INSOLVENT DEBTORS: THE INTERNATIONAL VERSION

Greece Replays Our Problems

At first, the similarities were striking between our domestic financial crisis and what is happening with governments abroad, especially in Greece.  It seemed as if everyone got into the habit of running up debts that became harder and harder to pay off – much less keep financing.  We could think about it as human nature run amok, especially in a highly competitive globalized economy.

But now it seems clear that it wasn’t just similar – it was exactly the same.  Greece and other European countries were under the same pressure to spend money they didn’t have, but also they engaged in the same psychological processes of collusion to deny the risks being faced.  Identical tricks were employed to make debt disappear off the books, identical language was used to describe it, and even the very same cast of characters was at hand, ready to make the deceptive deals.

Last weekend, The New York Times reported:  “In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books.” (See, “Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis.”)

Moreover: “Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.”

That’s just what banks did here, up through 2008, securitizing mortgages to make the liability of mortgage debt disappear, replaced by financial instruments that could then be marketed and reappear on the books as assets.  The Times put it blandly: “such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.”  Having such instruments classified AAA by rating agencies, no doubt, also helped to mislead investors, a process paralleled in Europe by regulators willing to look the other way to bring about the unification of European currencies and markets.

“In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money. . . .  Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 . . . devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.”

Greece, of course, is “too big to fail.”  If it goes bankrupt, so will other European countries –- and perhaps even the idea of Europe. No doubt that’s why Germany felt obliged to step in.  On the other hand, perhaps Germany and other European countries were aware that they were part of the collusion from the start.

Such deals cannot occur without prolonged deliberation.  The ministers, the banks, and the European agencies knew what they were doing.  But it does seem that what they didn’t consider the extent of the long-term risks they were running.

At the moment, no doubt, they felt those risks worth taking – but they allowed themselves to neglect not only the extent of the danger but also the interconnectedness of the problems.  They didn’t know they knew how bad it could get.