Op-Ed: Good side of Greek debt? Markets might learn the LIARS lesson

Posted May 9, 2012 by Paul Wallis
The likelihood of a Greek default has been causing shudders around the world. A small economy’s debt has terrified the finance markets. The risk of a Greek default, followed by further defaults is the bug eyed monster, but there’s a good side.
European Central Bank
The European Central Bank in Frankfurt, Germany
Photo by James Shiell
The scenarios for Greece pulling out of the Eurozone are pretty grim in some ways. They could mean a rocky road for Greece, at least in the short term. The world will not end, however. People will still get up in the morning. Financial markets will have to stagger on, because they don’t have a choice. Lenders will have to lick their wounds.
What seems to be missing from all this doom and gloom is any admission that one of the few working laws of credit has been vindicated thoroughly-
Thou shalt not lend more than the borrower can repay.
Money doesn’t make the world go round. Credit does. Credit is the staple source of modern finance on all levels of national finance as much as corporate finance and has been since the 1980s. The big explosion in credit has created volumes of money which couldn’t have existed in the real world of hard cash. Credit can be very good for economies, used wisely.
Used badly, credit creates black holes of debt. The totally discredited Third World loans, in which countries couldn’t possibly even afford the interest payments, are classic cases of debt gone mad. If a person earns $20,000 a year, you can’t lend that person $50 million. The interest rates, even at 1%, are more than the income. If you do lend that person that money, you deserve what you get- and what you don’t and won’t get- for your basic ignorance of arithmetic.
This lesson has apparently never been learned by the self-satisfied world of high finance. This insular collection of buffoons has in fact over-complicated the process, habitually using bad loans and iffy assets as if they were credible. This quaint habit was part of “creative accounting” and “high flying dynamics” in the 80s, and it’s totally trashed more corporations than every other financial management methodology combined.
Bad loans become fraud on the lender’s part when they reach this impossible state. The financial markets, however, which do this regularly, don’t see it that way. When Citigroup wrote down and wrote off $500 million of dead loans back around 2008-9, the markets punished it severely.
The delirious hope that loans which have become liabilities can still be assets is arguably worse than a gambler’s belief in winning a new life on a single card. Is this some sort of disease? No. This is what today’s senior financiers have been taught by 30 years of utterly reckless and totally cynical debt management.
They’ve been trained to see debt this way. A big loan to a nation, therefore, can be parlayed into all sorts of wonderful excuses to borrow more and lend more.
For example-
You have a $100 billion loan to a country called Deadbeatania on your books. You’ll never see that $100 billion again, or anything like it. Deadbeatania has a GDP of about $9.95 and grows mice for export to countries with bored cats. But you can use it as an asset on your books to borrow another $200 billion, in theory.
If you get the $200 billion, you throw it at another country, The Democratic Republic of Repoland, which exports smells to nations running out of stenches and earns about $1.25 per year. Repoland was recently hit by a crash on smell futures due to a glut of stinks and needs the money.
You genius, you. The fact that the original loan is certain to fall over is neither here nor there in this thinking. The other financiers, in fact, are prepared to play along to help balance their own “interesting” portfolios of loans. The myth perpetrates itself endlessly.
Another law of credit-
A debt has a real value, at any point in its existence. Even a good debt is only worth so much. A bad debt is usually worth progressively less. (Interesting that “depreciation” is such a basic principle of accountancy, but it’s never been used in debt management.)
So the question is, how long does it take for this basic lesson to be learned? The multiple degrees of over-complexity in these loans alone are costing billions. There’s a whole generation and a half of suits writing these loans and taking itself seriously. Worse, there’s another generation of politicians which assumes that it knows how “high finance” works and believes everything lenders tells it.
Greece is proof that this just doesn’t work. You can’t lend to people who can’t pay. The fact that Europe imposed an austerity plan which is also incapable of working simply proves that the basics aren’t understood. We hear a lot about debt ceilings. We never hear anything about credit ceilings. It’s about time we did. Economic viability of nations and millions of people can’t be put at risk simply so somebody can make a few bucks writing loans.
Try this for a formula. It’s actually a Mandelbrot, meaning it changes shape in real terms as the integers vary:
L = Loan amount
I = Interest payable
A= Net real value of loan
R= Real revenue unconditionally available for repayments
S= Secure lending verifiable level
L+I is to A-R= S
Or for short, LIARS. Love these acronyms. They say so much.
Those who don’t learn from history aren’t merely doomed to repeat it. They’re morons. All these debt situations, clear back to the Third World loans, were quite avoidable. So was the Iceland fiasco. Greece is the chance to start enforcing some sanity and responsibility on the financial markets.
Just mention the magic words “no bailouts” and everyone will get the message.