After all of the boisterous noise about rejecting austerity, Greece has finally agreed to the outlines of a bailout to address its debt crisis: more austerity. Its future is grim(mer). At times like this, it is useful to ask which side has the morality, and which has only the hazards.
Greek prime minister Alexis Tsipras is now seen as a capitulator, a man who played a game of chicken with international creditors and lost. Greeks explicitly voted against more harsh austerity measures and budget cuts, and are now stuck with precisely that.
The financial mismanagement and corruption of Greek government and elites deserve a large portion of the responsibility. But let’s not blame the beleaguered and desperate Greek government too much for what’s transpiring now. Greek has very little leverage left in its negotiations, except for a willingness to suffer. The power here rests in the hands of the entities that have the money—the richer European nations, the lenders, the creditors. They’re the ones who have won an agreement from Greece to try to squeeze more blood from a rock.
“I’ve seen this movie so many times before,” said Carmen M. Reinhart, a professor at the Kennedy School of Government at Harvard who is perhaps the world’s foremost expert on sovereign debt crises.
“It is very easy to get hung up on the idiosyncrasies of each individual situation and miss the recurring pattern.”
The recurring, historical pattern? Major debt overhangs are only solved after deep write-downs of the debt’s face value. The longer it takes for the debt to be cut, the bigger the necessary write-down will turn out to be.
A loan involves two parties: Borrowers and lenders. Both are equally responsible. Because lenders are powerful and obscure, we tend to focus our attention the borrowers, and their responsibility to repay their debts. That’s half of the story. The other half is the responsibility of the lender to make only loans that they believe will be repaid.
Why do lenders get paid interest on loans? Because of risk. What is the risk? The risk is that the borrower will not be able to repay the loan. This is the business of lending. Were there no risk involved in lending money, there would be no reason to demand high interest rates. Lenders, by making loans, assume risk. Just like the vaunted ideal free market entrepreneur does when opening a cookie store. Both are assuming a level of risk in return for the chance to make a good deal of profits.
If a cookie store fails to make enough money selling cookies to stay in business, society says “that’s a pity.” If lenders fail to make enough good loans to make a profit, though, society says, “we must protect you.”
Lenders—particularly big institutional lenders with loans big enough to finance entire nations—are quick to appeal to a sense of public morality. They claim that if a nation like Greece is allowed to fail to repay its loans, it will create a “moral hazard,” by setting the precedent that loans do not need to be repaid. They couch the imposition of harsh and counterproductive austerity measures in the simple, appealing language of right and wrong. Austerity—the practice of imposing extreme frugality on indebted nations, so that they may be better able to pay their debts to outside creditors—is presented as bitter medicine that the Greek people must swallow to heal their putrefying sense of duty.
There is already a built-in punishment for failing to repay a loan: the inability to borrow more money. For a nation, that is quite a severe penalty. There is no way that Greece will escape this debt crisis unscathed. But it could reject the austerity measures imposed by outside creditors, exit the Euro, devalue its currency, and wipe away its debt so that it can get down to the business of rebuilding its economy as quickly as possible.
Instead, it will hobble on under the weight of yet another bailout that will be used to repay outside lenders and will make life ever more unbearable for the citizens of Greece. The Greek economy will not recover as it must in order for that nation to thrive again.
Where’s the moral hazard for the creditors? Why are they compensated for the default of their risky loans? What’s the moral of a fable where the profligate spenders are doubly punished, while the risky lenders walk away whistling?
Austerity does not work. It weakens an indebted nation’s economy past the point of recovery, prolonging economic pain. It causes undue pain and untold suffering. There is nothing moral about that.
But austerity is not moral. It is not just desserts; it is not the sad but justified end of a fable. It is the exercise of power. The same power that a gangster loan shark has over a broke debtor: to be repaid no matter how much long-term pain it causes. Many lenders are owed many billions of dollars by Greece. They want to get paid. They therefore exercise their political power to make sure that that happens, to the best of their abilities. They want their money at all costs. The costs may include vast human suffering among 11 million Greek citizens. What do creditors care?
We agonize over the moral hazard posed by powerless borrowers. We should begin to consider the moral hazard posed by powerful lenders, who seek reward without risk, and are able to bend entire nations to the service of fattening their profits.