GREECE

Creditor and judge over Greece: when countries go bankrupt

Insolvency protocols for sovereign states are lacking. The failed negotiations with Greece have shown that without such plans, or some form of debt relief, there will be no end to the Greek drama. Andreas Becker reports.

When a business or an individual files for bankruptcy, the ensuing insolvency process is clearly regulated by law. The case is presented before a judge, and a neutral entity - not the incensed creditor or creditors - decides what steps are to be taken from there.

That is not the case with Greece. Here it is the creditors themselves that are judge and jury over the debtor. Creditor nations are desperately trying to protect their own interests, while at the same time labeling their actions a "rescue," in an utterly toxic conversational atmosphere full of distrust and accusations.

The philosopher Jürgen Habermas sees the shortcomings of European politicians on display in this situation. Recently, in an article for the German daily newspaper "Süddeutsche Zeitung" he wrote: "They look like politicians, but the words they speak are dictated solely by the economics of their role as creditors."

Resistance from the banks

The failed negotiations have shown just how problematic these multiple roles are for EU member states: As creditors, they want to force the debtor to enact certain budgetary cuts, while at the same time controlling the implementation of those cuts.

The involvement of the International Monetary Fund (IMF), an organization specialized in dealing with debt-ridden countries, further highlights the Europeans' conflict of interest. The IMF began pushing insolvency laws for sovereign states back in the early 2000s - so far their efforts have been in vain.

"Back then, the international banks fought against the idea," says Thomas Mayer, founding director of the Flossbach von Strorch Research Institute told DW.

In Greece's case, the creditors also serve as the judges

"The banks preferred that the IMF jump in with new credit, that way they could get back all of their money," Mayer added. He knows the financial industry's position well; he was Deutsche Bank's chief economist until 2012.

There are other arguments against insolvency law as well. Among them are legal questions over how sacrosanct a nation's sovereignty in fact is. But these problems already exist. For instance in 2011, Germany, France and other European countries forbade Greece's then prime minister, George Papandreou, from staging a national referendum on the course of action to be taken in Greece's debt crisis.

National bankruptcy has also long been regarded as a problem that only developing countries have. "An insolvency plan for the euro states was never made, because Greece is supposedly an isolated case - so it was not needed," Mayer said.

Wary of voters

In the absence of insolvency laws, the IMF is now pushing the idea of further debt cancellation for Greece. After all, most economists figure that Greece will never be able to repay the huge mountain of debt that it has amassed.

But the Europeans simply won't have it. German Chancellor Angela Merkel and her colleagues are politicians enough to be wary of the wrath of voters. After helping big banks dump their own bad Greek loans, politicians like Merkel are now trying to present themselves as the patron saints of taxpayers who don't want to sink any more money into Greece.

Merkel is also fighting against proposals to shift part of Greece's debt into the European Stability Mechanism (ESM) bailout fund, after all, that would put taxpayers on the hook again. Merkel's moralizing message to the Greeks: Debt must be repaid.

Lessons from Germany

In an interview with "Die Zeit," a German weekly, French economist Thomas Piketty said, "That's a joke! Germany is the country that never repaid its debts. It can't lecture other countries on debt."

European leaders are wary of taypayers' perceptions

In the London debt agreement of 1953, many creditors, among them Greece, forgave much of the young Federal Republic of Germany's debt - thus making the post-war economic boom, known as the Wirtschaftswunder or "economic miracle," possible.

And even though Germany and other European countries are against it - "One way or another there will be another debt cut," according to Johannes Mayr, senior economist at BayernLB, one of Germany's largest banks, told DW. "It can either take place explicitly, or - much more likely - the problem will be put off, to be dealt with at some unspecified time in the future."

Maximum damage, no solutions

The European political tendency to put off dealing with problems in an attempt to gain time leads to bizarre developments. That has been shown in the failed negotiations between Greece and the Eurogroup, which dragged on for months.

"While we were negotiating over loans of 7.2 billion euros ($8 billion) and were unable to come to an agreement regarding the terms thereof, Greek banks received 90 billion euros ($100 billion) in emergency credit with no conditions at all," Thomas Mayer of the Flossbach von Storch Research Institute said. He is referring to emergency loans given to the Bank of Greece with the blessings of the European Central Bank.

Mayer expects that a majority of Greeks will vote for austerity measures in Sunday's referendum. Then, following new elections, negotiations on a further financial aid program could begin. The IMF estimates that Greece's financial needs will be in excess of 50 billion euros ($56 billion).

Causing maximum damage while failing to solve the problem - that is exactly what insolvency laws and debt relief are designed to prevent. Alas, it will be a while before that insight is put to use in Europe.  dw de