by Upstate NY
Thu Mar 11th, 2010 at 01:46:00 PM EST
The French and Germans are apparently actually encouraging banks, pension funds and individuals to buy these Greek bonds -- despite the fact senior politicians must surely know this is a Ponzi scheme (i.e., people can get out of Greek bonds only to the extent that new investors come in).
At best, this does nothing more than postpone the crisis. In the business, it is known as "kicking the can down the road." At worst, it encourages less informed people (including perhaps pension funds) to buy bonds as smarter people (and big banks, surely) take the opportunity to exit.
I don't have much more to add. He raises some sobering questions, but he doesn't really analyze the flip side of "kicking the can down the road" which is, "buying time."
He doesn't ask, what does time afford you? Either bigger debts, or maybe Greece turns things around. Also, do bank balances improve over time? So that they can absorb the shock of a Greek default.
On a country-specific level, he does leave out a few important points. Maybe it's because he's looking at Greece as a case study and not as a country. If you're only looking at the ledger, you may miss something. One, Greece is a poor country with an undiversified economy that should always run surpluses except in times of recession. Its two main sectors are shipping and tourism, which are awful in recessions. The good thing about them is that if the world economy moves, they bring external funds quite apart from the internal business climate. Two, the country's bureaucracy is dysfunctional. Quite apart from the fact the country is poor, it has an internal problem that it needs to solve, and many statements uttered by EU politicians are meant to apply precisely this pressure. Europe does not need a drachma-denominated but still dysfunctional Greece at its southeastern tip. Whether it defaults or not, Greece needs to change course. Three, the country's tax system needs to modernize.
So, my point is: Greece has an external capacity for bringing funds to the economy, and this may cut into the debt when/if the world economy starts growing again. Also, a modern tax system and a justice system with bite would raise revenues as well. I know Johnson mentions that the rich are fleeing Greece, but the fact is, tax evasion in Greece is at 25%, and 19% in the Eurozone, and 14% in the USA. Yes, even 6% in additional revenues will help Greece, but the rich know how to beat taxes all over the world. Greece isn't going to solve that. But they can force doctors and lawyers to abide by tax laws.
Johnson's model needs to account for potential sources of revenue that aren't apparent in his model. Cutting the bureaucracy isn't really one of them since Greek bureaucrats pay is tiny and the payments are roughly akin to a social safety net. In other words, the Greek public sector is really just a form of workfare. If you slash the bureaucracy, you end up paying anyway. Only when the economy starts growing will the slashing of the bureaucracy pay off, as hopefully a more equitable environment will be in place for all Greek citizens, and this will lead to expansion of business.
Still, one needs to account for how much of Greek debt accounted for a 4 to 5% expansion of GDP over the last 10 years. If one subtracts the stimulative effects, what are we left with? Will EU growth and world trade contribute enough to Greece's GDP to prevent a default, or is this not very likely?