Teaching Comparative Government and Politics

Thursday, August 13, 2015

Borrowing or lending to blame?

And another look at austerity.

Why Greece’s Lenders Need to Suffer

There is definitive proof, for anyone willing to look, that Greece is not solely or even primarily responsible for its own financial crisis. The proof is not especially exciting: It is a single bond, with the identification code GR0133004177. But a consideration of this bond should end, permanently, any discussion of Greece’s crisis as a moral failing on the part of the Greeks.

GR0133004177 is the technical name for a bond the Greek government sold on Nov. 10, 2009…

A bond is a form of i.o.u.; when a government or a company issues one, it is actually borrowing money with a precisely defined promise to pay it back after a specified period of time at a set interest rate. Every bond has the same basic criteria: duration, yield and risk. This means that bonds can be easily compared and traded…

Federal bonds funded the growth of an American highway infrastructure and created a truly national economy; municipal bonds brought the South out of its agrarian doldrums. In Europe, the impact was even greater. European bonds allowed money to flow freely across borders, knitting disparate states that had warred for millenniums into one unified economy. More prosaically, bonds provided objective rigor to the funding of private companies’ activities, helping to break up a cozy, WASPy boys’ club that had determined which enterprises got to borrow money…

On that day in 2009 when GR0133004177 was issued, investors had every reason to assume that this was an especially risky loan… I was shocked, looking back, to see the winning number: 5.3 percent. That is a very low interest rate, only a couple of percentage points above the rate at which Germany, Europe’s most creditworthy nation, was borrowing money. This was a rate that expressed a near certainty that Greece would never miss a payment…

In hindsight, of course, we know that the investors should not have lent Greece anything at all, or, if they did, should have demanded something like 100 percent interest. But this is not a case of retrospective genius. At the time, investors had all the information they needed to make a smarter decision. Greece, then as now, was a small, poor, largely agrarian economy, with a spotty track record for adhering to globally recognized financial controls. Just three weeks earlier, a newly elected Greek prime minister revealed that the previous government had scrupulously hidden billions of dollars in debt from the rest of the world. In fact, the new leader revealed, Greece owed considerably more money than the size of its entire annual economy…

The original sin of the Greek crisis did not happen in Athens. It happened… in Frankfurt and London and Shanghai and New York. Yes, the Greeks took the money. But if I offered you €7 billion at 5.3 percent interest, you would probably take the money, too. I would be the one who looked nuts. And if I didn’t even own that money — if I was just watching over it for someone else, as most large investors do — I might even go to jail…

The institutions that bought that €7 billion in Greek debt in 2009 made a very bad judgment. Even at the time, it was clearly a foolish gamble — so foolish, in fact, that it can be explained in only one way. They believed that in the event of default, the Germans would bail the Greeks out. And just to be clear: This doesn’t mean they believed that the Germans would be kind to the Greeks. It means they believed that the Germans would be kind to the people who owned Greek bonds, a significant percentage of whom were certain to be German themselves. In lending money to Greece at 5.3 percent interest, they weren’t calculating Greece’s ability to pay. They were calculating the German government’s willingness to help out German banks…

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