So, in the wake of the Greek referendum result, the haggling continues. And let’s not ignore the fact that this referendum took place as a negotiation tool. Whether or not it turns out to be useful probably depends on how public the Greeks can keep the negotiations (their opponents across the table don’t really care about the claimed ‘democratic mandate’, not least because they are, at least theoretically, backed by the support of the other 496 million EU citizens who didn’t get a vote). In a public arena, it benefits them to be thought of as the underdogs; the Germans in particular have shown a sensitivity to coming across as bullies.
The ground may have shifted somewhat – how much remains to be seen – but this vote was never the make-or-break matter that either side pretended it was. Of course they had to maintain that it was critical, not least because it’s pretty hard to get people to turn out to the polling stations if they’re being told that their ballots make little or no difference. These things never end; the Greek government will continue to work to maintain as much control as possible of its domestic finances, and the Troika – on behalf of the creditors – will try and maximise the amount and security of the return on its ‘investment’.
Assuming, at least behind closed doors, that both parties understand that this is merely a business negotiation, it’s more interesting to me to look at how the rest of the world views it. And it appears either that, egged on by much of the media, this is a matter of morality. On the one hand, plenty of people take the view that, quite simply, one *must* pay one’s debts. On the other, that forcing Greece into a continuing spiral of cuts and austerity, as a punitive measure and one that shows no sign of returning them to a secure footing from which they might be able to enjoy solvency, is both cruel and unethical. I admittedly have more sympathy with the latter group, not least because the past few years of austerity in Greece have failed to produce the promised result. It appears that neither side have an answer to the financial situation, so I’ll take the one that is less reliant on the general misery of the ordinary Greek people, thank you very much. Anyway, with that given I’d like to look at the bases for insisting on the debt being repaid (aside from those with a direct interest in the matter, for whom the basis should go without saying).
Why repay debts?
Clearly, most people need to repay debts most of the time, otherwise no system of lending money could work. Just as linguistic communication relies on the fact that the majority of us tell the truth to the best of our ability, any arrangement of financial communication that relied on constant monitoring and coercion would be practically unworkable. However the conversational analogy works the other way too: any sensible person maintains some kind of measurement of reliability, and is in the habit of confirming important facts. This may not be due to outright dishonesty; we are all prone to spreading gossip and information the veracity of which is unknown. Likewise, we may overestimate our own solvency and ability to repay.
However, while acknowledging that a small number of defaults are unavoidable due to unforeseen circumstances, I think most people would still maintain that a debt should be repaid whenever possible. And when I say ‘whenever’ this usually includes the possibility of extreme discomfort to the debtor (and his or her dependants). It’s odd how strongly moral the talk around is: debts *must* be repaid or, it is implied, the whole system breaks down. But just as we can cope with the possibility that some people may not be telling the truth – however unwittingly – we are actually perfectly capable of dealing with defaults.
Initially, I’d demonstrate that the system is perfectly capable of dealing with defaults by observing that pretty much every country has experienced one at some point. Most several times. Plenty of observers have gleefully pointed out that Germany, in particular, did several times in the last century. And in the long term it doesn’t seem to have done them, or their creditor en masse (I’m not disputing that some people will have done very badly at the time) that much harm, as demonstrated by the fact that people and banks continue to lend to them. More immediately, in the wake of its own banking crisis, Iceland was threatened with being cut off from the world banking system, and ultimately economic destruction, if it failed to make food for its own bad banks. It refused, and bounced back. The threats and predictions were fairly rapidly shown to be groundless, little more than hard negotiating tools.
Actually, I’m going to go further and argue that not only are some bad debts inevitable, but they are a necessary part of the system. This is borne out by the existence of interest; why else is it charged. Few people can be ignorant of the fact that the rate of interest charged reflects, in large part, the risk that the debt will not be repaid. But I don’t think they’d be as quick to realise that this is the reason that one expects to receive more than one lent out in the first place. Of course they might say, Greece or a country in its situation should expect to pay a high rate of interest because of the high risk, but this starts from the basis that creditors would already expect to receive a return on their money. If one is certain of receiving X amount on their money, then a dubious prospect must offer, say 2X, or more (proportionate to the assesses risk). Germany can borrow at 1%, where Venezuela must pay 20%, for example. But even the 1% that Germany pays is based on an amount of risk, however small. Nowhere is entirely safe. The fact that *everybody* must pay interest reflects this. We have grown so used to this that we ignore the fact that money doesn’t actually grow by itself. It grows because somebody thinks that they can do something else with it while we don’t (or that they can do more with it than we can). And this is why the possibility of default, and even the necessity of some degree of it, is essential to the financial system. If nobody ever defaults, why should anybody expect to receive (or pay) interest on their money?
If I have a billion idle pounds and you need it, why shouldn’t I just give it to you? I ask for 10% interest, but that’s predicated on the fact that I could get 9% elsewhere, with somebody who looks like a safer prospect. Of course I could just sit on it, leave it under the mattress (assuming that robbery isn’t a concern), but that benefits nobody. And I think that most people are relatively altruistic: if a friend – i.e. somebody who I don’t consider a risk at all – asks to borrow a tenner from me (which I have spare), I hand it over with no questions asked. For anybody else I might ask for some kind of collateral or interest, but that is based on risk. And we all benefit from a world in which the lending of money is not only possible, but common. Not only might we find ourselves a bit short sometimes, but it allows for economic growth with all of the comforts and possibilities that that affords.
Given this lack of a purely financial justification for arguing against default, it’s unsurprising that we feel the need to fall back on a moral one. Which isn’t a bad thing, because it’s certainly still true that default should remain relatively rare. But when appropriate – i.e. when the costs of repaying the debts are too high in either financial or social terms – we shouldn’t feel too guilty about it.
Of course any specific claims I’ve made about the permissibility of Greece (or any other country) defaulting again are tempered somewhat by the newness of the situation. The Euro is a new thing, so there are additional potential complications. But the uncertainty is mirrored – it might ultimately bring down the single currency, but then it might actually strengthen it by allowing all the members to know that there is no inevitability – since neither side knows the future.
Those with an interest in the connection between morality and debt will no doubt be aware of the commonality, linguistic and otherwise, between religion and finance. Plenty of people more erudite than I have written on the subject, so I’ll just observe here that the word ‘redemption’ being used in both is merely one of the more prominent exmaples.