By Arnold Kling
Only the delusional can believe that, when everyone else is taking swingeing cuts, Greece’s creditors can continue receiving 100 cents on the euro. It beggars belief that Greek government debt can top out at 150% of GDP, as the IMF envisages. At this point the government will be transferring well more than 10% of national income to the creditors. In a time of severe austerity, this outcome is unsustainable both economically and politically.
Sooner or later, the creditors will have to exchange their existing bonds for new ones worth at most 50 cents on the euro. This will leave Greece with more public money for basic social services. That in turn will make it a tiny bit easier to achieve social consensus on the needed austerity measures. It will show the Greek in the street that he is not simply making sacrifices to pay the banks.
In short, he is saying that Greece is bound to walk away from its debt.
My guess is that one reason that the European financial community is in denial is that marking down the value of Greek debt would cause the balance sheets of some European banks to look a bit dicey.
Meanwhile, back here in the U.S., we get this cheerful news:
The key data point in Moody’s view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody’s managing director Pierre Cailleteau confirmed in an e-mail.
Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.
I guess that the thinking is that once debt service reaches a certain amount, the U.S. government will not be willing to transfer so much our GDP (roughly 4 percent) to creditors. I mean, just because creditors lent on good faith does not mean that they should get their money back, does it?
In the literature on third-world governments, there is a theory of “odious debt,” meaning that the people of one of these godforsaken countries should not have to be responsible for paying off the debt incurred on their behalf by their evil leaders. How does the theory of odious debt apply to Greece? To the U.S.?
It seems to me that the only way to prevent governments from accruing odious debt is to not lend to them. That would require a few minor changes in government behavior. It would make Keynesian stimulus a bit difficult to carry out. It might make it necessary to fund stuff like Social Security and Medicare with real assets, not IOU’s.
If government debt is odious whenever paying it off would be painful, then isn’t government debt always odious?