Greece is on its sixth default mate...
Heres an extract from a recent publication from a certain high street bank:
Defaulting on debt has been a normal state of affairs for Greece since it gained independence in 1829. The current default is its sixth. Greece has spent half of its post-independence life in default. Only four countries on the planet have defaulted for longer.
Countries tend to default because their political systems encourage it. Greece tried to break from its history by joining the European Community and the euro, moves designed to transform its institutions and to bind it to a compelling form of economic discipline. Neither worked.
The euro was created in 1999 and Greece joined in 2001. Before the euro, countries paid different rates of interest when they borrowed. Lending to Germany was a safe bet. There was a very good chance that you would receive in full and on time all you were due. So, Germany paid low rates of interest.
Riskier countries paid more. In the mid-1990s Greece was paying roughly double Germany’s rate. Yet, by the mid-2000s once Greece was in the euro, you could scarcely seperate the two.
This presented a huge incentive to borrow. The question was what to do with it: invest for growth or have a party? Investment, coupled with economic reform would have been the right answer for Greece. Even today it languishes at 100 out of 183 countries in the World Bank’s ‘Ease of doing business index’, squeezed between Yemen and Papua New Guinea.
Yet, the answer was to party, or at least to spend more on public services than it could afford. Loss of competitiveness and exchange rate flexibility Euro membership delivered cheap credit with one hand and imposed an exchange rate straitjacket with the other. Greece had long lived beyond its means. Its pre-euro ‘Get Out of Jail Free-ish Card’ had been a flexible currency. In 1980, the drachma bought US$8. On the eve of euro entry it bought less than one.
Cheap money led to inflation. Between 1999 and 2010, the wage cost of producing €1 of output increased by 4 per cent in Germany but by more than 40 per cent in Greece. Now inside the euro and unable to devalue, Greece dramatically lost competitiveness, severely limiting a possible source of growth.
Greece’s final problem has been the international community’s medicine. Greece needs to reduce its ratio of debt to income and to boost its productivity. The EU and the IMF have prescribed fiscal austerity and economic reform. Outside a currency union, austerity brings a lower exchange rate and interest rates. Inside the euro, the exchange rate doesn’t budge, although there could be some interest rate benefit.
With austerity, growth plummets. Greece is now in its fourth year of deep recession. High and rising debts are balancing on ever-decreasing incomes. The benefits of reforms that will make markets more flexible are years away.
Greece probably needs to renege on even more debt. That will lift a burden from its finances, creating a more favourable economic and political space for radical reform. But the cost will be even more loss of democratic control over its own affairs.
The alternative is to leave the euro, with all the calamities for the world’s banking system that could entail. Yet that would be all too consistent with the nation’s history.
So.. whilst i agree with you on agreements and repaying debt... its national debt isnt like a credit card with a credit agreement.. unfortunately !