By John Tamny
With Greece expected to default on its government debt, markets are to varying degrees convulsing. The obvious question is whether or not the panic is rooted in something real to worry about. Not really. As is always the case, market fears are a creation of government error, not worries about a very minor economic entity.
To see why, it needs to first be remembered that a Greek default would be nothing new. As Carmen Reinhart and Kenneth Rogoff noted in their much talked about 2009 book This Time Is Different, Greece has been in default mode roughly half of its modern existence. That its creditors might suffer a “haircut” on what is owed them is far from novel.
The only reason a default constitutes news has to do with who holds some of the country’s debt. As evidenced by how the shares of German and French banks have rallied over the years each time a potential debt workout was reached, the story behind the non-story that is a Greek default involves banks that do not have an Athens address. In short, Greece’s debt troubles have little to do with an historically profligate country, and everything to do with banks that are wrongly seen as too important to be allowed to suffer their mistakes.
Importantly, if banks were properly allowed to fail much like other private business are allowed to with great regularity, bank exposure to Greece would be a non-story. Better yet, banks likely wouldn’t have exposure to Greece in the first place given its lousy track record. In short, government involvement in what should be the private doings of the private economy has created a “crisis” that would not exist absent the desire of politicians to insert themselves into a global economy that would be much healthier without political meddling.
“Healthy” is the operative word here because lest we forget, a lack of economic health explains why Greece has so often been enmeshed in default throughout its modern history. What’s not stressed enough is that Greece has an economy that is around the size of Dallas, and that as a percentage of the overall Eurozone economy amounts to roughly 2-3 percent. That such a tiny part of Europe’s economy could have investors up in arms is further evidence that this is all about the major banks with exposure to Greece, and nothing about a potential Greek default. The country itself quite simply doesn’t much matter from either a global or European perspective. Even if Greece were big, it’s hardly a ‘crisis’ when investors impose discipline on poorly run governments.
Contagion? What a laugh. That’s like saying that Texas state debt might go south in value for it being close to Louisiana, or for Mexico bordering it. Does anyone seriously think that Switzerland will suffer “contagion” relating to Greek debt? Let’s be serious.
Can it then be said that Greece’s own troubles amount to “contagion” for Greece? Not in the least. To state what should be obvious to anyone with the most basic of math skills, Greece doesn’t suffer too much debt as much as it’s struggling from too little economic growth. If the economy grows, the debt is easy to pay off. That’s why rich countries can run up major “deficits,” while poor countries have a more difficult time raising debt in the first place.
If Greece’s economy were booming, it would not face a default situation. There are many authors of this weakness, it says here that the weak euro (in terms of gold) the last fourteen years has been the unsung driver of slower growth for it inhibiting investment, but the main point here is that if Greece in the most basic sense enjoyed lower rates of taxation (this includes low government spending which is by definition a tax irrespective of whether it’s in “deficit” or “surplus”) and a stable euro, its economy would be fine. And default on government debt would not be part of the discussion.
The only problem with the above is that good policies aren’t presently the norm for Greece. Not only is the euro weak and unstable, but global entities like the IMF are calling for tax hikes to help the country pay down its debt. Ignored is that tax hikes, for penalizing work, generally work against actual economic growth. Greece would be much less likely to default if the policy from its outside minders and the socialists on the inside was focused on reducing the government’s burden on the economy.
What about the euro? Is the common currency the problem, and if so, would Greece be wise to leave it? The previous question is the comically obtuse equivalent of asking if Mississippi and West Virginia should exit the dollar in favor of the MS Peso and WV Ringgit. Companies and jobs are a function of investment, so imagine how much more impoverished both states would be (in a relative, American sense) if the dollar were no longer the currency in use. Greece is no different. If it exits the euro, it will be much harder for the increasingly isolated country to attract investors eager to hold income streams that pay out “drachma.”
Of course, the above explains why Greece will never leave the euro even if it leaves the euro. The reality is that the country’s debt is denominated in euros, not to mention that its best companies will only be able to attain financing in euros. No reasonable investor is going to invest in debt that once again pays out “drachma,” and this underscores yet again why Greece will never leave the euro even if it returns to the drachma as its national currency.
What about the struggling banks in Greece, and runs on same? What can’t be forgotten is that businesses never just run out of cash. Ever. What happens is that some thought to be poorly operated run out of credibility with a lack of credit the logical next step. It’s hard to say, but the mere possibility that Greece will exit the euro for something much less desirable presumably has depositors eager to hold that which is relatively credible, is globally accepted, but that the Greek government is seeking to restrict movement of. In short, Greek banks haven’t run out of cash as much as they’re operating in a country led by leaders who lack a clue. Greek banks are the victims of the government’s cluelessness, the latter is sapping their credibility, but their struggles presumably speak to why Greece will never leave the euro. Eventually even socialists are mugged by reality.
As the penultimate paragraph makes plain, it’s ultimately all about the banks. It always is. Nothing against the banks, but it sure would be nice if a few big ones would be allowed to fail based on their exposure to Greek debt. Not only would failure ultimately be healthy for the banking system, but for a few implosions serving as a reminder that “investment” in government debt isn’t a one-way street, this failure would be very grand for the global economy. (my emphasis)
By John Tamny for Real Clear Markets
By permission John Tamny
John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He is author of the new book Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery).Print This Post Send To A Friend