On the Greek problem

Something that hugely surprised me.

The IMF seems to think that Greece will run a primary surplus in 2012. This rather changes things, if true.

To explain: sure, we all expect Greece to be running a huge budget deficit next year.

However, we\’re now, with that country, in the territory of owing your bank manager a billion, not a thousand: it\’s become his problem, not yours.

We all agree that there\’s absolutely no way at all that Greece is ever going to pay off all of this debt. Something\’s got to happen at some point.

And the thing that restricts Greece from simply defaulting is that they need to borrow to keep plugging that deficit. If they simply tell everyone to bugger off then they can\’t borrow to cover the gap beteen their taxation and spending in hte future and there will be riots and revolution.

However, that assumes that they are running a primary deficit: that current tax revenues are lower than current spending, leaving out of our calculations any interest payments on the debt. If, instead, they\’re running a primary surplus, that is, they\’re getting in enough tax to pay for current spending, it being only the interest being paid which tips them over into deficit, then all the power is with Greece.

For they can simply default on all the debt and still keep the government running and not have riot and revolution.

So, if the IMF is correct, that they will be running a primary surplus next year, Greece then has the freedom (tighly constrained by other factors, but it is there in a way that it wouldn\’t be without such a surplus) to simply say \”So long suckers!\” and tell everyone else to beg for their interest and their bonds.

Another way of putting it is that with a primary surplus it actually becomes rational for Greece to default: with or without agreement from anyone else.

I dunno whether the IMF is right here or not but it certainly makes it all interesting.

5 comments on “On the Greek problem

  1. Mitch – could the other countries in trouble do this? would this finish the euro.
    If they are also running a primary surplus then probably yes, however
    1 The euro is arguably going to be a stronger currency without the massively mismatched countries inside it.
    2 The political pressure to not take this action is enormous.

  2. If the Budget predictions are accurate, the UK will be in the same position next year (2012/13).

    Tax revenues then are predicted to be £620bn, and current expenditure (excluding depreciation, which doesn’t need cash to cover it, and the £51bn of interest that we’d avoid by defaulting) £619bn.

    That would leave our capital budget unfunded, so we’ll have to cope with what capital assets we’ve got (or arrange firm asset financing).

    We’d save £50bn p.a. on interest, plus the huge capital saving.

    But the best advantage would be that it would be years before the government would be able to borrow again (other than possibly some very secure asset financing, in those rare occasions where the government actually creates a valuable asset).

    Now all we’d have to deal with is the slight problem of all the banks and pension funds who will lose all their capital. Do you think we could persuade the foreigners to take on all the gilts in the next few months?

  3. Well it’s not quite a simple breach of contract, as the contracts were signed by politicians, who committed the country to pay back the debts they were contracting, not merely themselves.

    It’s quite difficult to justify government borrowing at all from a libertarian perspective, if you start from the idea that no one has any right to bind another person without their consent. On the other hand, governments do keep borrowing in reality.

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