5 ms·

Virtually everyone agrees that a default by Greece is the least desirable outcome for both Greece and its creditors That, I think is a key part of the problem.

by netcan 11y ago

Virtually everyone agrees that a default by Greece is the least desirable outcome for both Greece and its creditors That, I think is a key part of the problem. In the US context it's known as too big to fail and applies to banks. In Europe it's unnamed. The reality of every loan and every indebted entity is that default is a possibility. For a state to essentially become insolvent is no less likely than an individual or company. For some countries it is virtually inevitable on a 10-20 year scale. Before the euro, Greece dealt with this like all other countries, by printing money. They use the cash to pay debts and the resulting inflation actually helps manage national finances, that tend towards inefficiency and overpayment to vendors, employees, etc. If loans are denominated in foreign currency, debtors do not participate in the "haircut" and the danger of inflation notches up a bit. No one thinks this is an ideal system. It's certainly not better than not becoming insolvent, but it usually works. The Eurozone took this away without providing a working alternative. They solved liquidity issues using bailouts, emergency loans and nationalisation of debts and bad assets, but liquidity<>insolvency.

simonh 11y ago
So essentially back when Greece had it's own currency, it could decreate the cost of e.g. it's pension payments by printing more money, decreasing the value of the payments without decreasing the face value of the pyments. They'd pay pensioners the same amount in drachmas, but those drachmas would be worth less. Now they are part of the Euro, the only way to cut the cost of their pension payments is to actualy cut how many Euros they pay to pensioners. For ideological reasons, the Greek government isn't willing to do that. Membership of the Euro is a lens that reveals exactly how many clothes the Emperor is or isn't wearing.
- kokey 11y ago
  Perhaps they need a solution inspired by the Brazilian Real. Pay government salaries and pensions in a different currency, called the 'faux' or something. The value won't change, but how many Euros you can get for 1 faux would depend on supply/demand.
  - Ntrails 11y ago
    The Greek people just elected an "extreme" government because they were unwilling to suffer deprivation to repay an unmanageable debt-load. Your solution appears to ask them to do exactly that but structured slightly differently? Reducing pensions and public sector pay can be done by changing the payouts denominated in euros just as easily. I doubt the electorate would fail to notice, and make their views known.
- netcan 11y ago
  Yes, basically. Pension payments and debt repayments are both part of the general "national deficit." Printing money directly plugs the hole. Printing money causes inflation, so it also also makes the hole smaller. A Keynsian might say that salaries (and other prices) are "sticky" and can't be adjusted down like the price of petrol. Prices need to go down in a business cycle low point (which often happens simultaneously to debt repayment problems). So the inflation is a good thing in addition to the more commonly quoted Keynsian suggestion that government spending shouldn't be cut (austerity). A classical liberal perspective would just see this whole manoeuvre as default or a tax equivalents. Paying back debts with debased currency is a default and printing drachmas is a tax on whoever holds drachmas. Both agree that if you do this too much the currency becomes unreliable and contracts start to be denominated in a foreign currency or inflation adjusted. This makes the inflation problem worse because nominal prices and debt repayments go up when inflation happen. You need to print more to get the same effect, causing more inflation... With regard to pension payments, I am a little more cynical. I think the Greek Government was happier to write the contract than make good on it. The pensions were promised many governments ago, and the political gains have already been had. Paying them was left to future generations. Taken together, all these promises add up to more money than they have. The current debts are a manifestation of this "pass it forward" politics. To be both ideological and realistic, they could have set aside money as the liability accrued rather than promising that future generations would pay it without worrying about how. I don't like these "Emperors Clothes" slogans. They are too easy for politicians to sound like they are making a point without (necessarily) having any content. We should hold leaders to a higher standard, not accept rhetoric that skips over important questions with slogans. An ideological position is good, but it also needs a plan for how to make it happen. Also, I think if the Greek government could print money, devalue the pensions and get out of this mess they would. They did it when they could. For a different (and very valid) perspective, see the vide linked by wsc981. For a very simplified synopsis: Germany loaned Greece money so they could buy german goods. Greece consumed the goods. Germany accumulated the wealth as debts owed to them by Greece. EU policies were encouraging this dynamic. My personal feeling is that this is not a victim/culprit situation. Greece's political imperative was consumption , they wanted loans for this. Germany's was exports (and subsequent economic benefits like jobs, accumulating bank wealth..) worth watching.
- StavrosK 11y ago
  It's not just ideological reasons. If your pension gets cut, you suddenly can't make rent. If your currency inflates, you can still make rent, because your rent inflates just as much as your pension does.
  - wolfgke 11y ago
    Landlords not reducing the rent when pensions get cut are equivalent to landlords increasing the rent when the pensions stay the same. In other words: I see no problem.
    - StavrosK 11y ago
      It's equivalent to every landlord in the country simultaneously raising rent by the same amount. Would you happen to be American, by any chance?
  - zmb_ 11y ago
    Rents tend to be inflation adjusted. Mine adjusts automatically every year based on the inflation figures. So while your pension remains the same, your rent will jump and you suddenly cannot afford it. The end result is the same: You'll have to negotiate with your landlord (cut the price vs. skip the inflation adjustment).
    - StavrosK 11y ago
      There's a clause in most contracts to adjust rents based on inflation here, but not many landlords require it, because salaries haven't tended to rise along with inflation.

by netcan 11y ago

simonh 11y ago

So essentially back when Greece had it's own currency, it could decreate the cost of e.g. it's pension payments by printing more money, decreasing the value of the payments without decreasing the face value of the pyments. They'd pay pensioners the same amount in drachmas, but those drachmas would be worth less. Now they are part of the Euro, the only way to cut the cost of their pension payments is to actualy cut how many Euros they pay to pensioners. For ideological reasons, the Greek government isn't willing to do that. Membership of the Euro is a lens that reveals exactly how many clothes the Emperor is or isn't wearing.

kokey 11y ago
Perhaps they need a solution inspired by the Brazilian Real. Pay government salaries and pensions in a different currency, called the 'faux' or something. The value won't change, but how many Euros you can get for 1 faux would depend on supply/demand.
- Ntrails 11y ago
  The Greek people just elected an "extreme" government because they were unwilling to suffer deprivation to repay an unmanageable debt-load. Your solution appears to ask them to do exactly that but structured slightly differently? Reducing pensions and public sector pay can be done by changing the payouts denominated in euros just as easily. I doubt the electorate would fail to notice, and make their views known.
netcan 11y ago
Yes, basically. Pension payments and debt repayments are both part of the general "national deficit." Printing money directly plugs the hole. Printing money causes inflation, so it also also makes the hole smaller. A Keynsian might say that salaries (and other prices) are "sticky" and can't be adjusted down like the price of petrol. Prices need to go down in a business cycle low point (which often happens simultaneously to debt repayment problems). So the inflation is a good thing in addition to the more commonly quoted Keynsian suggestion that government spending shouldn't be cut (austerity). A classical liberal perspective would just see this whole manoeuvre as default or a tax equivalents. Paying back debts with debased currency is a default and printing drachmas is a tax on whoever holds drachmas. Both agree that if you do this too much the currency becomes unreliable and contracts start to be denominated in a foreign currency or inflation adjusted. This makes the inflation problem worse because nominal prices and debt repayments go up when inflation happen. You need to print more to get the same effect, causing more inflation... With regard to pension payments, I am a little more cynical. I think the Greek Government was happier to write the contract than make good on it. The pensions were promised many governments ago, and the political gains have already been had. Paying them was left to future generations. Taken together, all these promises add up to more money than they have. The current debts are a manifestation of this "pass it forward" politics. To be both ideological and realistic, they could have set aside money as the liability accrued rather than promising that future generations would pay it without worrying about how. I don't like these "Emperors Clothes" slogans. They are too easy for politicians to sound like they are making a point without (necessarily) having any content. We should hold leaders to a higher standard, not accept rhetoric that skips over important questions with slogans. An ideological position is good, but it also needs a plan for how to make it happen. Also, I think if the Greek government could print money, devalue the pensions and get out of this mess they would. They did it when they could. For a different (and very valid) perspective, see the vide linked by wsc981. For a very simplified synopsis: Germany loaned Greece money so they could buy german goods. Greece consumed the goods. Germany accumulated the wealth as debts owed to them by Greece. EU policies were encouraging this dynamic. My personal feeling is that this is not a victim/culprit situation. Greece's political imperative was consumption , they wanted loans for this. Germany's was exports (and subsequent economic benefits like jobs, accumulating bank wealth..) worth watching.
StavrosK 11y ago
It's not just ideological reasons. If your pension gets cut, you suddenly can't make rent. If your currency inflates, you can still make rent, because your rent inflates just as much as your pension does.
- wolfgke 11y ago
  Landlords not reducing the rent when pensions get cut are equivalent to landlords increasing the rent when the pensions stay the same. In other words: I see no problem.
  - StavrosK 11y ago
    It's equivalent to every landlord in the country simultaneously raising rent by the same amount. Would you happen to be American, by any chance?
- zmb_ 11y ago
  Rents tend to be inflation adjusted. Mine adjusts automatically every year based on the inflation figures. So while your pension remains the same, your rent will jump and you suddenly cannot afford it. The end result is the same: You'll have to negotiate with your landlord (cut the price vs. skip the inflation adjustment).
  - StavrosK 11y ago
    There's a clause in most contracts to adjust rents based on inflation here, but not many landlords require it, because salaries haven't tended to rise along with inflation.