When governments go bankrupt

Greece and the Euro zone

Matters are coming to a head this week. Greece is in the final lap of its debt discussions with its international creditors, notably euro zone finance ministers.

It is estimated that Greece has an outstanding public debt of over € 320 billion, accumulated over several past years by many of its previous governments. This represents a share of 175% of its GDP. It is generally considered unsafe for a country to incur public debts in excess of 50% of its GDP.

Abide by conditionalities or go away

Greece badly needs the release of a € 1.6 billion tranche out of its bail-out funds negotiated in 2010 and 2012 to meet its debt repayments falling due before end of June 2015. When the bail-out was agreed, the bailers-out of Greece, namely the EU, the European Central Bank and the IMF, also known as the Troika, imposed conditions relating to austerity policies, referred to as ‘reforms’ to be adopted by the Greek government before this money and future bailout funds are released.

Since the Greek crisis began, pensions have been drastically reduced. Jobs in the public sector have been slashed. Welfare expenditures have been curtailed. The rate of joblessness in the country has increased. Greece has the highest rate of unemployment in the euro zone in excess of 25% of its workforce. More than 50% of the young have no jobs. Taxes are difficult to collect in an economy that has kept receding. Worried that the government will sooner or later have no alternative than to introduce capital controls, i.e., depositors cannot withdraw all that they need from their bank accounts, savings have been going down. There is hardly any investment to increase economic production. Bail-out money is largely being used to service past debt.

In the face of such continuing hardships, the Greek Syriza government was elected on a popular mandate a few months before so as not to keep yielding to the most oppressive of these austerity measures forming part of these Troika conditions. It has accordingly been fighting back against the EU ministers. Final discussions on the release of the June tranche to be used to repay debt to the IMF are scheduled for Thursday 18th June. A make or break situation is now facing both sides since, if that does not go through, it will jeopardize the whole process, leaving Greece no alternative than to default on its debt obligations.

Greece’s Syriza government is resisting certain of the Troika’s ‘reform’ demands as agreed by previous Greek governments, such as cutting back further public sector pensions to keep its budget deficit within prescribed bounds. It is also asking that the huge public debt – which the country is in no condition to repay any time soon — be either partly written off by creditors and/or be rescheduled as the country cannot meet such debt obligations in the face of a shrinking GDP. Northern European creditors, including Germany, want to hear nothing of the sort. EU ministers are scheduled to take the final decision regarding Greece’s resistance to the original ‘reform’ programme on Thursday 18th June. There is enormous tension facing both sides.

An uncertain future

If no consensus is reached, as it appears to be the case, the €1.6 billion will not be made available to the Greek government. Consequently, it will default on its debt. This might entail a possible exit of Greece from the euro zone.

That will open up a host of questions. How will a country already in such dire conditions fare if and when it is thrown out of the Eurozone group for having defaulted on its debt? Will this country, after six years of continuing economic recession which ended in the second quarter of 2014 and is now resuming again, be able to abide by the further austerity requirements of the EU finance ministers? What shape will the euro zone take after the almost impending exit of its first member, if that is what it will boil down to eventually?

We should learn the lessons

Mauritius faced an acute economic problem in the 1970s and early 1980s. As it is the case today, our exports of goods kept underperforming while our imports kept increasing. The resulting trade deficit produced an unsustainable external balance of payments condition. There were scarcely any inflows of capital. Consequently, we borrowed externally to sustain ourselves. The terms on which the debt was raised were tough but we had no alternative. The borrowed money did not all go into productive investments; they helped extinguish previous external debts, a good part of which had been incurred to meet welfare payments. The saving grace was that we did not go bankrupt, i.e., in a situation of not being able to meet our external debt obligations.

We extricated ourselves from this unenviable economic condition by developing new sectors of export activities, including export of services at a subsequent stage. We were lucky because the global markets were expanding and we supplied to this expanding market. Had this not been the case, we might have landed into the situation Greece is finding itself in. External markets to which Greece could have exported more goods and services, are depressed since a number of years, making it even more difficult to overcome the handicap. European sanctions against Russia in the context of Ukraine do not help Greece, an EU member, at all.

By putting more money into productive investments, we in Mauritius raised the scope of the economy. Greece unfortunately is facing tough international economic conditions and is finding it terribly difficult to increase its GDP, with hardly any surplus funds to put into investment. The debt which was raised earlier was unfortunately not put to optimal use to grow the country’s economic capacity. Greece is today paying up partly the heavy price of past exaggerations. This explains why the population has been up in riots whenever additional austerity measures have been introduced.

We should learn from the Greek experience. By not prioritizing the employment of debt raised into the specific productive channels for which they were intended, i.e., into areas which produce sufficient goods and services to more than pay back the debt so raised and its servicing, we will simply be squandering the debt money raised. Some governments have even gone to the extent of increasing their countries’ debt burdens artificially by engaging with outside parties into over-priced contracts e.g., for constructing Olympic stadia, possibly with kickbacks in the background. This makes it even more painful to face debt repayment since more debt had to be created than was needed for the project(s) in question.

We must recall that it may be very tempting to incur heavy debts when the going looks good and when lenders are too keen to lend money without much difficulty. But if we do not use the money productively while checking continuously on our ability to repay, we may end up putting ourselves in the same jeopardy in which Greece is finding itself today.

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Massive modern migrations

We are witness almost daily to people looking for new abodes from their countries of origin. The pictures shown on television of many of these migrants are highly distressing. At the risk and peril of their lives, many are seen tightly fitted into precarious boats off the coast of Libya moving towards Europe.

The assumption has been that those migrants would be risking all they have in the quest for greener pastures in the richer countries of the world. This is a totally biased way of looking at the tragic events currently unfolding on the “Mare Nostrum” of old or the Mediterranean Sea. Most of those people are not seeking to raise the level of their material comfort.

They are running away from untenable conditions in the places in which they used to live. The conditions back home are so harsh and their lives hang on to such a weak thread that they are ready to put their own lives, those of their children and family members, and whatever little lifetime savings they’ve been able to set aside, at risk in the quest for safer places.

The distress back home is mostly caused by politicians and dictators who cannot accept to share the dilapidated state to which they have reduced the home economies of these migrants. People are also made to pay the price of holding on to their opinions which are, in certain places, at variance with those of the orthodox.

All this is translating itself into a massive human suffering in the North African region in particular but also in the Middle East. The latest to join this group are the Rohingyas from Myanmar who find themselves persecuted by non-Rohingyas.

The latter have taken to sea as well but this time in the inhospitable seas of the Indian Ocean from the Bay of Bengal to the shores of Malaysia and Indonesia where they thought they would find shelter from their persecutions. Well, they’ve found rejection as well and many have either got killed on land while escaping across frontiers or have drowned at sea in their frail embarkations.

It’s a tragedy many decision-makers have been turning away from. Europeans got stuck into a debate of the risk of possible further Islamization of their societies where the migrants were of middle eastern origins. Or, where they accepted that something must be done about the refugees, they started quarrelling about quotas of migrants to be shared among the different host countries of Europe. Some have sent warships near the Libyan coast to prevent the dinghies of the migrants taking to sea on their way to Europe, claiming that all this was the result of human trafficking by unscrupulous exploiters.

Many countries inflict huge amount of suffering on their populations when political leaders want to grab power for its own sake. Dictators are busy extending their stay in Africa by amending Constitutions to include a third term where this is explicitly prohibited. The inexorable rivalry between Saudi Arabia and Iran for ideological control over the Middle East and the offshoots of this rivalry in neighbouring countries, is expanding the wave of human suffering. Others are inducing tribal war fares to be able to remain in power no matter what amount of human casualties this gives rise to.

We do not know at this stage how far this kind of quest for absolutism will be carried on by the various protagonists creating the entire chaos in different parts of the world. Many claim that it accentuated when the Soviet Union invaded Afghanistan. Others state that it is the invasion of Iraq in 2003 which triggered the vast destruction of social stabilities in the Middle East.

They may be forgetting that Israel has been the epicentre of vast movements of people eradicated from their homelands after 1967. Was there not the movement of boat people when the Americans lashed out against Vietnam in the late 1960s and early 1970s? There is too much greed behind all these stories ending up with the most vulnerable people having to pay the price with their lives.

No matter what the causes of the tragedy, the world has almost become helpless against the numerous tragedies unfolding at the behest of power grabbers and of those who want to dictate the consciences of others as to what they should or should not believe in. The tragedy of the victims are real. Many of them have paid the price by losing their very life.

The world saw another massive migration of peoples eradicated from their roots from the 16th century onwards. It was caused by the slave trade, an inhuman method of the most crude form of human exploitation during the heydays of colonialism. It was normal to consider this kind of treatment of humans as mere chattel in those days when there was no United Nations.

Today, we have the United Nations. Still, there is no moderation of the vast scale oppression that has unleashed the new waves of migration. Countries which dominate the UN Security Council are also the biggest sellers of arms to despots who are using them to massacre their own populations. Could they then put an end to their lucrative trades by helping set some order in regimes that have no regard for the common humanity they share with all the migrants they are sending to destruction, anyway?

 

*  Published in print edition on 19 June 2015

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