The Debts Which Will Never be Paid Back

Yesterday a tweet of mine got 270 re-tweets; a personal record.

I’m not one of these celebs who wake up, feel a bit groggy, tweet, “Ugh, mornings, they’re a bit crap, aren’t they?’ and get 35,672 retweets. As a lowly comedian/author/financial bod, if I get five, I think I’ve done well.

What I said was not Wildean in its wit, nor Orwellian in its incisiveness, I merely regurgitated a load of numbers. But they obviously hit a nerve.

Here’s what I tweeted:

Greece 175%
Italy 133%
Portugal 129%
Ireland 117%
Cyprus 112%
Belgium 105%
Spain 100%
France 100%

Maastricht said debt-GDP should be <60%

(For the sake of accuracy, Spain and France’s debt-to-GDP ratio is expected to hit 100% this year, so that 100% figure above is not official yet).

The treaty they ignored when it suited them

What ‘100% debt-to-GDP’ means is that the entire output of a country over a year is equal to the amount of money its government owes.

The Maastricht Treaty of 1992 was ‘the pillar structure of the European Union’ and it laid the foundations for the union’s currency. It was quite specific – laudably so – in its call for fiscal integrity: the ‘ratio of gross government debt to GDP must not exceed 60%’ and annual deficits should be ‘no greater than 3% of GDP’.

As Dickens so famously put it: “Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery.”

If you run a deficit – if you spend more than you earn – your debt will increase. Such are the mathematical laws of compounding, continuous deficit means debt pretty soon mounts up to the levels I posted in the tweet above. If you don’t believe me, ask Gideon.

So, of course, the way to lower the public debt of a nation (assuming you don’t get involved such monetary shenanigans as quantitative easing) is to run a surplus – to spend less than you earn.

Remember that word, ‘surplus’? You don’t hear it very often. It’s become something of an anomaly. Last year, of the 18 EU nations, Luxembourg was the only country to run one.

Germany, meanwhile, had its public finances balanced, for the most part. All other countries ran deficits. The average across the continent was over 3.3%, having fallen from an astounding 6% in 2010, though getting these numbers down has caused pain for many in Southern Europe. And at 3.3%, we are still, on average, 10% over budget.

Greece’s 2013 deficit (the 2014 numbers aren’t in yet) was 12.7%, by the way. Slovenia is European King of Deficits at 14.7%.

In the UK, we are not much better. We currently run a frightening 6% deficit, our debt-to-GDP stands at 90% and costs us, even at today’s incredibly low rates of interest, £2bn a week to service. 90% is the threshold, which Professors Reinhard and Rogoff, who made great study of history’s monetary implosions in This Time Its Different, declare the proverbial starts hitting the fan – though this conclusion is disputed.

So to the word that is Greece

This has all been allowed to happen because politicians and technocrats, in the long tradition of politicians taking the line of least resistance, ignored their own rules.

There have been many occasions when Maastricht criteria have not been met, but rather than face the music – Dickens’ ‘misery’ – some kind of can-kicking, blind-eye-turning or fudging has been preferred – particularly when the beloved Euro-project is at stake.

In the case of Greece, we are just such a time-to-face-the-music moment now.

The last time it was there – in 2011 – Greece was bullied into taking on a load more debt to add to the debt it already couldn’t repay. The prime minister resigned to be replaced by an EU stooge. And the can was kicked.

This time it seems stronger men are in charge and they have the mandate of the Greek people. These men will not be pushed about so easily.

Finance minister, Yanis Varoufakis, clearly an inexperienced politician because he so frank and honest about it all, says ‘We are bankrupt’.

Kicking the can is going to be that much harder for the boys in the EU.

But that won’t stop them trying.

It seems there are three options.

1. Facing the music. Greece defaults on the debt it cannot pay and the repercussions play out now rather than later.

These repercussions include:

• Bond-holders losing all their money (hey, they were buying Greek bonds – what did they expect?) – but the banks that bought these bonds will not want/allow that to happen.
• A serious undermining of the entire EU project (is that so bad?) – but the EU technocrats will not want/allow that to happen.
• A run on Greek banks and possible hyperinflation there if they are forced to abandon the euro – the Greeks won’t want that. One of the pre-election pledges of Syriza was to stay with the euro.

2. Some kind of debt jubilee.

Current EU jaw-boning suggests that is unlikely. Moreover, the German tax-payer would take the haircut – and, currently, 68% of them don’t want that. A jubilee for Greece will set precedents for the likes of Spain, Italy, Slovenia, Portugal and perhaps even France and Ireland. That, too, looks unlikely to be allowed to happen.

3. They find new ways to kick the can.

My money’s on ‘3’.

We’re already hearing expressions that stink can-kicking- “perpetual bonds” and “menu of debt swaps”.

The EU knew this Greece showdown was coming, and this, in my opinion, is why Mario Draghi, president of the central bank, has just announced this enormous quantitative easing (QE) of €1.1 trillion. QE is just another form of can-kicking – and that will be the subject of next week’s missive.

But my feeling is that people the world over are sick of can-kicking, pandering, beige politicians. We are entering a new era where people start voting for conviction, honesty and strength. In this regard, Greece is leading the charge.

Dominic Frisby is author of Life After The State and Bitcoin: the Future of Money.