Greece’s Lenders Need to Suffer

The Greek debt crisis goes on and on. A major issue is that lenders do not want to lose money and are unwilling to write down any debt in order to make repayment easier. The New York Times writes that Greece’s lenders need to suffer.

There is definitive proof, for anyone willing to look, that Greece is not solely or even primarily responsible for its own financial crisis. The proof is not especially exciting: It is a single bond, with the identification code GR0133004177. But a consideration of this bond should end, permanently, any discussion of Greece’s crisis as a moral failing on the part of the Greeks.

On that day in 2009 when GR0133004177 was issued, investors had every reason to assume that this was an especially risky loan.

The bond sold for 5.3% only a percent or two above what Germany would have to pay.

In hindsight, of course, we know that the investors should not have lent Greece anything at all, or, if they did, should have demanded something like 100 percent interest.

Just three weeks earlier, a newly elected Greek prime minister revealed that the previous government had scrupulously hidden billions of dollars in debt from the rest of the world. In fact, the new leader revealed, Greece owed considerably more money than the size of its entire annual economy.

The bottom line is that Greece lenders did not exercise due diligence and in a market economy need to suffer the consequences of their mistake.

How Much More Pain and Suffering?

Now we hear that the IMF wants more economic reforms but also debt relief. Debt relief makes sense as a common practice when a nation is bankrupt is to write down the debt, reduce the interest rate and extend the period of the loan. Greece may indeed need to clean up its way of doing business but not at the price of its national sovereignty. For now ABC News reports that the IMF will not join the Greek bailout talks.

An International Monetary Fund official says the IMF cannot participate in another Greek bailout until Greece and its creditors make difficult decisions on economic reforms and debt relief.

Briefing reporters on condition of anonymity, the official says Greece needs to commit to reforms and creditors must provide debt relief – extending loan terms or reducing the debt outright – that will allow Greece to pay its bills over time. “It’s always been clear the IMF will only come in once these conditions are in place,” he said, suggesting that point is months away.

Our view is that Greece’s lenders need to suffer the consequences of their previous actions. The Greek debt dilemma should have been dealt with more effectively with stimulus measures instead of austerity and no one should have lent any money with the expectation that the big lenders such as the European Central Bank and International Monetary Fund would pick up the pieces in the end. In the meantime the Euro and European economy suffer the consequences. It is time to let Greece’s lenders suffer a little.