Lots of ink has been spilled over financial events in Europe, but the essential issues are much more straightforward than they've been portrayed.
If every sovereign using the euro is going to be treated as too big or too indispensable or too pampered to fail, then why should they ever pay? And who's going to lend them the pyramiding sums that they then won’t have to pay back?
The conventional, thoughtless answer is that in the distant future, at least 17 countries will ratify a treaty that makes debtor nations curtail spending and maybe even raise taxes.
When has there ever been a treaty that could be enforced to assure responsible financial conduct? Enforced how? In Europe?
Germany's budget explicitly, obviously violated European Union financial treaty obligations. France explicitly stated that its national interest would prevail over EU treaties. Greece lied over and over again about its finances. Who's kidding whom?
Yes, there was a way to get nations to pay. It's called gunboat diplomacy. The U.S. used it in the Dominican Republic, Haiti and Nicaragua to collect amounts owed — between the late 19th century and the advent of FDR. Britain even used it in Greece. Those were the days!
But with gunboats gone, default losses are for keeps.
You can try to hide them. Too bad for those who bought credit-default swaps on Greece. There was a 25% "haircut," then supposedly 50%, now more like 75%, or greater.
It is said that the International Monetary Fund, currently featured in euro headlines, has never suffered a total default. Admirable. A promise to pay 1% of the debt in 100 years would avert "total default."
The bargaining goes on about how to split the next tranche of the trillions of dollars of losses forthcoming from Greece, Spain, Italy, Belgium …
Geithner sounds happy to make U.S. taxpayers pay via the IMF. I say our fair share (and Britain’s) is $0. The Fed is already lending money more cheaply to foreign than to U.S. banks. Sounds like foreign aid, which should require legislative approval.
The IMF is proposed as the hub through which these mushrooming losses can be redistributed, after being hidden and multiplied at least until after the elections in France, Germany, the U.S.
The mendacious justification is that somehow a declared default by Greece would be utterly catastrophic — though a fig-leaf default with investors getting only 25% of their money back would not be. That’s a bit difficult to see.
I take geofinancial risks very seriously. Failing to intervene to prevent Russia's default was probably our most serious foreign policy error of the past 50 years. We needed and had a friend. The default brought back a totalitarian enemy that hates and opposes us at every turn. The second-largest party in Russia is now the Communist Party.
The Greeks can burn Athens, but they don't have nuclear weapons. Their political system has failed. The "principle" that no euro country can default spews out a snowballing, limitless moral hazard. Shoveling money at them so they can go on buying German goods is a shortsighted election-year expedient.
Let's cut all the cant around Germans being
What matters is that, as Greece has shown, if you treat sovereigns as incapable of default, then they'll bankrupt all of us. All the money in China wouldn't fill this bottomless pit. And anyway, you'd have to be excessively philanthropic to "lend" money to countries that won't ever need to pay it back. To say the least, we can't afford it — no, not even until the interminable election campaigns are concluded.
Name a president who's said he'd bail out any state or municipality in the U.S. No way. And if they go broke, the relevant provisions of the Bankruptcy Act assure that they will still have to pay. That is precisely why no states and very few smaller political units default here.
California will either have to raise taxes or cut services further. Why does Geithner want to be more generous to Italy than to California?
Accept the cross-border losses rather than multiplying them. France can bail out its banks and the Fed can bail out ours, maybe by lending on their devalued European collateral — probably much less than the $7.7 trillion it's alleged the Fed committed during the crisis. Grasp the problem, grasp the nettle.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at
