Europe's Populist Left

[Admiral Yi]

I think Shelf's subtext is that the creditors have a moral obligation to forgive their loans, and Greece should not feel ashamed for defaulting.

At least that's how I'm reading it.

[Sheilbh]

The mindset that the creditor of a failed program country has a moral obligation to forgive the loans.

They don't and it isn't what I meant. I don't think morality should come into it really as I think a large part of why we are where we are is an emphasis on morality tales rather than making things work again and making the Eurozone work. Some stuff has been done on that (banking union, OMT, QE), though it's all qualified and still pretty problematic.

Just that moral hazard cuts both ways and, since the 19th century, it isn't just the debtor who 'suffers the consequences'. And of course modern approaches are far better at paying back distressed loans than debtors' prisons ever were. Hopefully if Europe moves beyond its 'get out the bats' mindset they'll produce a deal that is better for Greece and better for her creditors.

ECB held a teleconference on Greece and the EuCo's getting started. Greece will only be discussed on the sidelines. Merkel said there's a deal to be done, always willing to show solidarity as long as the rules are followed. As with Sapin I think 'the rules' bit is interesting and may offer wiggle room.

The other ministers are just as democratically legitimated as the Greeks. Or is there some rule that whoever had the last election somehow has priority in negotiations?

No but they're not micro-managed as program countries are. What is the point of voting in Greece or Portugal if it makes no difference? Especially if, as is the case in Greece, they vote for a party that is outside the corrupt duopoly that ran up their debts and have, in effect, gone outside the system? The Commission could still set broader fiscal and economic targets that would allow for different emphases within governments and more meaningful elections. The reason the three historic parties of government in Ireland are now together polling at lower than 50% is in part because there's not really any difference between Fianna Fail or Fine Gael-Labour.

I do think more generally that as with the threats to member states' banks (Ireland, Cyprus, Greece possibly) and the technical governments (Greece, Italy) that there is an issue of democratic legitimacy that needs to be addressed in the Euro over the long run and I think the better way to do it is compromise and alignment of interests between elected governments, rather than coercion.

[Tamas]

I think Shelf's subtext is that the creditors have a moral obligation to forgive their loans, and Greece should not feel ashamed for defaulting.

At least that's how I'm reading it.

That's how I am reading it, and that is appaling.

This is what Sheilbh is saying on a personal level:

A dirtbag bohemian guy approaches me asking me to lend him some money on some pretty sweet terms.
I give it to him, he spends it all very carelessly, and when he declares himself unable to pay me back, somehow I have the obligation to let it go because I was an idiot to loan to him?!!

And jumping back to the state level, "you should not have given that loan" is not a valid reasoning, since not giving loans would have only hastened this collapse a few decades.

[Admiral Yi]

Just that moral hazard cuts both ways

what do you mean by this?

[Tamas]

The mindset that the creditor of a failed program country has a moral obligation to forgive the loans.

They don't and it isn't what I meant. I don't think morality should come into it really as I think a large part of why we are where we are is an emphasis on morality tales rather than making things work again and making the Eurozone work. Some stuff has been done on that (banking union, OMT, QE), though it's all qualified and still pretty problematic.

No, absolutely not.

This isn't an isolated incident in a lab.

This is about what happens, when one country pisses away the creditors money and then have the audicity to play the blame game. Europe's interest is to make this an impossible route for the future, even if it means royally screwing the Greek common man over. Because it is not the EU, which has screwed them over, it is their own governments, and their own blindness caused by too much bling.

[Valmy]

I do think more generally that as with the threats to member states' banks (Ireland, Cyprus, Greece possibly) and the technical governments (Greece, Italy) that there is an issue of democratic legitimacy that needs to be addressed in the Euro over the long run and I think the better way to do it is compromise and alignment of interests between elected governments, rather than coercion.

Negotiations between nations without sticks and carrots?  Tough since most diplomats regard their job as getting the best deal possible for their nation.  How exactly do you get a diplomat to agree to something lesser without sticks and carrots?  Appealing to them to trust that everybody else has their best interests at heart?

[Sheilbh]

what do you mean by this?

If creditors don't do due diligence and lend to uncreditworthy individuals, and then take a loss - that's not just the debtors fault. Both sides suffer the consequences through a loss and a bankruptcy. That's a better reflection of moral hazard than debt peonage.

I think it also leads to better results for everyone if creditors do due diligence, debtors are at risk from bankruptcy or winding up and if both sides work together to align their interests and try and maximise the return for the creditors while keeping the debtor a going concern. It's normally better to try and reach some sort of mutual agreement like that than just liquidating bad debts. That may not be morally perfect (though I do think it's better than debtors' prison) but it is more sensible and pragmatic.

Of course there's times when you have to ignore it - the financial crisis would have been far worse if the UK and US had behaved like Europe and knowing what they know now, I think most American policymakers would've not let Lehman's fail.

[Admiral Yi]

If creditors don't do due diligence and lend to uncreditworthy individuals, and then take a loss - that's not just the debtors fault. Both sides suffer the consequences through a loss and a bankruptcy. That's a better reflection of moral hazard than debt peonage.

What does debt peonage have to do with anything?

[Sheilbh]

This isn't an isolated incident in a lab.

This is about what happens, when one country pisses away the creditors money and then have the audicity to play the blame game. Europe's interest is to make this an impossible route for the future, even if it means royally screwing the Greek common man over. Because it is not the EU, which has screwed them over, it is their own governments, and their own blindness caused by too much bling.

But you're the one treating it like an isolated incident in a lab and trying to build this ideal, morally coherent rationalist system. I'm saying let's do what works. And I don't think the blame game has anything to do with it - though I saw far more about the feckless Irish, lazy Greeks and corrupt Italians than any other sort of blaming.

Have a look at that Michael Pettis piece I posted above and the one from the IMF about Ireland. As I've said before I think Europe is something of a microcosm of the global financial crisis (Germany as the developing world, the periphery as the US), one of the core problems was capital imbalances which is why simultaneously there were numerous credit booms within the Eurozone. It wasn't always their own governments - Ireland and Spain had debt under 40% and weren't running deficits - or always their own people - Greece has one of the lowest rates of personal borrowing in the EU - but conditions within the Eurozone that created a glut of cheap credit. Which the Eurozone institutionally couldn't deal with and the consequences of which the Eurozone institutionally couldn't deal with. Some money went on useful things, other money was wasted. Greece is, as ever, an extreme case and probably the most blameworthy - or her governments were.

Leading from that a large part of the solution has to be European. There is no German or Irish answer to this crisis which is why the best steps forward have been those which are European - banking union, OMT, QE. However all of those are still somewhat problematic as each of them I believe operates through the national central banks so while they're good in principle I'm not convinced that they're moving away from a fragmentation of the Eurozone which is a real problem.

I'm not sure quite what you want to make impossible? In my view the thing you should probably try and make impossible is leaving the Eurozone.

Negotiations between nations without sticks and carrots?  Tough since most diplomats regard their job as getting the best deal possible for their nation.  How exactly do you get a diplomat to agree to something lesser without sticks and carrots?  Appealing to them to trust that everybody else has their best interests at heart?

It's not about negotiations or sticks and carrots. Having the Central Bank threaten to cause a run on your nation's banks isn't diplomats with sticks and carrots. Neither's getting a democratically constituted government dismissed to form a technocratic government. As I say both may be justified, but I think these are dodgy waters for Europe to be getting into.

[Sheilbh]

What does debt peonage have to do with anything?

The same as my debtors' prison references.

[Admiral Yi]

The same as my debtors' prison references.

Which is what?  Neither debt peonage or debtors' prison have the slightest relevance to Greece.

[Sheilbh]

The same as my debtors' prison references.

Which is what?  Neither debt peonage or debtors' prison have the slightest relevance to Greece.

Remember my starting position on Greece's debt is roughly this by Daniel Davies - though I normally disagree with him and I'm not sure on his conclusions:

The fact is, everyone knows that the total burden of Greek debt is too big to be serviced by the Greek GDP, and that if it isn't written down, then Greece will always be reliant on an increasing stream of official financing to meet its roll-overs. Everyone also knows, although some of them might not be ready to admit it to themselves, that an indefinite commitment to financing the roll-over of an ever increasing debt burden is a fiscal transfer in all but name.

Don't think of the Greek debt burden, either in cash € terms or as a ratio to GDP, as an economic quantity. It basically isn't an economically meaningful number any more. The purpose of its existence is as a political quantity; it's part of the means by which control is exercised over the Greek budget by the Eurosystem. The regular rituals of renegotiation of the bailout package, financing of debt maturity peaks and so on, are the way in which the solvent Euroland nations exercise the kind of political control that they feel they need to have if they are going to be fiscally responsible for the bills.

It is, therefore, totally inimical to the Eurosystem to hold out any hope of the kind of debt writedown that Syriza wants, as opposed to some smaller, cosmetic face value reduction or maturity extension.

http://crookedtimber.org/2015/01/25/greek-games-and-scenarios/

[Admiral Yi]

You think it is harmful to hold out hope of a debt write down? 

[Sheilbh]

No, but I think if the rest follows I can see how it could be from the Eurozone perspective.

Ultimately I'd give Syriza bridge financing as much for seeing if they'll actually start to restructure Greek society and politics, as to negotiate. Allow some 'humanitarian' laws but ask them to focus on their plans to destroy the oligarchic, clientilist structure of the economy and politics and to reduce tax evasion. How they perform on that would then influence how seriously the Eurogroup should negotiate.

[Admiral Yi]

Shelf, you've lost me.

You posted an article that you said encapsulated your views and explained the relevance of debt peonage, but then you say you disagree with the author's bottom line and it has nothing to do with debt peonage.