13 Feb

What to do about Greece’s Debt?

debt

The election of Greece’s left-wing government on a promise to reduce the country’s mountain of debt, has brought the issue of what to do with Greece’s debt firmly on the agenda.

The journalist Gillian Tett recently wrote about this in the Financial Times. She recollects a meeting where Economist Benjamin Friedman discussed whether Greece should have its debts forgiven. Some argue that as Germany received forgiveness for its debts, so Greece should be forgiven. Others argue that it’s immoral to forgive Greece its debts – “how can you forgive debt when a country has a retirement age of 50?”

Gillian Tett writes:

Either way, what became clear that night was that the question of how to handle Greece is a deeply emotional issue, not just a matter of economics — even (or especially) among central bankers. In one sense, that is no surprise.

As David Graeber noted in his seminal book Debt: The First 5,000 Years, credit is a social and political construct. And whenever societies have operated in the past with few constraints on how much credit they can create, this has invariably caused debt to spiral until it either triggered social implosions or the society has used rituals to forgive that debt. In the past, there have been many such safety valves, be it the debt jubilees used in biblical Israel or the practice of “wiping the slate clean” (that recorded debts) in ancient Mesopotamia.

The issue of Greek debt and whether it should be forgiven, is a strong reminder of the relational issues surrounding debt.

Earlier this week in The Daily Telegraph, there was a discussion about whether the current low interest rates should be an opportunity for people to pay off their mortgages, or to borrow more for a greater financial return. As well as ignoring the financial problems that taking on more debt causes, the article doesn’t take into account the relational implications of debt.

Firstly, the relationship between lenders and borrowers, at any level, is inherently unequal. There is a lack of parity between the parties. When unexpected events leave the borrower unable to service the loan, calamity often ensues.

Secondly, debt finance does little to reduce relational distance between corporate borrowers and corporate lenders. It is seldom associated with close involvement by the lender in the affairs of the borrowing company because the security provided for the loan acts as a convenient substitute for close monitoring.

Thirdly, increases in national debt in effect constitute a promise that future generations will meet the cost of the interest payments and eventually repay the debt.  What would be considered a grossly unfair transaction between contemporaries is waved through because future generations have no voice.

Finally, financial difficulty, and particularly debt, is a major cause of stress.  A Barclays survey showed that money was the most frequently cited reason for arguments between partners.  The psychological pressure resulting from personal debt is linked directly with child abuse and physical violence between adults in households.

Whatever decision is eventually taken on Greece’s debt, the impact of debt on relationships is clear.  As Graeber notes, when there have been few constraints on debt,  there has either been a social implosions or the society has used rituals to forgive debt. Debt is not a relationally neutral financial action. One hopes that with all the discussions surrounding Greece’s debt, society will wake up to the relational impact of debt and will be far more reluctant to borrow.