by Neil H. Buchanan
This week in Verdict, I am publishing a two-part column about the Greek/European economic and political crisis, which dominated the news until very recently. Part One was published today, and Part Two will be published on Thursday.
In today's column, I explain why the economic conditions that have been imposed on the Greek people are so ruinous, to say nothing of being self-defeating for the creditor countries. The economics behind this story continue to be quite simple, and I am hardly the first economist to describe the insistence on ever-deeper austerity policies as both cruel and insane. Continued austerity simply makes it ever-harder for Greece to pay its debts, which all but guarantees that the country will soon need further debt negotiations to avoid the next possible full-on default. Yet the leaders of the key European institutions -- quite clearly at the insistence of the most politically and economically powerful country in Europe, Germany -- demanded even further austerity even to begin the process of negotiating a longer-term package.
Prior to the Great Recession, Greece was avoiding reforms of its governance structure that would have been in the overall interest of the country. But so were most countries. For example, it is of more than passing interest that I have given lectures abroad over the last few years with titles like, "Will the United States Ever Again Have a Functioning Budgetary System?" As I argue in today's Verdict column, however, the idea that Greece's longstanding political problems are an excuse to impose gratuitous, mutually destructive conditions on the Greek people is simply absurd.
There is much more in today's Verdict column, of course, and I encourage readers of Dorf on Law to read it in full. Here, however, I want to focus on a particular issue that I raise in the column, regarding the moral claims that Germany's leaders have openly relied upon in condemning Greece to unending pain. In particular, German Chancellor Angela Merkel and others have continually sneered that the Greeks supposedly refuse to "play by the rules." If you borrow money, you must repay the money, on time and in full, they say. End of story. And, they continue, they are tired of the Greeks repeatedly breaking that simple moral code. That the Germans themselves have not always considered that code to be inviolable, of course, is conveniently forgotten, as West Germany's post-World War II debt relief is sucked into the memory hole.
The problem, however, is that this idea of inviolable loan contracts is beyond naive. Not just in the context of debt write-downs in the aftermath of global war, but in simple day-to-day commerce, parties to contracts -- especially loan contracts -- engage in debt relief all the time, and sometimes debtors default entirely. As I note in today's column, commercial debt is "rated" by trained financial analysts on the basis of how likely it is to be repaid. Debt risk analysis could not even be "a thing" if the Germans' simplistic moralizing were an accurate description of how the world works.
And then, of course, there is bankruptcy. The U.S. Congress itself engaged in its own spasm of victim-blaming moralizing not long ago, restricting the availability of bankruptcy protection on the basis of false and exaggerated claims that the system was allowing morally defective people to walk away from their debts. Even so, Congress obviously did not repeal Title 11 of the U.S. Code, which still provides various ways in which people and businesses can obtain relief from debt obligations that have become impossible to repay.
Most importantly, when lenders issue loans, they do so knowing how those bankruptcy provisions work, which in turn allows them to determine the interest rates and other conditions that they will impose on those loans. The loans are then issued in the full knowledge that the borrower might not pay, in full or in part. Lending to people or businesses that already owe large amounts of money is more risky than lending to people with relatively low levels of debt. This is Finance 101, hardly some exotic theory worked out by libertine anti-capitalists.
Yet the availability of bankruptcy -- both formal bankruptcy, and what might be called "effective bankruptcy," in which parties engage in lender-borrower negotiations to adjust loan terms on the fly -- surely cannot be allowed to provide carte blanche for anyone and everyone to walk away from their debts. Before one even gets to the question of debtors who walk away from formal loan contracts, however, it is important to think about other categories of debt that are treated differently by the bankruptcy laws (and in other areas of the law).
As one particularly interesting example, U.S. personal bankruptcy laws prevent "deadbeat dads" from walking away from their child support and related debts. This is essential, because the nature of a negotiation that created a divorced spouse's obligations is obviously rather different from the negotiations that lead to the issuance of legally enforceable loans. In particular, the payor spouse is supposed to be paying for the expenses of the child, who is represented in the negotiation partly by the payee spouse, but importantly also by the court. When child support is unpaid, it either means that the child suffers, or the other spouse essentially fronts the money to the ex-spouse, by paying for the child's expenses.
I suppose that one could still say, "Well, the would-be-payee spouse knew, when she decided to pay for the child's expenses, that the should-be-payor spouse might never be brought to justice. So the spouse to whom back support is now owed made her decision knowing that the money might never be recovered." In a sense, that is true. Plenty of women (and some men) have essentially reduced their own living standards on what amounts to little more than hope that their ex-spouses will finally be made to pay.
In some broad categorical sense, then, it is true that every decision to loan money is made in the shadow of the threat of never being repaid. Yet our bankruptcy laws sensibly recognize that some categories of debt are meaningfully different from others, and Chapters 7 and 13 of the bankruptcy code explicitly forbid discharges of child support and divorce-related obligations. (On the other hand, the code is now gratuitously harsh regarding student loan debt.)
The difference between allowing a person to reduce some of his formal borrowing obligations while preventing him from reducing his payments to other categories of obligees is based, in part, on the idea of the relative power or vulnerability of the obligees. The counter-party to a deadbeat dad is, in general, not a repeat player in this kind of loan process, and is thus not likely to be able to smooth out the occasional loss that banks and other lenders take as a matter of course.
Such classic equitable concerns, however, are not the whole story. There is an important difference between saying, "Well, nothing is certain in life, and so I should not consider anything a sure thing," and something like this: "The ability to carry on normal commerce requires that parties update their expectations on a regular basis. While it would be great if every loan and every contract were carried out to the letter, that is not the world in which we live. Some categories of contracts, while still enforceable, deserve less of a presumption of inviolability than others."
What puts a loan in the category of being potentially more easily renegotiated? In part, it is a matter of simply understanding what counts as "normal" in daily life, along with how explicit the risks are before the parties agree to a contract. For example, in our writings about the U.S. debt ceiling, Professor Dorf and I have argued that the federal government should avoid a default on its obligations, if push comes to shove, by issuing debt in excess of the statutory ceiling.
As I have argued in multiple blog posts, one reason for this is that the people who are currently awaiting payments from the federal government -- not just bondholders, but hospitals that have already provided services to Medicare patients, contractors who have provided equipment to the Pentagon, and many others -- have every reason to think that they will be paid, in full and on time. Why? Because the U.S. government always has done so, and it has very good reasons to want to keep that winning streak alive. Even though one could say that, especially in the post-2011 Tea Party era of debt ceiling showdowns, everyone is now on notice that the federal government could default in the midst of a political standoff, that strikes me as an odd way to assign risk.
What makes it so strange is not merely that the federal government's counter-parties are generally in such a poor position to predict and prepare for such a catastrophic event. It is also because the alternative, while bad, is so much less bad. That is, if the government were to issue debt in excess of the statutory ceiling, everyone acknowledges that bond buyers (aka lenders) will treat that new debt as riskier than other federal debt. The new debt will thus surely carry higher interest rates, which is the price that taxpayers will pay for the Republicans' insistence on using this highly inappropriate strategy.
The larger point, however, is that the buyers of the new debt will loan money in the knowledge that they might not be repaid -- and such knowledge is significantly more salient than the background knowledge that there are no guarantees in life.
One of the reasons that the U.S. government should avoid defaulting on its day-to-day obligations, in fact, is that doing so will create difficulties in the future, as hospitals and others that have been harmed take measures that will increase transactions costs for everyone involved, if they are even willing to work with the federal government again. We affirmatively want people to know that they can count on the United States government to meet its obligations.
By contrast, everyone knew -- or should have known -- when the loans were issued to Greece (especially by Germany and other governments) that the likelihood of repayment was low. Notably, the people who now accuse the Greeks of being chronically dishonest, corrupt, and so on, can hardly also say that they are surprised when the Greek government does not pay its loans. But even those lenders who are not engaged in chauvinistic name-calling were issuing loans even as they were aware that the Greek economy was being forced to contract further. Repayment of such loans was knowably impossible.
Of the types of obligations that can be subject to adjustment through renegotiation, then, the loans that the Greek government (and, I should emphasize, the International Monetary Fund) says must be reduced are right at the top of the list. There are still reasons why governments (including the Greek government) will want to avoid and minimize the need for such renegotiations in the future, so we are not opening a Pandora's Box by recognizing that Greece is in a debt trap from which orthodox policies prevent its escape.
Again, this entire discussion of the supposed immorality of renegotiating debt should be unnecessary, because the continued austerity that is being imposed on Greece is simply going to guarantee that the loans will never be repaid, anyway. That ship has sailed. The only question is how to make it possible for the Greek people to escape this trap, and for the Greek economy to emerge from its depression as soon as possible. Calling the Greeks bad people might make other Europeans feel good, but it solves nothing, and -- at least in the context of debt renegotiations -- it is simply wrong.