or back to the farm and start milking. You spill milk and the store won't sell you any more because your credit is bad its too bad . You then have to wait till you have money to buy more. Greece did not invest in new cows and used up all their milk. Too bad. The great thing is America is still here with plenty of milk it will send milk over even if the Europeans won't. If not milk it will be US dollars. The dollars won't be enough to make the debts whole but they will be enough to keep the babies from crying there is no milk. That's probably a stimulus for the US economy as the dollars will come back and be in circulation with circulation velocity of money in the economy being a plus not a minus and that will be more stimulus than Europe will have. It is probably worth the cost of helping Greece out of it's short term money bind. Letting Greece have more time to pay is even cheaper. When credit markets crashed in America not long ago. Letting people with mortgages off the hook temporarily could have prevented the damage that did occur. Instead of a crisis and disaster lenders would have had the inconvenience of receiving lower payment or temporarily not receiving any. Government could have made that feasible by allowing banks to take the losses as a tax credits. Tax credits for debt relief would have been a great advantage for the US economy when it needed but government did not feel it should give up it's cut and it prefer having panic and crisis because that increased the importance of government. When you look back you see clearly that the US government found the home building industry to be it's special economic growth engine and money gravy train. The government benefited in the real estate housing boom directly and it gave advantages to home ownership to encourage the boom then after the bubble popped they blamed the private sector's greed exclusively as if they had no part or take in it themselves. That is the same thing happening with the European debt crisis situation. European banks and nations lent to quickly develop poorer nations because they saw it as a gravy train in their own advantage . Everyone involved was taking advantage of the befits and disregarding the obvious risks. Especially the governments. The solution really comes down to giving more time to pay and other options to cash in claims for alternative options. Europe had to know that something like this would eventually happen when you offer credit to governments that spend the money on social programs and not on creating wealth . There is no reason to kill the Euro nor the European union just because payments will be deferred or extended out in time. Everyone involved in the transactions from the beginning knew the loans were not based on collateral and that was a known risk. The lesson pertains to the USA where we keep hearing politicians telling us that infrastructure spending is a great investment. It was not so in Europe. After you get all that state of the art super infrastructure development you end up with a broken financial system and no way to pay for all the work you have done but you do have the finished projects and there is national propaganda value in that. Europe traded fast growth in the past for slow growth in the future . They had to know they were doing that because the government was not using the money to create market viable businesses. .