A note on sovereign debt

This is a guest post from Dr Joseph Clark

There is now a good chance the Greek government will default on its bonds. If it does, the impact on financial markets in Europe and elsewhere will be savage. Interestingly, there is actually no need for Greece to default. It is not, nor is it ever likely to be, bankrupt. It is a sovereign country with plenty of assets (like the Mediterranean coast) that could be used to pay off bondholders. If it defaults it will simply be because it doesn’t feel like selling these assets.

If the Greek government didn’t want to pay higher yields on its debts it could secure the bonds with assets. Like the Mediterranean coast, or the Acropolis, or all those unused Olympic Stadiums. Greece and countries like it only issue unsecured debt because they want the opportunity to default or restructure when it suits them.

The natural response of the market would (should) be to demand a higher yield on Greek bonds now and in the future. But that is unlikely to happen in the long term while Greece is part of the Euro and can blackmail the Germans (and the IMF, etc) into giving them bridging loans and, ultimately, restructuring the debt. (Nice international financial system you got there. Shame if anything were to happen to it.) As long as this is likely the debt market will (rationally) not charge as high a default premium on the debt. So the Greeks get cheaper borrowing rates at the expense of the rest of the world.

It is extremely unfortunate that the mechanism that would usually purge this kind of nonsense — credit rationing and higher yields — cannot operate while the world is convinced that any sovereign or large corporate default must be prevented at all costs to forestall a descent into Hades. But such is the prevailing thinking.

25 thoughts on “A note on sovereign debt

  1. Greece should default and those that have lent Greece money (eg the governments of France and Germany) should learn a tough lesson. Nobody would lend unsecured funds to the Greek government for a very long time and so the Greek government would be forced to balance it’s budget. Other governments would tighten their belts out of the fear of being next.

    I like the point about secured versus unsecured debts. I also like the graphic Fleeced linked to.

  2. An insight into the mind of some of our fellow Australians from another blog:

    “The tea party simply reminds everyone that the USA was founded on tax evasion, or as they might prefer to say a tax revolt. The Greeks are currently suffering the legacy of tea-party-esque failure to pay tax”

    God help us were in a lot of trouble.

  3. “I think that’s the scariest thing about this Damian – too many stupid people with warped ideas.”

    I see it as human weakness and evil. America, the commenter states was founded on ‘tax evasion’, and look at the wealth, happiness and prosperity that engendered, at a level that makes the rest of the world and history look like an absolute joke.

    How can these fruitcakes get to their upside down conclusions? Economic logic and the clear historical demonstrations of how dysfunctional socialism is in all implementations and how prosperous America became from ‘tax evasion’ refute them so thoroughly it’s absolutely unbelievable to me there is still an abundance of poisonous anti-liberal sentiment like this.

  4. Because it’s all about money. When you read someone complaining about not enough taxes been bilkrd it’s really another way of asking for a handout.

    It’s a little heartening to see that over 1/2 of our population isn’t buying Charlie Rudd’s attempt to start a class war by hitting the miners.

  5. Another example of stupidity is the concern about a “two-speed economy.” Some dingbats actually seem to think slowing down the mining sector would be a “good” thing, because it will eliminate this “problem”

    Treasury believes that if miners do make good on their threats to shut projects or expand overseas rather than in Australia, it would help address the problems of managing a two-speed economy.

    The country is in the very best of hands!

  6. Fleeced – everything is a problem. That’s why we need lots of government.

  7. The Left really do celebrate mediocrity and punish excellence, don’t they? The nonsense about two-speed economies just puts it all in perspective. They’d rather us all equally poor, than all rich, but with a widening gap between top and bottom.

  8. Those with a focus on equality do, Fleeced.

    In Rawls “A Theory of Justice” however he advocates the “maximin” principle. That is, you want to maximise the position of the worst off. So it’s okay for there to be inequality, but only if it sees the poor improve.

    It’s basically a justification for capitalism in social democracy.

  9. Shem,

    I’ve got a feeling that lefties read Rawls because he is contentious to Nozick. I also think they bother to read half of what he said. The veil of ignorance supports socialism?

    You could only conclude that if you were very bad at maths.

  10. I think of it as egalitarianism. I always thought of Rudd as a pragmatist doing what “works” in the short term, ie: he’ll do whatever is popular without any principled approach to policy.
    However the new mining tax makes me think there is a significant egalitarian streak to the Labor party.

    Continuing what Fleeced and Shem said, some egalitarians are fully aware that socialism will result in poorer results overall and lower productivity. But that is OK to them because the tall popppies have been cut down a bit and there is more “equality”.

    The problem is that reality and nature don’t do equality. Equality is impossible. We’re all different. Not only are our genes and upbringing different, we’re born in different situations, and luck plays a role in life.

    Egalitarians hate luck and wish it didn’t exist. Problem is, it does exist. They believe that if someone gets struck by lightening, we should all be made to suffer for it. Or conversely if someone was a bit lucky in business, an egalitarian would say they don’t deserve their full profit. To them, any luck component should be penalised.
    Think of a kid whining that “it’s not fair”. The parent usually says something like, “life’s not fair, deal with it”.

    So I think the Labor party believe it’s “unfair” that commodities prices have sky rocketed over the years. Or they think it’s “unfair” that China wants iron ore, but doesn’t want to buy other goods and services. They therefore incorrectly believe that the mining companies don’t deserve all their profits.

    Then you have the whole mess of property rights and all the people out there who believe they rightly own minerals in the ground simply because they live in the same country as these minerals. This is another fundamental problem.

  11. I have nothing against egalitarianism if they are open and honest about what will happen, is well designed and what happens in consensus based.

    I think they’ve fooled themselves into believing there are no costs.= in their ideas.

  12. Yes, I think some on the left are genuinely naive too. eg/ I noticed some people arguing government health would be more efficient during the US health care debate.

    I have a big problem with egalitarianism, I think it is unfair. :) I believe in “equality” of individual rights. Egalitarianism must violate peoples rights and is an impossible dream anyway.

  13. Tim R., someone else made the bright insight once that the slogan of the French Revolution ‘Liberty Equality Fraternity’ was an oxymoron. How can you have liberty if you are forced to be equal in talents and skills to the least-talented person, in the name of equality? Would you want to be in such a brotherhood? Of course, we’ve taken them out of context now- at the time of that revolution, the french wanted an end to serfdom, equality before the law, and an end to the class system by treating all men as your brother. Those meanings have changed.

  14. Banks under capitalist conditions, would be forced to lend in a way that created wealth. Not in a way that subverts democracy by funding budget irresponsibility. The mathematics of compounding interest do not allow the situation, of bankers funding wealth-destroying activities to go on for ever.

    Furthermore there is little moral necessity to pay back people who have extorted the funds in the first place via the creation of new money. So debts to bankers and governments ought not be seen as something that should be paid back in full. The Greeks ought to get their budget in surplus and then default. To do otherwise is immoral and will be bad for everyone. Since it will keep the viscious thieving bankers in business.

    At the beginning of this week the bankers stole another trillion dollars. We must bring this tidalwave of thieving to a close. Defaulting is the best way that the Europeans can effect this outcome.

  15. Yeah, I’ve heard the question asked, why did the French revolution turn out so different to the US revolution?
    And while I’m pretty weak in this area (corrections or comments welcome) my impression is that it was only the US who really sought to focus on the individual, not society, and to iron out any contradictions involved with granting rights.

    eg/ A line from the 1791 French Constitution: “……the law may establish penalties for acts which, assailing either public security or the rights of others, might be injurious to society.”
    It’s lines like “injurous to society” that get my alarm bells ringing.

    Having said that, The 1791 French Constitution looks pretty good to me especially by 20th century standards. http://sourcebook.fsc.edu/history/constitutionof1791.html

    Compare to something like the Weimar Republic’s constitution. It all sounds pretty good until you notice little clauses like these: (from wikipedia summary)

    “Expropriation of property could be made only on the basis of law and for the public welfare”

    “The rights of the individual are inviolable. Individual liberties may be limited or deprived only on the basis of law”

    This type of thing is typical of constitutions in countries that are certainly not good at providing freedom for their citizens.
    Basically, you see articles saying you have rights except when the government says it’s not in the collective interest and decides you don’t :)

    Another rule of thumb to how good a constitution is, is how many pages does it take up? The less the better. Some constitutions are awash with contradictions, pages and pages of so-called rights for just about everything that sounds nice.

    eg/ This comes from Brazil’s constitution: http://www.v-brazil.com/government/laws/constitution.html
    “Article 3. The fundamental objectives of the Federative Republic of Brazil are:
    I – to build a free, just and solidary society;
    II – to guarantee national development;
    III – to eradicate poverty and substandard living conditions and to reduce social and regional inequalities;
    IV – to promote the well-being of all, without prejudice as to origin, race, sex, colour, age and any other forms of discrimination.”

  16. I’ve felt for a long time that the American ‘Revolution’ was not really a revolution, but an act of secession. Did Hutt River Principality revolt against Western Australia, or secede? Were the american confederates revolting, or seceding?
    It was not a real revolution in another sense- King George stayed on his throne, and was not overthrown, nor did the upper classes in Britain suffer.
    Also, the white Americans were not serfs, and already had lots of liberties under British rule- weren’t they fighting to keep their English rights, which they felt were being taken away from them by Parliament?
    France, however, was a repressive society. the term ‘Revolution’ is the right one for what happened there. So revolutions might be bad, in that you end up with a central government to win the fight, and then want to export it to other countries.

  17. This is probably very simplistic but from what I gather the French revolution followed more the ideas of Rousseau and the ‘general will’ while the American revolution followed the classical liberal model of private property and individualism.

    Two totally different experiments.

  18. Yeah well thats right. The American revolution was a straight secession from the British Empire. No doubt about it. But brutal wars legitimize the causes of the victors, and make the causes of the losers politically incorrect. So it was that after the civil war, Americans, and the rest of us, were not allowed to think of the American revolution as secession, and had to characterise it otherwise.

  19. Interestingly the Greeks were rioting about austerity measures in pretty much the same way as would be expected anywhere if any government were to implement them.

    Given that the nation is broke and can only hope to survive economically with outside bailouts, is it possible that welfare recipients now expect the world to owe them a living instead of just the nation?

  20. One could think of it as the blood-sucker-central always putting their benefactors in a pincer movement. It ought to be the Greek taxpayer hitting the streets but no doubt such people are too busy working. By these big public sector rallies going ahead the governments interests are being put front and centre and societal concern towards the taxpayer is being kicked off-stage.

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