Tuesday, June 29, 2010

Posner: Greek debt history

The answer is probably that the market believed that either eurozone countries would discipline Greece's financial excesses or bail out Greece if they failed. If so, the irony is palpable. Greece (like most other eurozone countries) did not comply with a treaty provision requiring financial discipline but was allowed into the eurozone anyway. Investors must have reasoned that if the treaty provision governing financial discipline could be ignored, then the treaty provision banning bail-outs could be ignored as well. And they were right. But if the treaty could be ignored, then why would entering a treaty make a difference to Greece's creditworthiness in the first place? We suspect that the story is about politics, not economics. In their effort to press forward with European integration, political elites sought monetary union in the hope that it would forge bonds between still mutually suspicious nationalities. But monetary (and political) union cannot succeed when vast disparities of wealth exist across regions.

Political elites squared this circle by (we suspect) encouraging national banks to buy up Greek debt despite reservations about its quality - so that transfers would take place but disguised as credit made cheap by implicit government guarantees.

6 comments:

  1. You write: "Greece (like most other eurozone countries) did not comply with a treaty provision requiring financial discipline but was allowed into the eurozone anyway."

    European bankers wanted to invest in Greece as prior to the formation of the Euro, Greece's soveeign debt bonds were gradually going up in value as the interest rate was going down. And Greece had set up an excellent trading system for its sovereign debt which gave some assurance of a liquid market for its debt.

    And Greece did have some contacts in other nations that could be used for carry trade investing, so Greece was allowed into the Euro currency trading zone.

    It is as you write: "Monetary (and political) union cannot succeed when vast disparities of wealth exist across regions.

    Political elites squared this circle by (we suspect) encouraging national banks to buy up Greek debt despite reservations about its quality - so that transfers would take place but disguised as credit made cheap by implicit government guarantees.

    There is an economic difference between Germany which is frugal and Greece which is very socialistic, which for example has the Hellenic Railways, encumbered with $14 billion in debt due in 2014, and where workers are paid on average $78,000 per year. Also, it is a well know fact that tax avoidance was a national passtime in Greece; and bribery at hospitals for operations was commonplace; and that tax collection officers accepted bribes for not reporting failure to properly report income which resulted in the top tier of society paying very very little in taxes.

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