When I see the current over-indebted countries like Greece and Italy (however, the Czech Republic is also in debt…), I have to ask: did it really have to go that far? Who made it possible?
How could states get into debt like this?
Someone had to let them. By lending them to them. In the event of bankruptcy, it comes short. But why did it have to go that far?
He goes bankrupt when the debtor should repay, but he has nothing to do. He could borrow again, but he would probably not find a creditor in such a situation. There is no creditor who would have enough confidence that he will get the borrowed money back.
But this is not something that cannot be estimated in advance. The debtor has been unreliable for some time before bankruptcy, so the latter could have guessed. If they did not lend to him, they would save and bankruptcy would come a little earlier (with less damage). Feedback on mismanagement occurs earlier.
But this simply brings another part of the creditors. (I make a little inaccuracy here - I assume that someone else always lent it to him. I want to avoid complicated wording.) Together it will be less money (bankruptcy will occur with less debt) and maybe a smaller number of creditors, but there will be some loans, which would have been paid if bankruptcy had taken place later. But it's actually already in this part loans could be predicted…
Increasing the prudence of creditors therefore leads to a further increase in the prudence of creditors. I don't believe it will work indefinitely, but it is obvious even a relatively small increase in the prudence of creditors at the outset can result in a large-scale haste of bankruptcy. That's not bad - Such a rapid bankruptcy will have relatively small consequences and early feedback. (In computer science we call it fail fast). As soon as the period from the beginning of indebtedness to bankruptcy decreases close to the length of the election period (even two or three election periods are quite short), the consequences of scattering politicians would be much better seen. They would change their minds. And if not, voters would change their minds.
How are trust and prudence measured?
At first glance, trust can be a difficult concept to grasp. In general, probably yes, but in the case of loans it is not so difficult. Lenders express this largely by number.
The less I believe that the debtor will return the money to me, the higher the risk I see here. And I have to balance the risk somehow. In addition to enforceability and guarantees (for example, in case of non-payment you will lose the house) is possibleincrease interest.
Who made the mistake?
But we are still not at the heart of the problem. We know that someone has lent too much to the states and that they will take it. The question remains:
- Who was that?
- Why did he do it? (If he does bear the consequences himself, he has no reason to borrow…)
- Will we take it somehow?
- Did we contribute to that ourselves?
I will try to answer these questions. According to many articles, the answer to the first question looks quite simple - banks. (It's pretty stupid to verify or refute - it requires more extensive analysis. I don't dare to do that, but the possibility that they are banks sounds quite reasonable. Banks have quite a lot of money and they want to invest them somewhere.)
The answer to the connection with us is also obvious - many of us have money in the bank, and if the banks get into trouble, we will pay for it. The question remains why banks behave in this way and why we support them.
(So I think of the idea of putting money in a bank and the state giving us a gift for that money, for which we thank him. Don't look at the donated horse's teeth. "Let's not be surprised that the money isn't here. But don't take that idea quite literally.)
What does prudence for banks and people?
But banks are not interested in going bankrupt and people are not interested in losing their money! Bankers should be extremely careful to keep banks solvent, that's in their best interest, isn't it?
Maybe not quite. This is where the state enters into its written and unwritten guarantees. What are we talking about?
The first thing is that most bank deposits are state-insured. In such a case, people will not be so interested in how the bank manages. Banks will be motivated to take risks because risky investments typically yield more. If the risk comes out, the profit will come mainly to the bankers. (Okay, they'll share it in interest, haha.) The moment the risk doesn't work out (in the case of bonds, it probably won't be right away), everyone will pay it in taxes. If only the bank's clients paid for it, then only those who believed in its promises would pay. People would be motivated to choose well-run banks that do not take too many risks.
The second thing is even worse - a troubled bank can be saved with everything. Bankers who take risks still have jobs to do and can take risks for others' money. (But when the risk pays off, they rake in the profits themselves.) If I remember correctly, it happened in the United States with the argument that they were too big to fail. (So we support them and in time let them make an even bigger fail…). And most importantly, it is probably planned in the EU - as I should understand otherwise recapitalization of banks?
It sums up the naming quite well private profit and public losses. This is not exactly according to capitalism, where not only profit but also loss is private.
Does the state guarantee itself?
If the state sold the bonds only to its banks (and they would not resell them and would not take out insurance with them elsewhere), then the state would insure its possible insolvency with its deposit insurance. It would be clear that state deposit insurance would only be an illusion in the event of its bankruptcy, because it would still have nothing to pay for it. It's a little (but not much more complicated).
Very fragile system
States owe a lot abroad. If Greece goes bankrupt, not only Greek banks can get into trouble. And if one of them goes bankrupt and is insured by the state, the state can get into trouble. If it goes bankrupt, it can get other banks into trouble… You can see how everyone is leaning on each other. (Greece probably won't be such a problem. Unless 'Euroval' was used and Italy fell with Greece - I admit here that I don't know the current situation well enough, but I hope that 'Euroval' will be buried.)
By the way, someone has already described this domino. It is simply clear that those guarantees cannot work indefinitely.
To be precise, in the extreme case, the state could put pressure on the central bank to print any amount of money and buy government bonds for it, for example. But this is basically just another form of taxation - inflation. High inflation is perhaps a worse alternative to bankruptcy. Slightly different is the situation in the euro area countries, which would have to influence the ECB for inflation. On the other hand, I think there is even more motivation to rely on it. But that would be a separate article.
Add state intervention? Remove!
Some may think that the state needs to be better supervised by the state. It is indeed possible that such efforts will occur. But what would solve it? Which of the officials has a real motivation to make the right decision for others? He will have no more power here bribe or (in this case) pressure from politicianswho want to scatter and buy voters from foreign taxes?
It probably will. And who will benefit from such state supervision?
In this context, I remembered efforts of politicians introduce a new tax and make an exception for their bonds. Do you think it would turn out differently here?
No, this is not the way to go. Guarantees for banks must disappear, even gradually. Then citizens will have an incentive to look after the banks (or cough up on them and their low interest rates, also the way - the market will also be affected) and banks will have an incentive to make less risky investments.
Is change needed in all states?
When I bit the intertwining between the states, the question arises as to whether the abolition of guarantees in the Czech Republic should be enough for us, or whether the neighboring states must also cancel them in order for it to have effect. At first glance, this does not make sense to us without the cooperation of other states. Our state will be able to continue to get into debt.
But our banks would not support it and we would not bear the risk. And other states should have the motivation to join us. And if loans "disadvantaged" us by any regulation, as a result it would be more or less the same for us. It would not be ideal (it would be run by politicians, not the market), but it would also be a possibility.
What's the point of a current account?
So it definitely makes sense - it is definitely suitable for paying via the Internet, etc. But I don't think it's worth putting all my savings into it. What of it? The interest rate is usually ridiculous and the risk is unnecessarily high. That you will break it down into more banks? Fine, but in case of problems with, for example, government bonds, the banks will be in a similar situation and more of them can fall practically at the same time.
Something else are savings accounts, term deposits, mutual funds and the like. That may be worth considering. Interest can already be said about interest. One can already think about whether there is a greater risk or a return. I don't dare to estimate that, and in general it is probably impossible to say.
Article originally published on the author's blog.