Hidden Benefits of a Greek Debt Default

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by: Avery Goodman

There is now intense pressure to provide government sponsored loans to Greece. The Orwellian double-speak, these days, is about so-called “contagion” and an economic “tsunami”. According to the party-line, taxpayers of other nations, such as Germany, eurozone members, and the U.S.A. and U.K. (through the IMF) should pay for the mistakes and greed of others. If they don't want to, they are being "selfish" and are simply not "enlightened" people. The truth, of course, is that all of it is crony-capitalism, and it is running rampant. The rest of the propaganda is nonsense designed for public consumption.

Taxpayers all over the world, and savers, in particular, will be fleeced again, from any bailouts of the PIIG nations. The proposed bailouts have nothing to do with the well-being of the countries involved. Greece, Portugal, Ireland, Spain and Italy would all be immeasurably better off if their governments default. When push comes to shove, just as with the American TARP program, and the Federal Reserve sponsored giveaway grab bag in the U.S.A., this talk of bailouts is all about saving bankers from their mistakes.

The risk of lending to fiscally irresponsible nations should have been recognized when the loans were made. People who lend money have a duty to recognize those issues. Their shareholders should be properly compensated for being induced to take high risk. They should have demanded high rates of return from Greece, for example, a long time ago.

Similarly, it is entirely correct, and an economically sound idea that irresponsible countries, who spend beyond their means, face the impossibility of borrowing more. We could have nipped problems like Greece, in the bud, years before they had the potential to become catastrophes, had sober principles and practices been followed from the start.

Nations should be forced to collect more taxes if they want to provide more services, or dramatically slash government expenditures if they can’t. Banks should not be allowed to ignore reality. Lending money, at very low rates, to nations with centuries-long traditions of defaulting on debt (through currency debasement) is simply foolish. The taxpayers of Europe and America are not responsible for the belief, among bankers, that because Greece joined a currency union, its centuries old modus operandi would suddenly change.

Taxpayers of other nations never guaranteed Greek debt. Indeed, it was widely understood and accepted, at the time the eurozone was created, that no nation would be bailed out, no matter what the circumstances. Now, all of that has been thrown out the door, simply because the political savvy of bankers who don't want to suffer losses have made it so.

Greece will default. It will not happen this year, or next, if there is a big money giveaway, but it will eventually happen. We saw riots in the streets at even the hint of budgetary cutbacks. Can you imagine what will happen when the cutbacks actually occur? Common sense tells us that the Greek government will never be able to cut its budget sufficiently to repay $150 billion in bailout money without a severe debasement of the euro.

Buyers and guarantors of Greek bonds, and of the bonds of similarly profligate nations, will lose all or a part of their investment, one way or the other. Bailing out the nations involved merely means delaying the inevitable, and shifting losses from the banks which are responsible for incurring them, onto the backs of the taxpayers of Germany, France, the other EU states, and the U.S.A. and U.K. (though the IMF). It is NOT a matter of “if” Greece defaults, but merely of "when".

The proposed bailout will do little more than delay the inevitable, and serve to transfer hundreds of billions of dollars to banks. Talk of “contagion” and other fear mongering are the result of private players pushing for help out of a bind. Bankers in Europe face huge losses and don’t want to pay the piper. The executives don’t want their jobs and bonuses compromised by their incompetence. It is better, from their point of view, if previous gains were privatized, while present and future losses are distributed among taxpayers.

A refusal to give money to Greece will result in a default. When Greece defaults many banks will spend euros and panic-buy other currencies. This phenomenon may temporarily cause further drops in the exchange value of the euro. That is not a very frightening prospect. The euro is still overvalued. But, even if it were not, the alternative is more short-term thinking.

Letting Greece default is the best of a lot of bad choices. In the short run, a cheap euro will temporarily spur economic growth and that will create new conditions that strengthen the euro. In the long run, a refusal to monetize Greek debt to the taxpayers of other nations (and, secondarily, the debts of other PIIG nations), would send a strong message. It would create a much stronger euro that would be likely to replace the American dollar as the world’s exchange currency.

Default would also teach invaluable lessons to future generations of bankers, and would have the effect of shifting control of critical banking assets away from those who choose to operate banks as if they were casinos, to more sober hands. To avoid any possibility of a collapse of the banking system, insolvent institutions could immediately be nationalized, management replaced, and then assets could be sold off as quickly as possible. The process would reduce moral hazard, increase the power of responsible managements, and outline a vast difference between the crony-capitalist and irresponsible USA, and the more honest eurozone.

Without access to low cost loans, and subsidies by the taxpayers of other countries, Greece would be forced either to collect more taxes or cut spending. Europe would see productivity and prosperity soaring. In contrast, the misallocation and waste of resources that is driven by a government sponsored zero percent interest rate, money printing, bailout natino, like the United States, would doom that nation to second rate economic status.

Governments deserve to be punished with high rates and difficult financial conditions if they fail to exercise fiscal restraint. Banks and others who lend money to them need to be aware of the risk, and should suffer steep losses when they make big mistakes. Failures should be punished and successes rewarded. Innocent taxpayers SHOULD NOT pay for the foolishness of bankers, nor the corruption of governments controlled by them, nor the inability of other governments to control spending.

There is no sovereign right to a “reasonable” interest rate on government debt. In short, Greece should be left to default.

The process of default would help cleanse the banking system of incompetents and casino-operators, and it should have started in the USA in 2008, but didn’t. That opportunity was missed, but this is as good place as any to make a late start. Otherwise, once again, prudent people will be the losers, and speculators and irresponsible governments will be the subsidized winners. With a big bailout, the game will go on, until, finally, in a few years, the system will collapse so deeply that no amount of subsidization will keep it going.

Disclosure: No positions