Don't cry for Greece.

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You Say Debt Relief, I Say Theft

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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As someone who sides with Germany in the matter of Greek debt, I often hear that creditors should be held culpable for driving deadbeats like Greece to the brink of bankruptcy. That's true to an extent, but not when the debtor is a government. Nation-states have confiscatory powers that allow them to do to their creditors what medieval kings did to their Jews. It's a big mistake to pretend that a country like Greece is more vulnerable than it really is.

Nobel prizewinning economist Joseph Stiglitz eloquently described the concept of lenders' fault in a recent column:

Debts are contracts -- that is, voluntary agreements -- so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements... Every (advanced) country has realised that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the 19th century were a failure -- inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.

This is as perfectly logical as saying a drug pusher is more of a criminal than the addict who buys from him. Except governments are hardly unsophisticated borrowers, and they know that if worst comes to worst, they will simply refuse to pay. If they do, there's no debtors' prison for them. There's no bankruptcy mechanism, either: A country cannot be liquidated and sold off piecemeal to satisfy its creditors. In the end, the bankers that buy a country's bonds are as dependent on the sovereign's will as European Jews were 1,000 years ago.

"An absolute ruler's ability to confiscate hinders his opportunities to strike deals with his subjects," Yoram Barzel wrote in a 1992 paper on Jewish lending in the Middle Ages. "Loans to the ruler are especially vulnerable to confiscation. In Medieval England, Jews who were major lenders were entirely at the king's mercy."

Having apparently arrived on the British Isles with the invading Normans, the Jews quickly came to dominate England's loan market. Christians could not openly charge each other interest without violating Church dictates. Judaism banned usury, but not to Gentiles. So, in an arrangement that was convenient for everybody, Jews, banned from most other trades, became the country's bankers. They charged 21 to 43 percent annually. Beginning in the 1190s, England had an official loan registry that recorded every transaction. 

The reason the system worked was that the Jews were providing one-seventh of the crown's total revenue in the form of tax payments. The government made sure to strictly enforce the repayment of debts; if they didn't, the Jews would not have been able to pay their taxes. Even when the king himself needed to borrow, he made sure to repay.

Then, in the 13th century, Italian bankers emerged as competition, offering better terms to the English. It was suddenly more profitable for the English monarchs to confiscate Jewish capital than to continue collecting taxes on its use. That's what Henry III and his successor, Edward I, proceeded to do. In 1290, King Edward expelled the now-indigent Jews from England.

A modern nation-state, too, can suddenly decide that the benefits of imposing a partial expropriation on its creditors outweigh the risks. It doesn't matter that other countries shuffle along with bigger debt servicing burdens or put up with lower living standards -- a government can claim a democratic mandate, as the Greek one is doing now, and it will be just as final for its lenders as an absolute monarch's will was in the 13th century.

The risks of expropriation tend to be minimized these days. Governments are getting adept at whipping up public anger against creditors to intimidate them. Syriza, the Greek ruling party, has perfected the art. People already hate bankers, and, in many parts of the world, Germans don't fare much better, so bashing them is politically popular.

Those creditors who resist and go to court to chase the sovereign's property and funds to ensure repayment are condemned as vultures. The polite, reasonable thing to do is to make a deal and slink away with one's tail between one's legs. Greece's private creditors have already done that, accepting a more than 50 percent haircut on the bonds they owned.

When a deadbeat country is seen as the hero and its creditors as villains, the only consideration that deters more countries from defaulting -- the threat of financial ostracism -- loses its power. A country that has successfully done a restructuring deal knows it can be welcomed back to the debt market with open arms. Lenders, apparently suffering from a strange form of masochism induced by all the editorial ink shaming them, prepare to take out their wallets again.

If Greece gets its way, more countries will be tempted to declare responsibility a dirty word. The International Monetary Fund predicts that this year, only 6 out of 34 advanced economies -- Germany, Hong Kong, Korea, Norway, Singapore and Switzerland -- will have a positive fiscal balance. Nations are hardly deleveraging: The average debt level of a G20 nation in 2014 was 113.5 percent economic output, the same as a year before and only slightly lower than the record of 115.3 percent reached in 2012. So why pay all that money back?

I would argue that, if Greece's new government succeeds, it should result in a fundamental repricing of all public debt in line with the realization that any government's creditors are as powerless as the Jews in Edward I's England.

Stiglitz has long called for a universal mechanism for sovereign bankruptcies that would make the risks of non-payment transparent to all lenders and borrowers. In the absence of such a framework, Germany is doing the right thing by making sure no other government is tempted to go down the Greek path just because it wants to spend more than its debt burden allows.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net