Greece: a lose-lose situation, debtor imprisoned with a debt which will never be redeemed

My 2 cents on Greece: The root of all evil was not having a credible no-bailout cost.

The root of all evil. Markets believed (and rightly so) that if a euro area Member State ever got into serious trouble it would be bailed out by the other Member States, this is the only way countries with such different fundamentals as Germany and Greece were paying almost the same 4 percent interest rate on their sovereign debts before the crisis. Greece was living above its means, as pointed out by many and had to tighten its belt, back to reality, indeed.

The second blunder was to chicken out from financial contagion and to bailout the private lenders. The 2010 bailout was in effect, not a bailout of the debtor but of the creditors: private debt was replaced by official debt, i.e. save the banks with taxpayers money, yes the markets were absolutely right in pricing German and Greek as equally good, it was the Eurozone after all. It was not a market failure as some like to think, but a government failure (as usual, or as I choose to believe). Had they built a credible no bailout clause banks and other private creditors would have never lent Greece so much money at such low rates and the previous Greek governments would have never been able to pile up so much debt in the first place. A credible no-bailout clause would say something like: you may run deficits as large as you want, but if you can’t pay your bills that’s your business, you’re on your own. Instead they constructed non credible fiscal rules that everybody (beginning with Germany and France) violated anyway, since the fines for violation were not a credible threat.

So fine, by 2010, they had already messed it up. What do you do with a debtor who can’t afford his/her bills, you incarcerate him/her? That was the usual practice in Medieval Europe. Nowadays though, the International Covenant on Civil and Political Rights says: "No one shall be imprisoned merely on the ground of inability to fulfill a contractual obligation." There are bankruptcy laws, and there are sovereign defaults too (though no system for orderly sovereign defaults exists, as proposed by the IMF because big creditors lobby against such thing). So came the third blunder: instead of restructuring the unsustainable debt as the IMF wanted and they now publicly acknowledge (IMF: "Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output,"), they EU side convinced the IMF to do otherwise: no euro area country shall ever default or restructure its debt. They were obviously wrong and restructuring did happen 2 years later.

Now, most of the necessary market reforms to make Greece more productive and competitive were simply not carried out during the last 5 years, this is what Hausmann rightly points to. The previous Greek governments were just playing along in the EU’s kicking the can game. Oh, you’ll lend us even more money if we promise to be responsible good boys, as long as we commit to pay our unsustainable debt, which we know we won’t ever be able to pay, and we know you know we won’t be able to pay, cool!

So, why is a right libertarian like me supporting a far left government with communist roots (which would usually nauseate me). Because they’re defaulting, and that’s the only sensible thing to do, end this madness of incarcerating a debtor who is unable to pay back. This time, you (official creditors) have no mechanism to implement forced labor through which Greece will eventually pay you back, it ain’t happening, and you know it!

This economic mess has turn into a simple power struggle, do as I do or walk your way, so that all other Members see what happens when you’re a naughty boy. This is not the way you build up a credible no bailout rule guys, you are in effect bailing them out. Ultimately, if the referendum results in a majority of Yes votes, and a new government accepts to implement even more austerity, guess what? You’ll be bailing them out again, putting more money on the table that will never be repaid because they won’t grow like that!. It’s a lose-lose situation, debtor imprisoned with a debt which will never be redeemed.

Note: this was very roughly drafted in a rampage of inspiration that rarely materializes into any writing, so I'll be happy if you point out spelling/grammar mistakes, factual inaccuracies and most of all, constructive opinion comments.

Carlos de Sousa.

The deadliest border crossing in the world

November, 2014

Last month, Berliners commemorated the 25th anniversary of the fall of the Berlin Wall, a border crossing that not only separated a nation and families for decades but one that also took an official toll of at least 136 human lives. Still nowadays, many deadly border crossings continue to exist around the world, mostly as a product of governments whose migration policies prioritize preventing illegal immigration over protecting human rights.

North Korea’s abhorrent regime, with its minefield border with South Korea, is one of the first that comes to mind; with a border crossing that is deadly enough to deter even the bravest and the most foolish from an escape attempt south. The border between the United States and Mexico scores a comfortable second in the ranking of the deadliest border crossings in the world. But what if I told you that during the first nine months of 2014, 13 times as many people died by drowning trying to reach Europe through the Mediterranean Sea than crossing the US-Mexico border? What is more, what if I told you that this year, three quarters of all migration fatalities across the world happened during attempts to reach Europe and that thousands of lives could be saved at a negligible cost but they are currently dispensed?

The well known Lampedusa tragedy, where over 360 migrants officially died in October 2013, was just one of many shipwrecks that occur every year. According to the International Organization for Migration more than 3,000 migrants from North Africa drowned while trying to reach Europe in the first three quarters of 2014, a new historical record; the previous peak was reached in 2011 with the outbreak of the Syrian civil war but the annual death toll had never reached 3000 in a year.

These numerous fatalities occurred despite the significant efforts of Operation Mare Nostrum, established after the Lampedusa tragedy in October last year, which managed to rescue over 150,000 migrants across the Mediterranean since the beginning of its operations. How many thousands of people will drown now that Operation Mare Nostrum has officially ended and been replaced by Operation Triton, which has one third of the budget (3 million euro a month), and whose primary focus is on border management instead of on search and rescue and whose range of operations is confined within 30 nautical miles from the Italian coast?

Although the Italian navy’s commander-in-chief declared that they will continue to operate as if no decision had been taken and that they do not plan to pass on the search and rescue activities to Operation Triton, the future of Operation Mare Nostrum is uncertain; other sources point that the Italian navy will continue to scale-back its operations during the next two months.

Although one cannot rule-out the possibility of a pull-factor as an unintended consequence of the undertaken search and rescue operations, this possible secondary effect that may encourage more migrants and smugglers to take this risky trip, cannot be used as a reason to oppose saving human lives at a relatively low cost as the UK government officials have done. What is more, as rightly pointed out by the International Migration Organization and Amnesty International, it is the humanitarian crises near Europe’s border that are driving this large migration wave, these are not economic migrants but refugees fleeing from life threatening conditions in their countries of origin.

The Italian authorities (including Prime Minister Matteo Renzi) had been complaining (and rightly so) about the unfairly heavy burden they have to carry in the moral responsibility of rescuing migrants from drifting and sinking boats in the Mediterranean.

In an ideal world, the responsibility of safeguarding human rights would be shared on a global scale according to each country’s capacity to help. This is obviously not politically feasible, but a fair system of burden-sharing between EU Member States is a perfectly reasonable goal given the legal framework defined by the Lisbon Treaty. This legal framework is also adequate for creating a well-functioning Common European Asylum System, which currently serves as a coordinator but not as a unified policy unit that could work together with EuropeAid to tackle the refugee’s migration flow at its roots, in the most effective and cost efficient manner.

Instead of downsizing the relatively (but not sufficiently) successful Operation Mare Nostrum into an operation that prioritizes border management over human lives, the EU should jointly fund enhanced search and rescue operations throughout the Mediterranean and jointly manage refugees across Member States in a way that can be agreed upon as fair burden-sharing.

Carlos de Sousa

Greek Prime Minister Antonis Samaras has some balls

July 2 (Bloomberg) -- Greek Prime Minister Antonis Samaras says “things are now improving” in the crisis-hit country and it’ll avoid Argentina’s fate.

“If you want the opposite example of Argentina, a very rich country that went bankrupt back in 2002, 12 years later, today, they are still in a crisis, on the verge of a collapse again, much more suffering and no hope -- this is what we did not want to happen in Greece,” he says

He really has some balls to say that:

First of all, they are not "still in a crisis". I fact, they are on the verge of entering into a new crisis: not because of the 2002 default and the new US court ruling against them, but rather because of the nonsensical economic policies they have applied during the last few years following Chaveznomics, but that's a different story for another occasion.

Second, I'm not sure about the "much more suffering" nor the lack of hope: just by looking at real GDP and unemployment rates it doesn't seem like Argentines suffered much more:

The real GDP fell by about the same magnitude during the Argentine and Greek crises

Source: IMF WEO, April 2014

The unemployment rate went up much more sharply in Greece and it has taken much longer to recover

Source: IMF WEO, April 2014

Regarding hope, well, I think Greeks have no hope on catching up with the Argentine GDP and unemployment rate trends during the next decade or so.Just check IMF's forecasts. It seems like they're gonna suffer from very high unemployment and sluggish growth for the foreseeable future

"That's not what they wanted to happen in Greece", I think they wish they had been able to do an outright default, devalue and skip the painful austerity, Argentine style

CdS