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Greece, debt default and ‘moral hazard’

January 27, 2015

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A few very quick words on this, as I have had this conversation many times and it seems sensible to pin it down. Do not expect subtlety – this isn’t an essay.

Hysteria over a Greek default, restructuring, haircut – whatever you want to call it – is in part manufactured and in part stoked by ignorant and sensationalist media. We’ve been told several times over the last few years that the world is about to stop turning. It hasn’t and won’t. Such alarmism is deeply unhelpful and entirely counterproductive. We really shouldn’t feed that particular beast.

Debt default, restructuring or partial write-off (a haircut) is, of course, not a good thing. But neither is it the end of the world. It is completely part and parcel of lending. It is explicitly expressed in the rate of interest. The reason entity A can borrow at 5% while entity B can only borrow at 20% is because B is seen as much more likely to default than A. That is how it works. So, let us not act like it is some unprecedented act of economic vandalism. It isn’t.

Then there is the issue of ‘moral hazard’ – the idea that if entities can take risks with no consequences this would act as incentive for more reckless risk-taking. This is a massive red herring in the Greek context. The idea that anybody might look at what has happened in Greece in the last six years and think “yeah, I’ll have me a bit of that, let’s borrow lots of money” is manifestly ludicrous. The consequences have been dramatic. Greece is, if anything, a cautionary tale on unbalanced budgets, however the remaining debt payments are now handled.

So, let’s keep a cool head and not propagate tabloid-style analysis full of chewing-gum terms, simply because it sounds good and gives a boring moment in our lives a little frisson.

Love. Peace.

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5 Comments leave one →
  1. January 27, 2015 3:36 pm

    So right on, keep writing your balanced perspective, a cool head.

  2. Rose permalink
    January 27, 2015 3:50 pm

    You provide a frisson (albeit intellectual) in my boring little life, for which much thanks xx

  3. January 27, 2015 4:23 pm

    Reblogged this on sdbast.

  4. iamamro permalink
    January 27, 2015 7:27 pm

    I thought your article was brilliant. Well done the Greeks for showing us all the way. Eff off right wing reactionaries.

  5. James permalink
    January 27, 2015 10:40 pm

    Then there is the issue of ‘moral hazard’ – the idea that if entities can take risks with no consequences this would act as incentive for more reckless risk-taking.

    …a rule that doesn’t apply to lying banksters who rig interest rates…

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