This is an old Chinese proverb (so I was told). EU-elites should ponder it before they proclaim that Greece will have to reduce her debt.
One can never get more water out of a dried-out well than what one first dumps into it. The wisdom of dumping water into a well for the sole purpose of draining it out again is not obvious to everyone.
Greece as a country (not only the state!) presently owes foreigners about 500 BN EUR. That is the "gross foreign debt of Greece in nominal terms". Put differently, that is the amount of savings of other countries which have been lent to Greece. To put it even more drastically: should Greece fall into the Aegean, those 500 BN EUR would go down with Greece to never reappear again.
Regardless what brilliant ideas EU-Einsteins come up with (escrow accounts; budget commissioner; etc.), the 500 BN EUR will not get less going forward (unless part of it is forgiven). Instead, it will get larger month by month, by about 1,5 BN EUR per month at least. Why? Because - on a monthly average - Greece spends about 1,5 BN EUR more abroad than she earns abroad, and the difference between the two has to be financed. To date, this has been financed by the ECB (Target-2). Of course, the ECB could stop Target-2 lending but then the Greek economy would come to a sreetching halt (a lot less cars, motorcycles, smartphones, etc.).
To recognize reality would be saying to the lenders of the above 500 BN EUR the following:
Your 500 BN EUR will have to stay in Greece for quite some time to come. Until the time when Greece can again access capital markets in a normal way, if that ever happens. In the meantime, consider yourselves lucky if you receive some interest on the 500 BN EUR.
For you to even have a chance to ever reach that time (i. e. when Greece can again access capital markets in a normal way), you have to lend us more money to the tune of about 2 BN EUR per month. The good news is that this Fresh Money will be in a senior position to the 500 BN EUR already at risk.
How does it make sense for you to lend more money to Greece when Greece can't even repay the loans already on the books?
The answer is: because we will use that Fresh Money to repair our well. So that our well again generates water on its own.
What makes us so certain that we can repair the well? Because we will ask you for advice and help. You all have well-functioning wells so you must know something about wells. Share with us your knowledge and once we have repaired our well, we will all live happily every thereafter!
Is there any mistake in my thinking?
One can never get more water out of a dried-out well than what one first dumps into it. The wisdom of dumping water into a well for the sole purpose of draining it out again is not obvious to everyone.
Greece as a country (not only the state!) presently owes foreigners about 500 BN EUR. That is the "gross foreign debt of Greece in nominal terms". Put differently, that is the amount of savings of other countries which have been lent to Greece. To put it even more drastically: should Greece fall into the Aegean, those 500 BN EUR would go down with Greece to never reappear again.
Regardless what brilliant ideas EU-Einsteins come up with (escrow accounts; budget commissioner; etc.), the 500 BN EUR will not get less going forward (unless part of it is forgiven). Instead, it will get larger month by month, by about 1,5 BN EUR per month at least. Why? Because - on a monthly average - Greece spends about 1,5 BN EUR more abroad than she earns abroad, and the difference between the two has to be financed. To date, this has been financed by the ECB (Target-2). Of course, the ECB could stop Target-2 lending but then the Greek economy would come to a sreetching halt (a lot less cars, motorcycles, smartphones, etc.).
To recognize reality would be saying to the lenders of the above 500 BN EUR the following:
Your 500 BN EUR will have to stay in Greece for quite some time to come. Until the time when Greece can again access capital markets in a normal way, if that ever happens. In the meantime, consider yourselves lucky if you receive some interest on the 500 BN EUR.
For you to even have a chance to ever reach that time (i. e. when Greece can again access capital markets in a normal way), you have to lend us more money to the tune of about 2 BN EUR per month. The good news is that this Fresh Money will be in a senior position to the 500 BN EUR already at risk.
How does it make sense for you to lend more money to Greece when Greece can't even repay the loans already on the books?
The answer is: because we will use that Fresh Money to repair our well. So that our well again generates water on its own.
What makes us so certain that we can repair the well? Because we will ask you for advice and help. You all have well-functioning wells so you must know something about wells. Share with us your knowledge and once we have repaired our well, we will all live happily every thereafter!
Is there any mistake in my thinking?
I doubt the Eurocrats would permit advice from outside the EU. Besides, apart from the African countries that use CFA, there are no other significant multi-national monetary unions from which advise might be sought. So there's no point thinking about countries like Chile, New Zealand or Taiwan - unless Greece can get its Drachma back.
ReplyDeleteSo, most of those who Greece might ask for advice don't have very good wells either. Two countries that do are Germany and Sweden, but they repaired their wells when the global economy was booming, also Sweden isn't in the Eurozone. Another non Eurozone country, that comes to mind is Poland, but its well is probably going to go dry because of the one-size-fits-all Austerity Pact its just signed up to.
I can't believe that the Greeks don't know exactly what they have to do to repair their well. Eliminate feather-bedding; pay taxes; get rid of corruption (HK could help on that); stop buying things it doesn't need and can't afford especially weapons; to the extent that EU rules permit get rid of business hindering red tape; adopt modern bureaucratic process and record keeping practices ....
But even if every e-cent, nickel, dime, yen and penny of debt was forgiven and they were loaned 2BN EUR a month at ECB cash rates then I suspect in 5 years the well would not only be dry, it would be filled with dead cats and rubble.
Without radical EMU re-engineering, economies such as Greece, Portugal, Spain, Slovenia, Ireland etc cannot survive inside the beast. And they wouldn't survive the upheavals of re-engineering either. So give them them back their own currencies and tell them to come back later. And allow them to look for alternate models outside the North Atlantic basin.
Yes, their wells are all watertight, aren't they. None of them have ever had to seek debt forgiveness, certainly not in the 20th century. Heh. Another excellent article! I'm learning so much from your blog.
ReplyDeleteNone of them ever had to seek debt forgiveness??? Open the link below and be surprised!
Deletehttp://klauskastner.blogspot.com/2011/06/germany-was-biggest-debt-transgressor.html
I was trying to be sarcastic... I guess it didn't come across too well. ;)
DeleteI think that you are broadly right but i also rather like the idea of a german budget commisar in greece controlling spending. The reason is that alot of the spending is catastrophically inefficient.
ReplyDeleteThe control of the budget and a gradual and sustainable spending review away from nonsense would save alot of money, i also think that it would change the perception of greece abroad...
The greeks can decide what the priorities are but not the level of spending. This would preclude overspending and borrowing.