Ford to City: Drop Dead
I recently tweeted: “Receivership is better than Grexit for Greece, hence Tsipras; but worse for Europe, hence Schauble.” That’s the headline. Here is the explication.
On Greece, I have been trying to understand how rational people (on both sides) wound up with such an unworkable solution. It seems to me that in the end Tsipras made a calculation that Grexit was the worst outcome, or at least an outcome over which he was unprepared/unwilling to preside, given the debt overhang. Schauble made the opposite calculation that receivership was the worst outcome, or at least an outcome over which he was unprepared/unwilling to preside, given the debt overhang. So Schauble made the alternative to Grexit as unattractive as possible, hoping that Tsipras would turn it down, but Tsipras took it anyway because he felt he had no other choice.
The result is that no one is happy with the outcome. Certainly not Greece, but also not Brussels. Greece does not want Brussels to be running their country, and neither does Brussels, but that is what the solution entails.
I leave aside the question of where the debt overhang came from, since it is now a fact on the ground. But I agree with those who say that the original lenders (private banks in France and Germany mostly) got bailed out by Europe, which now seems to want Greece to pay the bill. It makes no economic sense. Debts that cannot be repaid will not be repaid, and markets will only begin to work again when this economic reality is embraced.
In all this I am inspired somewhat by the experience of my hometown New York, which had its own financial crisis in 1975. Initially the federal government refused to help. The local paper had a famous headline “Ford to City: Drop Dead”. Here is a good account of what happened after that. I urge everyone to click on the link and read it.
The New York experience suggests to me the importance of finding, or creating, some institutional structure in between Greece and Brussels that can serve as a credible receiver, credible to both Greece and Brussels. In the case of New York, that receiver was the Emergency Financial Control Board, created by New York State (not the Federal government). This is the key. What analogue could be created for Greece and Europe?