current affairs economics

Austerity without debt relief is unjust

I’ve hesitated to weigh in on Greece and the ongoing debt crisis. It’s a complex situation and I don’t think I have much to contribute. But one thing I do know – debt always has two sides, and those two sides are not well reflected in the current debate.

Debt requires two parties – a lender and a borrower. “Debtor and creditor are two sides of a single entity” as Margaret Atwood writes. “One cannot exist without the other”. Unsustainable debt only happens when there is a failure on both sides – a cavalier borrower, and a lender that is either unscrupulous or hasn’t done due diligence.

When a debt becomes unpayable, as Greece’s undoubtedly is, the responsibility for that is shared. Greece has borrowed unwisely, but banks have lent unwisely. Since both sides carry some responsibility for the problem, both sides need to make sacrifices in putting it right.

But that’s not how things have proceeded. All the burden of that unsustainable debt has fallen on the Greek people, while the creditors have been protected. Austerity without debt relief is a one-sided and unfair deal.

The usual objection to debt relief is that of ‘moral hazard’. Writing off Greece’s debts would imply that corruption and financial mismanagement doesn’t have consequences. Other indebted states would expect similar treatment, and good government would generally be dis-incentivised. But moral hazard works the other way too. If Greece doesn’t get any debt relief, the message is that reckless lending is no crime. It encourages the banks to lend irresponsibly, because they know they will be protected regardless.

I don’t pretend to have any new solutions for Greece, but the current outcome is unjust and does the Eurozone no credit whatsoever.

There is a lot of talk at the moment about Greek solidarity – what can we do to stand with the Greek people? There have been hashtags and there’s a proposed protest gathering tomorrow if that’s your sort of thing. The Jubilee Debt Campaign has a petition on Greek debt that you can sign here. If you want to help practically, the country’s medical facilities have suffered most during the crisis and that has led to a shortage of supplies. You can chip in for that here. You may have noticed the ‘people’s bailout’ in the press, which was a nice symbolic gesture if not destined for success. That obviously didn’t reach its funding level, but it’s moved on to a less ambitious fundraising initiative which you can support here.

Looking beyond the immediate crisis, a healthier balance of power between debtors and creditors must be possible. The international community needs a mechanism for national bankruptcy, a process of adjudication for this sort of crisis that protects both citizens and banks, and shares responsibility equitably. The brinkmanship and blackmail of the last couple of weeks is no way to sort these things out in the 21st century.


  1. The first thing to remember with Greece is that it isn’t private banks that hold its debt. There was an in effect debt forgiveness in that private bondholders took something like a 70% haircut a couple of years ago. The banks have suffered for their lending to Greece.

    The vast majority of the debt is to the Euro zone countries. So this isn’t the people of Greece vs private shareholders (boo!) but the taxpayers of Europe.

    Even here there has been in effect debt forgiveness. Greece has been given interest holidays, lowered interest rates and the terms of the debts have been massively increased. All that makes the amount that Greece has to pay each year on €1 of debt much less. If you owed me £100 at 10% which is better? I cut the debt by half but keep the rate the same or keep the principal the same but cut the rate to 3%?

    Yet despite the cuts to the debt burden (or perhaps because of) the Greeks didn’t reformed enough . You can see why the Germans are cross to be painted the bad guys here. They could have cut Greece loose in 2010 and just bailed out their banks for duff Greek debt but they spent billions they will never get back on keeping Greece afloat. And they just get called names.

    Obviously Greece shouldn’t have been allowed in the European and that is joint fault between Greece and the Euro zone. That Greece hasn’t reformed like Ireland so far means the pain wil continue. And Greece’s failure to reform is no one’s fault but their own.

    The brutal fact is if Greece want the Euro they have to knuckle down and really make the painful free market reforms they have tried to avoid so far. Personally I think they would be better out of the Euro but that would be painful too.

      1. Don’t forget the Greeks massively lied about their budget for years. Off balance sheet schemes developed by Goldman Sachs and others.

        Just blaming the lenders is like just blaming the mark for being swindled by a confidence trickster.

        Now the marks have lost most of their money and the trickster lost their liberty.

        1. Greek misreporting was an open secret, even before they joined the Euro. Germany and everyone else, government or bank, all knew what they were lending to.

          This is not about blaming lenders and sympathising with borrowers, or letting either side off the hook in any way. It’s about shared responsibility. If the German taxpayers were prepared to profit from Greece by lending them money, they have to accept that their investment didn’t pay off and they’re not going to get their money back – or at least not all of it.

          1. German taxpayers did not lend to Greece to make money. German banks, many of them state banks lent to Greece pre-crisis to make a profit. The German taxpayers only really started lending in the bailout which wasn’t to make money but to save Greece and the rest of Europe from Euro collapse in 2010.

            The Greek off balance sheet fiddles were not known till 2009, so whilst it was foolish to lend to Greece pre 2009 at the same coupon as Germany but there was direct fraud by the Greeks government.

            Anyway as I said before, German (and Slovak etc) taxpayers have seen a reduction in the value of their loans through rate cuts and maturity extensions. A haircut by other means.

  2. I don’t support the Euro but do support the EU and will be campaigning for a yes vote (in this referendum). However, the EU has not covered itself in glory over this one, nor has Syriza . The simple matter is Greece cannot afford to pay its debt nor can it really take any more austerity. There has been no recognition of that by the EU but there has been belatedly by the IMF. Some debt forgiveness or extension of payback is essential, the current agreement will fail and we will be back to square one within six months. For Syriza to organise a referendum and then accept worse terms than people voted for a week later is simply unbelievable. Also unbelievable is that Greece is supposed to raise 50 billion Euros by privatisation over the next 3 years. I think Greece will have to leave the Euro. Whatever it does it needs to get the wealthy and companies to pay their fair share of tax. Finally the Germans hypocrisy is breathtaking. After WWI there should have been debt forgiveness after WWII there was. Any deviation from neoliberal economics…

    1. Yes, interesting to read of the leaked IMF report that Reuters got a look at yesterday, which clearly says that the debts are unsustainable and Greece needs debt relief. Since that’s not being recognised, mostly out of ideology it would seem, the problem is only delayed – again.

      And of course, the people most affected by it all are ordinary Greeks. That’s where the importance of solidarity comes in – not with Syriza or with the leaders, but with the people just trying to get on with their lives.

      1. Greece needs to reform itself but it has shown over the last 5 years incapable of doing so. The only thing that makes them do anything is the threat of its creditors cutting off future funds.

        Debt forgiveness should be a reward when Greece has reformed, collects its taxes and loses its political crony jobs. That is what the IMF want and I agree but this is not ideology. Debt relief without reform and Greece just spends itself back into this position in 10-15 years.

        Btw Neil, Neo-liberals argued aganst the Euro. This is not neo-liberalism. The false categorisation of this being due to ‘neo-liberalism is just labelling anything that the writer doesn’t like as ‘neo-liberal’. It just shows ignorance.

          1. So in this context Neo-liberals = common sense. Go on, define Neoliberalism. Extra points if you do so by reference descriptions by those economists who would be described as neo-liberals, other than the opponents.

  3. I see it this way. Would you lend money twice over to a spendthrift cousin who blew it on booze and gambling? What sympathy could you expect if you did not get your money back?

    1. Exactly, and the fact that the EU places all the blame on Greece shows how unbalanced the power is between debtor and creditor.

      It wasn’t always like this, of course. Debt is cultural, and in the past moneylenders were the bad guys. Now the debtors are the bad guys. Somewhere in-between them there’s a healthy medium where debt is priced right and responsibility is shared.

      1. The question really is, do the Greeks want to borrow any money in the near future?

        If no then they have the power by walking away from the existing debt. If yes then the lenders have the power. We know Greece needs more money which is why the lenders have the whip hand.

        This is why balanced budgets are what countries should aim for.

    1. I’m not saying that the Greeks bear no responsibility or that there should not be spending cuts or pension reform. There has clearly been corruption and tax evasion on an epic scale. However it seems to me unfair that the poorest who could not evade much tax pay for it and the current bailout plan won’t work. You know this when the lenders lend more money to the debtor to pay back some debts….

  4. My understanding of debt is it’s all a con. Our banking system relies on debt to make profit and without debt our economy as we know it would collapse. This might not be a bad thing for us all, hard times would ensue but in the long run it would be better. My believe (and correct me if i’m wrong) is that Greece has been used and abused to make profit to fuel the banks. Many other countries are in the same boat and Africa as been treated like this for years. Until our banking system is changed debt will increase and profit for the rich will grow! Positive money have some great ideas!

    Please take a look at these posts:

    1. Yes, ultimately it boils down to the right to create money – who gets to do it and what they are allowed to charge. I believe the system can and will be different, although I don’t think the big change will be the sovereign money creation that Positive Money campaign for. I think it will be simpler than that, and probably digital.

      1. Yes maybe your right, i’ve recently join the digital finance world. Although I do think Positive money’s point of creating money through physical existence rather debt is a very important one.

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