Schuldenschnitt (Haircut)

Ein Schuldenschnitt (Haircut) bei einem EU-Mitglied nach nur 3 Jahren Krise wäre ein Präzedenzfall ungeahnten Ausmaßes, dessen langfristige Folgewirkungen nicht einmal annähernd eingeschätzt werden können. Haircuts von Staatsschulden hat es in der jüngeren Geschichte nur in 2 Situationen gegeben: entweder weil ein Land der „4. Welt“ so arm war, dass ein Ausweg aus der Armut nicht vorstellbar war, und auch dann gab es solche Haircuts erst nach jahrelangen Verhandlungen. Oder weil ein Land sich von einer einmaligen Zerstörung erholen musste (Deutschland nach dem 2. Weltkrieg).

Bei einem Unternehmen kann ein Haircut erforderlich sein, weil ein Unternehmen bilanzieren muss und weil es ohne Haircut möglicherweise nicht mehr bilanzieren könnte und Insolvenz beantragen müsste. Ein Staat ist ein Einnahmen-/Ausgabenrechner: es fließen nur jene Ausgaben durch den Staatshaushalt, die auch tatsächlich bezahlt werden. Würde ein Staat keine Zinsen bezahlen (weil sie beispielsweise gestundet wurden), dann hätte er keinen Zinsaufwand im Staatshaushalt.

Es gibt kaum Staaten, die jemals ihre Staatsschulden zur Gänze getilgt (d. h. „bezahlt“) haben. Es gibt derzeit nur wenige Staaten, die ihre Schulden in absoluten Beträgen reduzieren. Warum werden dann Ausdrücke wie z. B. „Land xy muss seine Schulden reduzieren“ überhaupt verwendet? Weil sich eingebürgert hat, Staatsschulden nicht in absoluten Beträgen, sondern in Prozent der Wirtschaftsleistung zu messen. Wenn die Wirtschaftsleistung rascher wächst als die Verschuldung, dann sinkt die Quote der Staatsverschuldung.

Ein Staat zahlt also seine Schulden nur ganz selten in absoluten Beträgen zurück, sondern er „refinanziert“ seine Schulden, d. h. er macht Umschuldungen. Wenn – wie heutzutage oft der Fall – eine Umschuldung mit einer Pleite gleichgestellt wird, dann geht Deutschland andauernd pleite. Deutschland muss andauernd neue Schulden mit längeren Laufzeiten aufnehmen, um fällig werdende Schulden bezahlen zu können.

Es ist also nicht die Umschuldung per se das Problem, sondern die Frage ist, ob ein Staat eine Umschuldung seiner Schulden freiwillig bekommen kann. Deutschland kann das aufgrund seiner ausgezeichneten Bonität. Griechenland kann das nicht (mehr).

Das beste Beispiel hierfür ist das krisengebeutelte Mexiko, dass vor nicht allzu langer Zeit eine 99-Jahre Anleihe erfolgreich platzieren konnte. Kein derzeit Lebender wird die Fälligkeit (d. h. die Rückzahlung) dieser Anleihe erleben, aber jeder wird Zinsen erhalten und wenn er das Kapital vorzeitig zurückhaben möchte, kann er die Anleihe im Sekundärmarkt verkaufen. Der jeweilige Marktpreis im Sekundärmarkt wird dadurch der beste Indikator, wie die Bonität Mexikos vom Markt eingeschätzt wird.

Natürlich muss man einen Staatshaushalt wie z. B. jenen Griechenlands von der nicht verkraftbaren Last des Schuldendienstes – vorübergehend – entlasten. Das erreicht man dadurch, dass man beispielsweise die Fälligkeiten von Kapital und Zinsen bei 50% der Schulden auf 30 Jahre verlängert (umschuldet). Das wäre gewissermaßen ein „Haircut auf 30 Jahre“; die Schulden bleiben aber de jure bestehen.

Warum darf man bei einem Staat einen Haircut nicht zu rasch machen? Erstens, weil ein Staat nicht verschwinden kann, ein Unternehmen jedoch schon. Enron gibt es nicht mehr, Griechenland wird es wohl immer geben. Und zweitens: über längere Zeiträume hinweg (20-30 Jahre) kann sich die Bonität bzw. Refinanzierungsfähigkeit eines Staates vollkommen drehen. Je schwächer der Staat, desto rascher kann sich seine Bonität verbessern, wenn richtige Maßnahmen erfolgreich umgesetzt werden. Niemand kann heute voraussagen, dass Griechenland auch in 20-30 Jahren seine heutigen Schuldenprobleme nicht gelöst haben wird.

Nach 10, 20 oder 30 Jahren kann man dann langsam darüber nachdenken, ob man nicht doch einen Schuldenschnitt gestatten sollte. Aber nach nur 3 Jahren Krise ist das viel zu früh!

How to reestablish confidence!

All Euroland-countries should clean up their banks at all cost if they want stability in financial markets to return.The only real solution is that European banks are forced to write-down the value of their risk assets to real market prices (to those banks which do not want to play along, the EU should say: "ok; that's fine with us but it means that from now on you are on your own. Should you get in trouble, we are ready to take you over and your shareholders lose everything"). That would be a one-time shock which only few institutions could absorb at once. Thus, banks need to be given a grace period of up to a maximum of 10 years to spread-out those write-downs. During this time no dividends!

Those banks which cannot make it even in 10 years ought to be wound down in orderly fashion.

One cannot imagine that Europe would not be able to absorb the losses from sovereign loans over a period of 10 years.

Once the markets see that a spade is a spade in banks’ financial statements, the nervousness will decline because one no longer has to speculate about skeletons which might be hidden in banks’ financial statements.

Response to Mr. Walter Koenig

Mr. Koenig responded to my comment in the WSJ with a passionate argument that Greece simply has to change totally before further financial support could be considered. Below is my reply.

As you can see from my blog, I totally agree with you that Greece as a whole needs to be changed from A-Z. That’s obvious for all the reasons you mention. But one cannot change a whole country from A-Z in a reasonably short time because that would lead to revolution. I say this because I experienced it live in Chile in the late 1970s and early 1980s. Chile did what you seem to want Greece to do: change traffic from one side of the road to the other, and pronto! Chile succeeded with that for one very simple reason: it did not have democracy. There is no way that a democracy would have survived the social costs which come along with such an abrupt change.

I am not a friend of expressions like “what should have been done”, “what should be done”, etc. However, I use them now to explain to you my position and, again, my position is formed and shaped by the actual experiences which I had in Chile (turning an economy around) and in Argentina (rescheduling debt).

If EU-elites had accepted the advice of those who were involved in the Latin American sovereign debt problems then (they rejected it!), then they would have let the Greek problem remain a Greek problem. Which means: as soon as you notice that a country faces a run on its liquidity, you have to draw a line because no one can ever stop such a run. The timing for that would have been mid-2009 when foreign banks cancelled their short-term credit lines for Greek banks and when Greek capital flight started in serious amounts. Instead of drawing a line, the ECB started replenishing the funds which private parties transferred offshore. I attach a link about that irresponsible behavior on the part of the ECB (I trust you read German).

Drawing a line means announcing to one’s creditors (not to third parties like the EU or other governments) that a debt rescheduling is necessary. The actual “rescheduling date” is set retroactively by a few months so that those creditors who managed to flee through the exit door have to turn back what they fled with. This is standard procedure.

The debt rescheduling would have essentially moved maturities of principal and interest into the future. And conditions for that rescheduling would have been very similar to the conditions which are being made today. And now is the point where 2 different views compete with one another.

The traditional IMF-view is (and there are examples which prove it correct): get the state’s household in order and, eventually, everything will trickle down to the economy and set things straight again. I happen to think that this traditional view won’t work in Greece for all the reasons that you list why things don’t work in Greece.

So the other view is that an economy no longer has a self-correcting ability. Thus, someone needs to “manage” it. We have “managed” economies in today’s world and, typically, they do not have the political system of democracy. Yet, they seem to be doing very well (China). Before one comes to the conclusion that “managed” systems are the cure to all our problems, I would warn that, over time, managed systems tend to run into all kinds of other problems.

If the economy cannot be “managed” by authoritarian rule, it has to be managed via incentives. And this is my point about Greece. Greece cannot self-correct any more; the bad habits are too engrained in the system (as you point out). A benevolent dictator (which some Greeks are already calling for…) would cure this problem in a hurry but how do you get rid of a benevolent dictator when he ceases to be benevolent?

And this leads to the points which I have posted over and over again in my blog. Greeks need to be shown in practice that there are better ways to run one’s economy and if that works, they may voluntarily copy that. When I talk about Free Trade Zones, I really mean “little Germany’s”. One is not going to turn Greeks into Germans (thank God!) but one can incentivate Greeks to adopt some of the German methods which have proved to lead to economic success.

Greece is a country with a staggering current account deficit. This means that the Greek economy desperately needs savings of other countries in order to function. There are, in my mind and based on my experiences in Chile, only 3 ways to solve such a problem: foreign investment, foreign investment and, again, foreign investment. The money can no longer enter the country as debt; it must enter the country as equity.

Capital flows to locations which offer the kind of incentives which the owners of capital seek. Greece would only need to ask those investors what they would like to have and offer it to them. Typically, this would be: the prospect of proper “corporate governance”; security of investment; the ability to operate internationally competitively; and the prospect of earning good returns on investment. Greece is presently light years away from offering that.

This could very quickly be changed. All Greece would have to do is to implement a new Foreign Investment Law which guarantees all those things which foreign investors would like to have. And since foreign investors would presently not even trust Greek laws any more, the EU should guarantee compliance with the Foreign Investment Law.

Once new investment starts flowing and new jobs are being created, people start recognizing light at the end of the tunnel. And if things go well, that light will lead to self-reinforcing forces. In Chile I could experience how a run on foreign investments started to take place.

Papandreou and Obama - too soft?

Just like other members of the Greek elites, Papandreou easily outclasses the people sitting with him at the same table in Brussels and/or other European capitals. He gave a speech in Germany yesterday where Merkel and the head of the German Industrial Association also spoke. The latter came across like a German professor from the text book; Merkel came across as the "Mutti" that she is perceived as; and Papandreou was the "sir". A German journalist commented with a strong German accent that Papandreou spoke “good English”. Great observation!

Papandreou’s fault is that he doesn’t come across as “calling the shots”. He comes across more like the fatherly figure who tell his compatriots that they don’t have an alternative. This hurts so much more in as much as Greece actually has the stronger cards in the present game of chicken. He knows that, one way or the other, Greeks will have to accept a much lower standard of living than before. The only question is whether this happens radically (Euro-exit) or gradually.

Greece has very little to lose except the positive image which Papandreou projected in the last 3 years. Someone told me that out of the last 100 years or so, Greece has been in default 2/3 of the time. Another default won’t hurt Greece as much as the rest of the world.

Papandreou ought to give a Churchill-like speech to his compatriots telling them something like the following: “We now have a long-term industrial development plan for the Greek economy which will turn Greece into a competitive, market-driven economy. To accomplish that, we need the help of banks and the help of the EU. We have already informed them what kind of help we need and we expect them to comply because they all must have a strong interest in Greece’s becoming a value-generating member of the EU. They simply cannot allow Greece to become an underdeveloped region of Europe living on money transfers from other countries because that would hurt them more than us!”

And then he should add something like “When should it be done if not now? Who should do it if not us?”

A rescheduling of sovereign debt is the most natural thing in the world!

Here is finally an article which explains that a default and/or debt rescheduling is the most natural thing when a country hits external payment problems (and not the financial Armaggeddon which EU-elites want us to believe). A haircut of sovereign debt after only 3 years of crisis, on the other hand, is an absolute no-no.

The EU-elites have got it completely wrong. The normal thing of a rescheduling is financial Armaggeddon for them but a haircut is something they talk about casually. Good grief!

http://blogs.wsj.com/source/2011/09/26/lessons-for-greece-from-a-decade-ago/

Speech to a group of young Greeks

Dear young generation of Greeks,

please do not expect a sophisticated analysis of the “Greek problem” from me, or of Greece’s role in Euroland or of the whole world now allegedly being in trouble because of Greece. I simply want to apply common sense. An analysis of the past is relevant for today and for the future only in as much as it shows what went wrong in the past and what should be done differently in the future.

Let me start with simple cash flows.

From 2001-10, Greece – that is the Greek economy as a whole (including the sovereign state) – generated revenues from outside the country of 247 billion EUR. That consisted of exports of 146 billion EUR and services (tourism, shipping, etc.) of 101 billion EUR. This translates into an average of almost 25 billion EUR per year. By all standards, it is very respectable when a country of about 11 million people generates on average revenues of 25 billion EUR annually from abroad.

Revenues from abroad serve, among others, to facilitate expenses abroad (imports). In 2001, Greece’s imports were 33 billion EUR; quite a bit more than her revenues from abroad but not necessarily an alarming deficit for a country which was in development and which needed the savings of other countries for its development.

If revenues from abroad amounted to 247 billion EUR during 2001-10, how much could Greece have reasonably afforded to spend abroad during this time? If Greece had spent exactly 247 billion abroad, everything would be fine today.

Instead, Greece spent 446 billion EUR abroad for imports. Now, that is quite a deficit! Greece, during this period, spent 199 billion EUR more abroad than she earned abroad. Isn’t that staggering?

Suppose that half of the Greeks would had been guestworkers in Germany during this period, that they would have earned there sensational incomes and could have saved 199 billion EUR and sent them back to Greece. Then everything would be fine today. Greeks would have generated wealth abroad and sent it back to their country so that their country could enjoy a good standard of living. This is how the Greek economy grew during the 1960s and 1970s.

Unfortunately, it was not the savings of Greek guestworkers in Germany which financed the domestic standard of living but, instead, it was foreign debt. Greece, since the Euro, became approximately 40% more expensive relative to Germany but the Greek Euro maintained the same international purchasing power as the German Euro. Thus, Greeks were obviously incentivated to buy cheaper products & services abroad instead of delivering them domestically. And foreign banks were more than willing to lend Greeks the money to do that.

Now, please picture for a moment the following: an unemployed who hits a jackpot and who decides to spend it all on consumption may live very well for, say, 10 years. When the money is spent, he has to return to the standard of living of 10 years ago. So much worse for you, the Greeks, because you didn’t hit a jackpot but, instead, you incurred debt which is still there.

Debt is not bad per se; it all depends what it is used for. If a large portion of the debt which Greece took up had been invested in revenue generating projects (instead of consumption), Greece would have revenue from these projects today in order to service her debt. Instead, and to give you only one example, Greece spent billions of Euros on an Olympic village which was expected to develop into a new residential paradise generating a lot of revenue for the state. The project failed and today it even costs the state money to maintain it.

For some time now, foreign debt no longer flows voluntarily to Greece. In other words, the gasoline which drove the growth engine of the Greek economy during the last 10 years and which provided for the standard of living is now gone. As suggested above, simple mathematics (and not economics) will now force Greece to return to the standard of living of at least 10 years ago.

That is, indeed, bad news but it cannot be changed. The only thing which can be influenced is whether the “shock” takes place extremely painfully overnight or more or less painfully over a period of time. A Euro-exit would accomplish that overnight. Greece would overnight become 30-40% cheaper and poorer. What is your opinion? After all the pain which Greeks have already had to accept over the last 1-2 years, do you think this additional, immediate and enormous pain would be accepted by Greeks peacefully? Or do you possibly fear that social peace could collapse and domestic political turmoil could be the result of it, including perhaps a break-down of democracy and a call for a “strong leader”?

This is why, today, Greece has to hold on to the Euro. Greece might have been able to exit the Euro a few years back without too much turmoil and Greece might again be able to exit the Euro in a few years’ time without too much turmoil. But in today’s chaotic situation, a Euro-exit on the part of Greece would create enormous turmoil in the world economy and, above all, it would put democracy at risk domestically.

If Greece should hold on to the Euro but if Greece cannot make it with the present Euro-structure, common sense will tell you that Greece should hold on to the Euro but simulate a situation – at least temporarily – as though she had returned to the Drachma. Doesn’t that make sense?

What would be such a simulation? Well, if Greece returned to the Drachma, imports would decline rapidly because they would suddenly be 30-40% more expensive. Also, the government might have to impose import restrictions simply because there wouldn’t be enough foreign currency to pay for them.

Greek exports would increase because in terms of the German Euro, Greek production would now be 30-40% less expensive than before.

And the Greek state would no longer have any problem at all with the paying of salaries, pensions, etc., because it could now print its own currency.

Now, this almost sounds like paradise would return to Greece in case of a Euro-exit; doesn’t it?

Well, it could be a return to paradise but, as explained before, it would overnight eliminate a big chunk of the domestic financial wealth of Greeks and once the government can print its own money again, it would lead to inflation which is just another form of destroying financial wealth. Common sense will tell you that this is not paradise which would return to Greece.

There is a much better way to accomplish the same (and better!) results without too much immediate pain. Suppose Greece would put a tax of 30-40% on all imports. That would drive imports down very substantially because all of a sudden Greeks could no longer afford to buy them. You say “but that would make everything which we really need from abroad, like energy, medicines, etc., also so much more expensive!” Well, not necessarily. The import taxes could (and should) be staggered. Essential imports should be exempted from the tax; on luxury imports, on the other hand, the tax should be as high as 100%.

If you import less but if you still want to enjoy most of the products & services which you have enjoyed in the past, common sense will tell you that you have to produce them domestically in the future. And guess what? When you produce them domestically, jobs will be created which generate income for the employees on which the employees have to pay taxes to the government. And the owners of the new profitable businesses will have to pay taxes on the dividends which they take out of their businesses.

Well, I can already hear you arguing why this won’t work. Greek products will be very expensive because Greek production costs are so high. Greeks don’t even know how to manufacture these products because Greece does not have a culture of manufacturing. Capital will be required for those new productions and there is no capital. And, finally, those new businesses will be as corrupt as present-day Greece is and, at the end of the day, we will be in the same mess as before.

Yes, that could happen. However, there are ways to avoid it!

First, where could the money for the new investments come from? Certainly not from foreign banks because, by now, they have had enough of lending money to Greece. But hold it! Don’t we all know that many Greeks themselves have a lot of money? Don’t we know that wealthy Greeks have hundreds of billions of Euros in foreign bank accounts? Why is that money in, say, Switzerland and not in Greece? For very good reasons! Because Switzerland is a safe country where that money can be safely invested, albeit at very low interest rates. Only fools would today bring back their money from Switzerland to Greece.

Now imagine that your government has, for once, a brilliant idea. That they say to those Greeks who hold billions of Euros in foreign bank accounts the following:

“We will offer you incentives so that you bring at least part of your money back to Greece for new investment. First of all, we will offer you the same security which you presently enjoy in Switzerland. We will make a new Investment Law which assures you of that. By now, you probably don’t even trust our laws any more. For this reason, we will ask the EU to guarantee that we comply with this law. Put differently, should we not comply with this law, you get your money back from the EU. And then we will establish a few Free Trade Zones where you can manage your business at the same terms and conditions as everyone else would offer you internationally. When you have the same security as in Switzerland but the prospect of much higher returns on your investment, why would you prefer to keep your money in Switzerland?”

Put yourself into the position of such a wealthy Greek. You know that wealthy Greeks are smart businessmen who recognize a good business opportunity. All of a sudden you have the opportunity to invest in your own country into manufacturings of products for which Greeks have demand (because, so far, they have imported them). You know that you can manufacture at terms and conditions which allow you to make a decent profit. You know that the EU guarantees any political risk which might occur. Now, wouldn’t you consider this as something close to a nirvana?

By golly, perhaps not only wealthy Greeks will be motivated to bring part of their money back to Greece in order to take advantage of that nirvana! Perhaps even foreign companies which have in the past exported to Greece but which no longer can export so much to Greece because Greeks no longer import so much (because imports have become so much more expensive), perhaps even they will start investing in Greece! Suppose Greece had bought all her toothpaste in Germany in the past because it was so much cheaper than Greek toothpaste could ever be. Well, maybe that German toothpaste manufacturer who now risks losing most of his exports to Greece might be interested in investing in Greece to produce toothpaste here?

Remember the Greek guestworkers of the 1960s and 1970s? They worked in Germany so that they could transfer their savings to Greece. Put differently, the job went to where work was offered. How about turning this around? In other words, how about offering work in Greece so that jobs are created in Greece?

However, I can still hear your doubts that this will work the way I have suggested. Maybe decades of malpractice have convinced you that Greece can never become a normal country. You probably expect that those Free Trade Zones will soon become as corrupt as the rest of Greece is. Investors will take advantage of the new opportunities in order to enrich themselves. Within a short period of time, the Free Trade Zones will be exactly like Greece is today.

Yes, that could happen but there are ways to avoid it. Put differently, if it were not avoided, you could forget this project from the start.

The new Investment Law (which, after all, is guaranteed by the EU) must stipulate specifically that the famous expression of “good corporate governance” must be complied with in the Free TradeZones down to the last detail. That everything is “above board”; that there will be severe penalties for those who violate the rules. That reputable external auditors will regularly check compliance with the law. That the EU will periodically send inspectors to review whether a law which they are guaranteeing is being complied with.

Think of the Free Trade Zones the following way. If you followed the recent debates in Central Europe, you might think that the Germans would like to convert the Greeks into Germans. Thank God that this is not possible! If the German people had all the passion which the Greeks have abundantly, they wouldn’t come to Greece as tourists in order to enjoy the passion which they lack. But it may help you to think of those Free Trade Zones as “little Germany’s”. Areas where things work as well as in Germany because they are started from scratch in correct fashion. To the extent that the rest of Greece wants to copy the Free Trade Zones because they respect their good attributes, they will copy those attributes. To the extent that they do not want to be “Germanized”, they will not.

Now I haven’t talked about exports yet. Remember that exports are the source of revenue which you need in order to buy imports. Greece does not have a tradition of exports and that is why everyone seems convinced that Greece will never export much. Wait a minute! Doesn’t Greece have great potential for exports? Exports of agricultural products; mining; shipping, tourism, etc.?

You can, of course, remain fatalistic if that is your pleasure and if you enjoy the victim role. Greeks have a long tradition of that. But you could also question yourself whether it is not smarter to aim for success instead of considering yourselves as victims. I think you would be happier if you determined your own future instead of considering yourselves as the object of the decisions of others.

Greece sells a good deal of her exports to Italy because Italy has greater marketing punch in the rest of Europe than Greece does. That means that Greece gets only a small portion of the total margin on her exports and Italy collects the larger portion. In case you haven’t heard yet: in 2010, Greece imported olive oil from Germany! Why? Because Greek production declined due to the low prices which Italy paid. And here is the catch: Greece imported olive oil from Germany which was originally Greek olive oil and which Germany had imported from Italy. You get it?

And now I want to address a point which is not only of financial relevance but, foremost, of moral importance. Greeks have been going to their Greek banks during the last 2-3 years in order to transfer phenomenal amounts of money to their foreign bank accounts. Capital flight is the term for that. And it is completely legal capital flight because Greek banks must effect such transfers. If they didn’t (perhaps because they don’t have the liquidity), they would have to close doors the same day. So how could they transfer those 50 billion EUR (or more) during the last 2-3 years? Because they could borrow the necessary liquidity from the ECB. Now, just picture the following: the ECB sends tax payers’ money to Greek banks so that wealthy Greeks can transfer their own money to their accounts in Switzerland! Doesn’t that make you sick? Doesn’t that make it easier for you to understand why some people in Central Europe are getting a bit fed up with Greeks?

This, too, can be changed very easily. All your government needs to do is to implement capital controls. Period.

By now, you have hopefully realized that a wonderful future could be ahead for Greece. Greeks would bring their foreign money back to Greece for new profitable investment; presently unemployed Greeks would find new jobs, earn income and pay taxes; Greece would spend less money abroad and much more money domestically; Greece might even become an important exporter; and so forth. There has got to be a catch somewhere, doesn’t there?

Well, the only catch that I can see is that Greeks, in their majority, do not want to follow the path which I suggest. One would, of course, have to accept that. That is what democracy is all about. But before Greeks object to that path, someone ought to explain to them what the consequences would be. And I cannot think of anyone better suited to do that than you, the young generation, because it is your future in Greece which is at stake.

Tell your compatriots what the alternative is. The alternative is that Greece becomes an underdeveloped region within Europe which depends on money transfers from other countries. That young Greeks and other good performers who seek challenges will leave the country. In short, a massive drain of brains and human potential from which Greece would not recover in your time. Is that what your compatriots want? I hope not but it is up to you to convince them.

And, before I close, there is one other thing which I almost forgot to talk about – the debt of Greece which has worried so many people all over the world of late. Frankly, in the grand scheme of all the problems which Greece needs to solve, the foreign debt is by far not the most difficult challenge. Let me explain why.

There is hardly a state which has ever repaid its debt in full. There are few states today which manage to reduce their debt in nominal terms (i. e. in absolute money amounts instead of in % of GDP). States do not “repay” their debt when it becomes due; states “refinance” their debt. If a state which cannot repay its maturing debt out of its own resources is deemed bankrupt, then Germany goes bankrupt all the time. Why? Because Germany always needs to borrow new money for longer terms in order to pay back loans which mature. Put differently, Germany reschedules her debt all the time.

Not the rescheduling of debt is the issue. The only issue is whether a state can reschedule its debt voluntarily or not. Germany can do it voluntarily because of her creditworthiness. Greece no longer can because of the lack of her creditworthiness.

If you hear people discussing in sophisticated terms whether or not Greece can ever repay her debt, suggest to them that they might want to return to school and learn about Economics 101. No one wants a creditworthy state to ever repay its debt. Everyone wants a state to be creditworthy so that it can refinance its debt.

Greece cannot refinance her debt voluntarily today because of the lack of her creditworthiness. However, there is no way of telling whether Greece will or will not regain creditworthiness in, say, 20-30 years’ time. Remember that Brazil, today’s economic power horse, had to reschedule her debts a little over 10 years ago.

So bear in mind: all that talk about Greece’s ability to repay her debt and the need for offering Greece a “haircut” on her debt is pure nonsense. A haircut, which is a forgiveness of debt, can have dramatic consequences for the future when it is offered to a state too quickly. Once one state is offered a haircut, every other state will come and cry “me too!”

In recent history, a haircut of sovereign debt has only been offered to really poor countries of the 4^th world which had no chance to get out of poverty, and then it was offered only after many, many years of negotiating. Or, a haircut was offered when countries had devastating one-time destructions (Germany after WWII is an example).

A country like Greece must never be thought of as a country deserving a haircut because Greece is a EU-member and, as such, definitely a member of the 1^st world. If Greece were offered a haircut by her creditors, she should refuse!

Obviously, if Greece continued on her downward track, she will eventually – in 10, 20 or 30 years – end up like a really poor country which deserves a haircut then. But if Greece manages a turn-around along the lines which I have explained before, then I can see no reason why Greece should not be able in 20 or 30 years down the road to again refinance her debt voluntarily.

So what should be done about Greece’s debt. Let me, again, explain it with common sense.

Suppose you had a loan from a bank and you could no longer service it because you just lost your job and your source of income. What would you do? I suppose you would go to your bank and explain the situation. You would explain the obvious, i. e. that without income you couldn’t service your loan for a while but as soon as you would have income again, you would service the loan again and ask the bank to calculate a new repayment schedule. And the bank would be silly not to agree because it would not get any money back from you today if it called the loan back (because you have no money). If anything, the bank would be smart if it helped you find a new job.

Would you believe that EU-elites have been working at this simple problem for 3 years by now and they still haven’t understood what is undoubtedly clear to you?

From a dried-out well, you can only draw water if you first dump it into the well. Why would one do that? Wouldn’t it be much smarter to repair the well so that it generates its own water in a natural way?

As I explained before, the Greek economy needs a lot of money from abroad because it spends so much more abroad than it earns there. Even if all my proposals were implemented immediately, this situation would continue for a number of years, albeit the problem would become smaller. And, I forgot to mention, the Greek state will also need a lot more money from abroad because it will take a number of years before it can balance its budget.

So, Greece is not really only a dried-out well. Greece is a dried-out well with a big fire at its bottom which needs to be extinguished by dumping new water down the well all the time. So, what sense does it make to talk about drawing water from this well in the near future? None, as far as I can tell.

It is the most natural situation in the world, and this has occurred many, many times in the last decades, that a country which has external payment problems needs to reschedule its debts. Unfortunately, the EU-elites have never had to deal with such a problem before and that is why they messed it up from the start. They turned what started out as an exclusively Greek problem into a Euro-problem, and today it seems that it may have become a problem for the world economy. So much for the competence of EU-elites!

Greece is clearly responsible for the mess she created up till 2008. For the much greater mess which developed since then, you can certainly blame EU-elites.

What should Greece do? Well, remember what the borrower did whom I talked about before? Greece should tell her lenders that she cannot service her debts right now. That she and her lenders need to negotiate new terms for the payment of the debt. Just as simple as that.

Greece should request that the maturities of principal and interest on 50% of her debt be rescheduled out to 30 years. It is important that interest, too, is rescheduled on this amount of debt. A state budget works differently from the P+L statement of a company. A state books only those revenues/expenses which actually occur. When interest is not paid (because it was rescheduled), the state shows no interest expense in its budget. That means that no debt service will flow through the budget on 50% of Greece's debt during this time (this is economically equivalent to a haircut for the next 30 years).

And the remaining 50% should be rescheduled for shorter terms with a payment structure which assures that Greece cannot waste money but which also assures that Greece has “breathing space” to do what she needs to do.

Mind you, this must be a negotiation between Greece and her private lenders. Not a negotiation with the EU!

Once this negotiation between Greece and her lenders is successfully completed (and it will be successfully completed because neither Greece nor her lenders have a better alternative), there is still this issue that Greece will need substantial Fresh Money for some time in order to get her feet on more solid grounds.

That Fresh Money can reasonably be expected to come from the EU (that is from tax payers) but it has to be in a senior position to the other debt. In other words, tax payers’ loans get paid first before private lenders get paid.

And when all of that is accomplished, Greece can turn all her attention to see that water will flow into the well naturally again. The state is not a company which sells products and has revenues. When a company cuts costs, that doesn’t need to have anything to do with its revenues. A state's revenues are its tax income. As the name suggests, taxes are only paid when there is income. Income is only there when the economy works well so that people can be employed and can pay taxes on their income. When a state cuts costs too quickly (and not intelligently), there is the great risk that it might cut off the hand by which it is fed.

Well, young Greeks, I have shared all my wisdom with you. I hope you realized that one doesn’t need a great deal of wisdom to solve the problem but, instead, a lot of common sense. But let me close with a couple of wisdoms which are a bit more than common sense.

There is no such thing as a free lunch. Everything must eventually be paid for by someone. If you thought for a number of years that there might indeed be such a thing as a free lunch, the final bill will shock you when it comes.

Individual and national wealth are created through hard work and clean living. If material wealth is not so important to you, you can make less of an effort. The more important it is to you, the more effort you have to make.

Every nation should be allowed to make as little effort as she wants. This is not the problem (even if there is a monetary union). The problem begins when nations who prefer less effort expect the same living standard which nations have who are workaholics (particularly when there is a monetary union).

When the Germans tell you that you, young Greeks, should become like young Germans are, tell them to read up on history. Remind them that their forefathers have demonstrated over centuries that material wealth is very important to them. And remind them that your ancestor Diogenes, when Alexander the Great offered him to fulfill every wish that he might have, simple requested that he should move out of the sun. He did not request any material wealth.

If they don’t understand what you mean, then explain to them that each nation has its own cultural formation and that the great opportunity of a united Europe is that different cultures can come together under one roof without having to give up their cultures. It is diversity which is Europe’s strength and not conformity. The latter doesn’t even work with light bulbs, much less with people.

Thank you very much for your attention!