Monday, November 28, 2011


Glen Tomkins 11.29.11 at 1:47 am

“It had already become clear
in October 2009 that the Greek government
had lied about the size of its deficit.”

That’s the part of this story that I keep hearing repeated, but the mechanics of which escape me.

How does a country lie, I mean lie enough to matter, about the size of its deficits, and escape detection from people doing even a cursory due diligence? It’s borrowing to cover its deficits. You know how big its deficit is from how much it’s borrowing.

Surely the total size of all Greek govt borrowing was known. Back when the sovereigns were monarchs rather than republics and not forced to keep public accounts, there was the possibilitily that because they were borrowing from all sorts of sources that you as an individual creditor had no idea existed, you could easily be sending money from whence there would be no hope of return. The sovereign himself might not have a clear idea of his total indebtedness. This is what happened to the Fuggers. Now, insofar as modern sovereigns still do this, borrow on the sly, then anyone who lends to such a sovereign deserves whatever happens to their money, deserves to be thoroughly Fuggered.

If you have that, that all of a sovereign’s borrowing is conducted in public bond auctions, or is otherwise a matter of public record, then you have enough information to judge its ability to meet its obligations. You know how much it’s borrowing every year. Any borrowing that is not directed towards a specific capital improvement, but simply plugs a shortfall in ordinary annual expenditures, should have a particular rationale, such as counter-cyclical stimulus, that has an end date and a plan to make up the deficits in good economic times.

In my experience with banks lending me money, their standard of due diligence is such that they don’t let me lie to them. I’m not allowed to make up an income figure and write it on a piece of paper and that’s that, they accept that I’m “good for it” because I say that I am. They want to see bank statements, and they want pay stubs, and they want tax returns and credit card statements. They want sufficient information about where I get my money and where it goes that they don’t have to rely on any representations I might make about how good I am for it. Bank officers who skipped all that due diligence and let me lie to them would be put in jail for fraud, for failure in their fiduciary responsibility to the people whose money they handed over to me.

There are different, lesser, standards for the people who lend much larger sums of other people’s money to sovereigns? Compared to a sovereign, I am subject to all sorts of coercion—I can be sued—and I am forced to offer the house as collateral before the bank hands over the money. I should get much less scrutiny, not more. That, or sovereigns ought to at least have their math checked, have creditors at least consider the size of what can’t be fudged, the total magnitude of their borrowing, for what that says about their ability to repay.

How did people who knew how much Greece was borrowing imagine that it was good for it all?

Correct me if I’m wrong, but what I’ve assumed all along, and it seems supported by statements in this review, is that at some point the creditors knew perfectly well that their loans likely wouldn’t be repaid by Greece, but that there would be a bail out. Why worry about boring old due diligence if you get to socialize the risks and privatize the profits?

Nuance is great. But when the story is simple, don’t complicate it needlessly. “Greek lies” were no more responsible for this debacle than Freddie Mac wrong-doing was responsible for the housing bubble in the US.

comment from crooked timber

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