Europe's Populist Left

[Admiral Yi]

And you're saying they're more likely to get their way, if less-than-savage conditions are imposed on a country like Greece who is in a crappy position due to a collapsed economy?

I'm saying they are facing perverse incentives if they think that loans may be forgiven if they reach an unsustainable level, but they will have to pay back full value if they manage to hold their debt level down.

[Admiral Yi]

I'm assuming they got the bailout loans because they had reached unsustainable levels of debt without it.  If they could have recovered without the loans then why would they get them?

At the time they received the bailouts the bond market was not interested in lending to them.

[Martinus]

The whole Greek crisis got me thinking whether we should re-evaluate our moral attitudes towards money lending and borrowing.

In the past it used to be that the lender would lend money to the borrower and then, pretty much, left the borrower to his own devices - only to show up when the debt was due. In that, it was a fairly reasonable to expect the borrow to pay up as agreed, as that was the lender's only security. So it is only the borrower who would bear the "moral" liability for not paying the debt.

Since then lenders have become much more actively involved in the borrowers' operations, businesses and lives - in a sense become more like shareholders. Doesn't it, therefore, make sense that they are treated more like shareholders - i.e. sharing the risk of the business of the borrower going badly? In that, a loan becomes less like a debt and more like a joint investment of the lender and the borrower. So, if a lender lends money to someone who ends up unable to pay, he (absent fraud or negligence on the part of the borrower) just made a bad investment - and should bear the consequences.

[Valmy]

Since then lenders have become much more actively involved in the borrowers' operations, businesses and lives - in a sense become more like shareholders. Doesn't it, therefore, make sense that they are treated more like shareholders - i.e. sharing the risk of the business of the borrower going badly? In that, a loan becomes less like a debt and more like a joint investment of the lender and the borrower. So, if a lender lends money to someone who ends up unable to pay, he just made a bad investment - and should bear the consequences.

Isn't that kind of how it already goes?  The old saying is if you owe the bank a little bit of money they own you, but if you owe the bank a lot of money you own them.

[Admiral Yi]

Since then lenders have become much more actively involved in the borrowers' operations, businesses and lives - in a sense become more like shareholders. Doesn't it, therefore, make sense that they are treated more like shareholders - i.e. sharing the risk of the business of the borrower going badly? In that, a loan becomes less like a debt and more like a joint investment of the lender and the borrower. So, if a lender lends money to someone who ends up unable to pay, he just made a bad investment - and should bear the consequences.

Shareholders get decision-making authority.  Not easy to do that with a sovereign.

[Martinus]

Since then lenders have become much more actively involved in the borrowers' operations, businesses and lives - in a sense become more like shareholders. Doesn't it, therefore, make sense that they are treated more like shareholders - i.e. sharing the risk of the business of the borrower going badly? In that, a loan becomes less like a debt and more like a joint investment of the lender and the borrower. So, if a lender lends money to someone who ends up unable to pay, he just made a bad investment - and should bear the consequences.

Isn't that kind of how it already goes?  The old saying is if you owe the bank a little bit of money they own you, but if you owe the bank a lot of money you own them.

Well yes but there still is this sort of moral attitude which states that if a borrower is unable to repay the loan, he is in the wrong. But if a company goes bust and its shareholders lose money as a result, noone is saying the company (assuming there was no fraud or gross negligence involved) committed a moral wrong.

[Martinus]

Since then lenders have become much more actively involved in the borrowers' operations, businesses and lives - in a sense become more like shareholders. Doesn't it, therefore, make sense that they are treated more like shareholders - i.e. sharing the risk of the business of the borrower going badly? In that, a loan becomes less like a debt and more like a joint investment of the lender and the borrower. So, if a lender lends money to someone who ends up unable to pay, he just made a bad investment - and should bear the consequences.

Shareholders get decision-making authority.  Not easy to do that with a sovereign.

That is my point - in fact lenders these days hold a lot of decision-making authority. Even with a sovereign - which is the reason why Troika is so hated.

If Greece was loaned money with no conditions, and did not repay it, then you could argue they are in the wrong. But since Greece was loaned money under conditions of austerity - and these conditions prevented it from repaying the money - then the lenders who made a bad investment should be equally to blame.

[Valmy]

Well yes but there still is this sort of moral attitude which states that if a borrower is unable to repay the loan, he is in the wrong. But if a company goes bust and its shareholders lose money as a result, noone is saying the company (assuming there was no fraud or gross negligence involved) committed a moral wrong.

I guess I don't get the distinction between going bankrupt and going bust.  If you are going to claim one is ok and the other isn't please explain.  I have never heard when a company goes bust and cannot pay its creditors they committed a moral wrong, well ok I do here that in some situations like with Enron.

But we are not talking about companies we are talking about sovereign states.  Having shareholders seems very dangerous politically.

[Valmy]

then the lenders who made a bad investment should be equally to blame.

Pretty sure investors and fund managers who make bad investments do receive plenty of blame.

That is my point - in fact lenders these days hold a lot of decision-making authority. Even with a sovereign - which is the reason why Troika is so hated.

So we should make it so they own the country even when the country can finance the debt?  Make a bad situation worse?

[Admiral Yi]

That is my point - in fact lenders these days hold a lot of decision-making authority. Even with a sovereign - which is the reason why Troika is so hated.

If Greece was loaned money with no conditions, and did not repay it, then you could argue they are in the wrong. But since Greece was loaned money under conditions of austerity - and these conditions prevented it from repaying the money - then the lenders who made a bad investment should be equally to blame.

Let's get something straight.  The Greek economy would not be rolling along blissfully in the absence of Troika-imposed austerity.  In 2010 Greece had a debt/GDP of around 120% and was running an annual deficit of 14% of GDP.  They then revealed that their books were cooked and the bond market said no fucking way I'm going to lend to these guys.  Eliminating a deficit of 14% overnight was going to be "austere" and was going to cause economic collapse regardless.  The Troika softened and delayed that collapse by allowing Greece to finance deficits that they otherwise would have been unable to.

[Martinus]

I am thinking more about general attitude towards lending than this specific case.

Consider this.

The shareholder is the least protected "creditor" of the company. He only gets paid if the company generates profit. The price for this is the fact that he has the biggest influence on decision making.

The bank is one of the best protected creditors. If the borrower company goes bust, bank debts are usually rank very high in the hierarchy - normally after employee wages and taxes.

Now, over the last decades, bank loan market moves towards much great control of lenders over borrowers - to the point that lenders have often control comparable to shareholders. But they continue to enjoy much better protections.

Now, the Troika is comparable in that it imposed conditions on Greek government that are comparable to those that can be made usually only by "shareholders" - i.e. the people of Greece. But they insist that their debt should get priority over debts Greece has towards its own people.

[Admiral Yi]

The Troika did not lend Greece money based on the profit motive Marty.

[mongers]

I was reading about one of the Syriza  MPs, he's 91 years old!

But not just any old pensioner, in 1941 he and a friend climbed to the top of the Acropolis and tore down the Nazi flag that had flown there since the German invasion a month early. That took some courage. 

  Almost the first act of resistance and despite being eventually captured, tortured, scheduled for execution, he managed to escape, get recaptured, and all sorts of other nr death experiences, both survived the war, the subsequent civil war and live or are still living a long life.

[frunk]

I'm assuming they got the bailout loans because they had reached unsustainable levels of debt without it.  If they could have recovered without the loans then why would they get them?

At the time they received the bailouts the bond market was not interested in lending to them.

Isn't that when a debt is unsustainable, when no one will lend you money?  Any debt is sustainable if there's always someone willing to lend you money.

[Sheilbh]

Because large numbers of well-intentioned people (see for example Shelf's numerous posts about granting "more fiscal space") think that countries like Spain and Italy *should* be running larger deficits, thereby increasing their indebtedness and thereby creeping closer to unsustainability.

Not necessarily. There isn't a magical number that is suddenly unsustainable, there's a range of factors. I think the biggest problem Spain and Italy have in terms of their debt is deflation. Their relatively small deficits are very much secondary.

In terms of fiscal space I think these are ultimately political judgements and if Europe wants to avoid dealing with Tsipras, Iglesias, Adams and Grillo then they should maybe start supporting Samaras, Rajoy, Kenny and Renzi.  If your policies lead to a collapse in social provision by the state, a severe recession and increasing debt I have limited pity for crying about how unfair it is to creditors.

Edit: Also the ECB (p. 33 onwards) seems rather comfortable with fiscal space, despite the fiscal pact of a few years ago:
http://www.ecb.europa.eu/pub/pdf/ecbu/eb201501.en.pdf

Now, the Troika is comparable in that it imposed conditions on Greek government that are comparable to those that can be made usually only by "shareholders" - i.e. the people of Greece. But they insist that their debt should get priority over debts Greece has towards its own people.

I think this is a fundamental issue of running a currency union of however many sovereign states and it's difficult to get right. There was a wonderful moment of disagreement on the Commission today when in separate conversations with the press the Finnish Commissioner (and VP) said basically we don't change our policies on the basis of elections and the French Commission Pierre Moscovici (a Blairite effectively) said what is the point of elections in the EU if there can't be choices.

I think it's an unresolved issue.

For myself I disagree on the moral hazard point. I think we've moved on from the 19th century, debtors' prison version of solely blaming the debtor. If creditors were stupid enough to not do their due diligence and lend to a reckless debtor then they deserve losses - and I think this is now the EU position with bail-ins.