[MGSA-L] Michael Pettis on Greece and overall debt picture

DANIEL P. Tompkins pericles at temple.edu
Wed Feb 25 18:45:48 PST 2015


I'm not an economist but I do try to read up on things.  Brad DeLong, who
teaches econ at Berkeley, pointed readers to this column
<http://ftalphaville.ft.com/2015/02/06/2113951/michael-pettis-explains-the-euro-crisis-and-a-lot-of-other-things-too/>
by
Michael Klein in *Financial Times *(also attached), praising and
summarizing one of Michael Pettis's two posts
<http://blog.mpettis.com/2015/02/syriza-and-the-french-indemnity-of-1871-73/>
on Greece this month. *Inter alia*, Klein praises Pettis' treatment of the
details of debt structuring and his stress on the need to act fast.  (Who's
Pettis?  I find that he teaches finance in Beijing
<http://en.wikipedia.org/wiki/Michael_Pettis>, where he also owned a
punk-rock nightclub.)

Pettis' second piece, out this week, emphasizes wider problems:
When do we decide that Europe must restructure much of its debt?
<http://blog.mpettis.com/2015/02/when-do-we-decide-that-europe-must-restructure-much-of-its-debt/>
Debt is high all over the place,  Pettis says, providing this report from
McKinsey to underline the point:
Debt and (not much) deleveraging
<http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging?utm_source=The+Sinocism+China+Newsletter&utm_campaign=92c4b4b56b-Sinocism02_25_152_24_2015&utm_medium=email&utm_term=0_171f237867-92c4b4b56b-29629989&mc_cid=92c4b4b56b&mc_eid=6aa1e1ecb8>

Pettis' lede:

It is hard to watch the Greek drama unfold without a sense of foreboding.
If it is possible for the Greek economy partially to revive in spite of its
tremendous debt burden, with a lot of hard work and even more good luck we
can posit scenarios that don't involve a painful social and political
breakdown, but I am pretty convinced that *the Greek balance sheet itself
makes growth all but impossible *[DPT emphasis] for many more years.

Greece and Europe, in other words, have a choice. They can choose to
restructure Greek debt explicitly, with substantial real debt forgiveness
and with the costs optimally allocated in a way that maximizes value for
all stakeholders, or Greece can continue to struggle for many more years as
the debt is resolved implicitly, with the costs allocated as the outcome of
an uncertain political struggle.

Until one or the other outcome, the country is not a viable creditor and it
will not grow. There is no way to get the numbers to work. If Europe
policymakers who oppose a rapid resolution of its debt crisis continue to
prove as intransigent over the next few months as they have been in the
past week, I suspect that they will only be able to pull off one of their
goals, which is to embarrass Syriza and get it thrown out of office.

Pettis adds that driving Syriza out of office would be a serious mistake,
since the replacement could be a party that is truly hostile to Europe and
also less competent: Golden Dawn, for instance.

He then gets into the wider European picture.  I read this fast but it
looks gloomy, but debt has been growing in many European countries. Pettis
discusses ways to get out of this pickle, and others may have comments.
But Greece is only one element: other countries face serious problems as
well.  The words "forgiveness" and "restructuring" come up several times.

Around 590 BCE, the olive farmers of Attica were deep in debt and needed
help.  Along came Solon, the best possible man for the job, and he seems to
have set things right in a way that paved the way for the birth of
democracy in 508 (my version of things, anyhow).  Debt forgiveness was
*apparently
*-- the sources are tricky -- an essential part of this.

 Plutarch's Life of Solon:


 For the first thing which he settled was, that what debts remained should
be forgiven, and no man, for the future, should engage the body of his
debtor for security. ... He [also] made a pound, which before passed for
seventy-three drachmas, go for a hundred;so that, though the number of
pieces in the payment was equal, the value was less; which proved a
considerable benefit to those that were to discharge great debts, and no
loss to the creditors

There's never a one-to-one relationship between the desperately foreign
world of antiquity and our own, and I'm not saying we must simply copy
Solon.  But for thousands of years, cancellation of debts and land reform
have been the cry of the disadvantaged, and we now know enough about
aggregate demand to conclude that these steps often help everyone, not just
the poor.

Plutarch and Solon don't hoot at the olive farmers' possible fecklessness:
 they treat debt as a serious problem that requires action, without undue
moralizing.

Best,

Dan



On Wed, Feb 25, 2015 at 9:03 PM, DANIEL P. Tompkins <pericles at temple.edu>
wrote:

> http://blog.mpettis.com/2015/02/syriza-and-the-french-indemnity-of-1871-73/
>
> On Wed, Feb 25, 2015 at 8:18 PM, DANIEL P. Tompkins <pericles at temple.edu>
> wrote:
>
>> Michael Pettis, in this useful but grim column
>> <http://blog.mpettis.com/2015/02/when-do-we-decide-that-europe-must-restructure-much-of-its-debt/>,
>> points out that debt is bad all over.  In all the clamor about Greece this
>> may be getting ignored.  Here's the McKinsey report
>> <http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging?utm_source=The+Sinocism+China+Newsletter&utm_campaign=92c4b4b56b-Sinocism02_25_152_24_2015&utm_medium=email&utm_term=0_171f237867-92c4b4b56b-29629989&mc_cid=92c4b4b56b&mc_eid=6aa1e1ecb8>he
>> cites as evidence.
>>
>> Pretty bad situation.
>>
>> Dan
>>
>
>
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