Greece has defaulted on its debt to the International Monetary Fund, the first “developed” country to do so. But is Greece merely a casualty of a flawed eurozone or a canary in the coal mine?
After hobbling along on “emergency” loans for five years, a $1.73 billion payment due Tuesday night went unpaid — the largest missed payment in the international finance organization’s seventy-one-year history. The IMF tellingly refused to call the missed payment what it was: a default, opting instead for “in arrears” (which, for the uninitiated, is a complex, highly-technical financial term that means default). Greece now shares company in this respect with the likes of Sudan, Zimbabwe, Afghanistan, Haiti, Yugoslavia, and Somalia.
For Greece, the pain has been a long time coming, since it began relying on emergency loans five years ago. And now default — while sending shocks of volatility through global financial markets — has been almost anticlimactic. But the jagged lines on a financial chart tell little of the carnage happening on the ground, or of what is to come.
The problems Greece and the world face now are manifold. For Greeks, capital controls and bank closures have left people without access to the funds in their accounts. ATMs have lines stringing away from them at all hours, even though daily withdrawals are limited to €60. The next weapon in the financial warfare: deposit seizures. While it may be easy to dismiss these afflictions as the result of socialist policy, but that wouldn’t be an accurate characterization of what’s transpired.
No, when Greece resorted to emergency funding, the Troika (the collective pejorative for the European Commission, European Central Bank, and IMF) authorized €110 billion in assistance, in exchange for vague, unquantified promises of “austerity.” The more recent loans were actually diversion of interest payments on Greek debt owed to other eurozone countries, lent back to Greece. Even now, after default, there is little doubt in the financial world what the “solution” to the debt crisis will be — more debt.
Of course, it’s easy to dismiss these presumptions as the misguided naïveté of Keynesian central planners, but doing so ignores the more pervasive threat of sovereign debt. As Greeks are learning, the IMF (like many of the world’s central banks) will not accept default; it never has, and never will. Calling Greece “in arrears” didn’t do it any favors. The message is clear: you will pay. So although for a time Greece was comfortable, living beyond its means, it’s soon time to pay the piper.
Sovereign debt isn’t like a credit card, family budget, or a mortgage, no matter how many folksy analogies politicians make. No, government debt is something altogether more sinister. When a state borrows money, repayment is on the heads of its citizenry, without expiration. At one point in the Hellenic drama Germany’s war reparations were at issue. An infinitesimally small minority of the population could recall the war, and an even smaller subset — if any — was even remotely accountable. But the point is illustrated clearly: public debt is interminable.
This trait alone is toothless without its necessary complement: enforcement. Since government revenues are generated through taxes, and government debts are future revenues spent now, then debts are simply future taxes. While this is well-covered ground, most people seem to forget that taxes are one of the only debts for which nonpayment results in prison time.