Why The Greeks Should Repudiate Their Government's Debt

In apportioning blame for the Greek government debt crisis, it would be difficult not to lay the major share on Greece itself. With government jobs paying three times the private sector average, a national rail service with a wage bill four times its annual revenue, a public pension system that would pay out generous benefits at fifty for anyone classified as working in “arduous” professions like hairdressing, there is no shortage of taxpayer-funded largesse running rampant through Greek society.

At this point however, dissecting the Greek’s failure to live within their means is not only nugatory - beyond proving the time-tested observation that people like something for nothing - but also obfuscates the true moral contours of the crisis. Moreover, it blurs our understanding of a fundamental truth crucial not just to the future of Greeks but all peoples: Government debt is not like private debt. In fact, government debt is fundamentally illegitimate and one might even be justified in claiming that anyone seeking to profit from it is aiding and abetting criminal activity.

Private Debt vs. Government Debt

As Murray Rothbard argued in his seminal essay, “Repudiating the National Debt [12],” public debt is a wholly different beast than private debt contracted between ordinary individuals. In the latter case, a creditor lends to a debtor a specified amount of their own funds in exchange for a specified payment from the debtor in the future. By making this contractual exchange from which both parties benefit (otherwise they wouldn’t enter into it) the creditor becomes the true owner of the future moneys pledged by the debtor. Consequently, if the debtor fails to make good on the future payment the debtor is really and objectively robbing the creditor of his property. In a just society, the creditor would rightfully be permitted to recover his property unjustly expropriated.

Government debt is different. When a government issues debt on the bond market, it is not pledging to make good on it out of its own resources because, as Rothbard points out, it owns no such resources:

For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation.”

What a government pledges to its creditors is payment of the future wealth of its subjects, the taxpayers. This is wealth obtained through violent coercion and pledged without its owner’s consent. Any moral claim the creditors who buy such debt have to repayment from the victims is thus non-existent. Indeed as Rothbard avers,

[P]ublic creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future.

By Rothbard’s lights, the only moral response to the Greek crisis is for Greece to repudiate entirely its public debt and let its creditors suffer the consequences. The Greek government, like all governments, acted in a manner akin to a perspicacious school bully who instead of punching people for lunch money, simply took out a credit card in the name of his victims. The fact that the victims might have enjoyed some of trinkets thrown back at them is morally irrelevant. They cannot be held responsible for the debt incurred.

Rothbard’s rationale for repudiation is notably different from that gaining the most traction amongst those campaigning for writing down Greek debt. Many would argue that the buyers of Greek debt “deserve” to get burned because they bought it as a calculated risk with a coupon or rate of interest reflecting the probability of default. However, this view — where reneging on debt, (i.e., theft) is not seen as an inherent wrong but is rather something that can be traded off against higher interest rates — is devoid of the moral substance and precision of Rothbard’s argument.

Who is to say: how much of the creditor’s loan “deserves” writing down? The part of interest which exceeds the rate charged on a risk free-asset like a T-Bill (whatever that means in this world of distorted asset prices)? Why then shouldn’t everyone simply refuse to pay interest on any loan exceeding some arbitrary risk-free rate, knowing that such behavior should be expected by the creditor who already priced it into the originally demanded rate of interest?

Rothbard’s argument does away with such ambiguities: those who buy Greek debt or indeed the debt of any sovereign nation debt deserve to get burned, not in degree but entirely, because their actions empower the state and enable it in its abuses against its subjects.

It’s Not German vs. Greek: It’s Taxpayers vs. the State

So just who are the unscrupulous “profiteers” of human misery protracting Greece's conundrum? Well, most agree that it is industrious German taxpayers, who now must pick up the tab for years of Greek profligacy. However, this characterization conveniently ignores how German taxpayers were put on the hook in the first place.

At the beginning of the crisis it was the major European banks holding most of Greece’s debt. Now the vast majority is held by the international bailout fund put together by the European Commission, European Central Bank (ECB), and IMF (i.e., the “Troika”). Of this, the major share, some €56 billion [13], is held by Germany. The Troika’s purchase of Greek debt was presented as an almost humanitarian gesture intended to save Greece from economic implosion. The reality is that they allowed the banks to offload toxic Greek assets from their balance sheets keeping them solvent and able to extend the fraudulent fractional reserve practices that caused the financial crisis in the first place.

Nothing in the Greek crisis makes sense unless it is understood in terms of the ultimate end of bailing out the European financial system and its major banks.

Now European taxpayers are being forced to bail out the bailout and the German people are bearing the brunt, but this is hardly cause for a simplistic narrative pitting German against Greek. It is eminently clear that both peoples are victims of their own governments.

What right does the German parliament have to hand over more of the wealth of its own people so that the Greek government can use it to pay off the convoluted ECB/EU/IMF bailout funds which are in turn funded by debt instruments bought up by and made liquid by the world’s biggest banks? It has about as much right as the Greek government had to take out loans in the name of its people in the first place.

It would be a welcome gesture for an incoming government to declare the actions of previous governments to be against the interests of the taxpayers and repudiate the national debt.

This would not only relieve the taxpayers of a present burden but would also mean that any future government would find it hard to borrow from international creditors forcing them to bear the negative effects of their fiscal and monetary policies much earlier and with greater severity.

Unfortunately Greece’s “anti-bailout” government’s decision to ignore a plebiscite opposing a new bailout deal and the German parliament’s recent approval of said deal (going against the will of the majority of Germans) proves that any concept of democratic legitimacy - through which government is viewed as acting on behalf of the people in a principle-agent manner - is not only logically flawed but will always be discredited in practice.