What a strange idea

\”If it happens, and I say if, it won\’t lead to civil war,\” he says. \”If the state runs out of money, it can write short-term IOUs like California did a few years ago.\” But Greece has no Apple, which is worth many times Greek GDP, to back up its solvency.

Eh? Apple backs up California\’s State solvency?

It pays corporate income tax there, yes…..but that\’s it. Not really quite the same as backing the solvency though, is it?

14 thoughts on “What a strange idea”

  1. Also once again, GDP being compared to a meaningless number.

    The “GDP” of Apple is not the market cap but the gross profit (very roughly)

  2. The market cap of a company is the same thing as the present value of the future income (net profit after tax) it’s expected generate, at whatever discount rate is generally considered reasonable. So when we’re talking about ability for a state to generate cashflow to service its future debts, it doesn’t seem like a terrible measure.

  3. john b

    That’s true that market cap gives a measure of a company’s ability to generate cash, but it still doesn’t mean that GDP is anyway comparable to market cap.

  4. I suppose California could issue bonds that are specifically secured on Apple’s future tax payments.

    Might be amusing if Apple then bought them.

  5. Philip Scott Thomas

    I suppose California could issue bonds that are specifically secured on Apple’s future tax payments.

    I wonder what would happen if Apple decided to up sticks and move to another, more business-friendly, state.

  6. PST (#5), that would just be one of the risks of the bonds. Disclose it in the prospectus, let the market price it in.

  7. Or California could do a deal with Apple; they agree to stay resident for the life of the bond, in return for an equal-length deal on taxes.

  8. You’re all missing the point. If a state has a healthy level of exports, it will be able to raise money when it needs it, not by raising taxes on the exporting companies, but indirectly by taxing the economic activity that comes from the money the exports bring in.

    For example, no one was seriously concerned about German budget deficits, even when they exceeded EU limits.

  9. Never mind this quote, what a simply silly headline. “The bloated inventory of a bankrupt state treasury”?? Oxymoronic.

    As I’ve said many times already, Greece is not insolvent. Its assets far exceed its liabilities – as Mr. Mitropoulos clearly knows. It is short of cash because of the idiotic Euro. Writing IOUs using state assets (that can’t easily be sold) as collateral to cover short-term cash shortfalls is a perfectly reasonable thing to do even in the absence of an Apple.

  10. Frances (#9), the problem with using “assets that can’t easily be sold” as collateral is that lenders don’t value them very highly (because they can’t easily be sold).

    Therefore the amount they’re willing to lend on those assets is low, and the interest rates charged tend to be high.

    One thing they can do is create a stream of cash from those assets; the asset is then much more attractive (provided the associated cash stream looks reliable). Hence charging tolls on roads, airport fees, etc. and selling off the asset.

    Depending on how bad Greece is, they may have to do that with schools and hospitals as well.

  11. “Not really quite the same as backing the solvency though, is it?”

    Especially as Apple can pick up and leave at short notice if CA gets too grabby.

  12. Richard

    It all depends what you are planning to use your IOUs for, of course. Or rather, who will get them. Fiat currency is a government IOU backed by the assets of the country. If the Greek government produced IOUs as a proxy for, say, the wages of civil servants it could a) force civil servants to accept them in lieu of Euros b) force shops etc. within Greece to accept them in lieu of Euros. Whether or not the assets have any value to external lenders is completely irrelevant. Mr. Mitropoulos’s idea amounts to Greece creating a domestic currency.

  13. Wouldn’t it be cheaper to just foreclose on Greece and wind it up? Divvy up the Acropolis etc. among the creditors? Bit hard evicting the squatters, though.

  14. David Gillies

    As I’ve explained elsewhere, foreclosing when the problem is cash flow is unnecessarily harsh. Greece’s immediate problem is lack of cash, and this is caused entirely by the silly Euro. Get rid of the Euro and allow it to print its own money, and hey presto, devalued currency and inflation but no more cash flow problems.

    Mr. Mitropoulos’s idea is cleverer than that – he’s essentially suggesting retaining the Euro as an international settlement currency but introducing a separate domestic currency for transactions entirely within Greece. Rather like the Lewes Pound. It neatly gets round the escrow account problem too, that forces Greece to pay foreign creditors before it can turn the lights on.

    It doesn’t solve their oil problem through: because of the unbelievably silly decision of the EU to impose sanctions against Iran, Greece is paying an absolute fortune for oil. Anyone would think they WANT Greece to run out of money.

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