When great nations go broke !

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Why Not? By Wong Sai Wan

Populist decisions and fear of election backlash are the surest way a country would go bankrupt.

TAXI drivers went on strike against the issuing of more licences as part of austerity measures adopted by the government by parking their vehicles on the highway leading to the airport.

Another government had to sell off its embassies in 11 countries to raise RM300mil because it could no longer afford to keep them.

And in a third country, the government is in a tussle with its elected representatives as the country (USA) hurdles towards defaulting on its US$14.5tril (RM43.4tril) debt.

No, none of the countries referred to is Malaysia. Instead, the striking taxi drivers were in Greece, the embassy selling country is Britain and of course with such a huge debt, the third is the United States. It’s frightening to think how these three countries – at one time or another was the greatest country of a certain generation.



In ancient time, Greece was the centre of the universe for everything ranging from democracy to sciences to world conquering feats by its leaders like Alexander the Great.

But it can no longer live on its past glories as it wallows in its own Greek tragedy.

Its economy, the 27th largest in the world, is in ruins just like the things that Greece is most famous for.

Britain – once called by everyone as the United Kingdom or Great Britain – had the largest empire in the world just a century ago with colonies in every continent. Malaysia was once its colony.

The British claimed the industrial revolution as its own and is rightly credited for turning manufacturing into becoming the mainstay of the global economy.

It is now a shadow of its glory days and at best is the rabble rousers in the European Union (EU) zone. Gone are its colonies in every far-flung corner of the world that kept its super economy running.

Now the British have even got to putting for sale its huge Chancery in Kuala Lumpur because it would be cheaper for the High Commission to operate out of a commercial building.

As for the United States, wasn’t it the leader of the free world and the fatherland of industrialisation where hardwork is always rewarded with ample financial gain?

But now the country is bogged down with wars on various fronts from Libya to Afghanistan.

Yes, the United States is still the No 1 country in the world as far as the economy size is concerned but for the first time in the past century, everyone else – especially China – is catching up quickly.

The Americans owe more money to everyone than anyone has in the past.

Go to the website http://www.usdebtclock.org/ and you will get the real time feeling of how much the land of the brave and free owe the rest of the world.

It will probably take hundreds of PhD thesis to explain what went wrong for these three nations but suffice to say that successive governments did not do enough to prevent their economies from falling into such a dark hole.

On top of that politics has played a strong role in pushing these economies into even darker places.

Political opponents in these countries, especially in the United States and Greece, have been playing a game of one-upmanship on every issue.

Even now on the brink of economic ruin, these politicians continue to play the game.

As for Greece, there are enough MPs there who want to play the popular game of not going ahead with the agreed austerity drive because it is supposedly too painful for its people.

But wasn’t it their foolhardiness that brought Greece to this position in the first place.

What was the hurry for Greece to join the single Euro monetary system? It was obvious that it was not ready to meet the standards set by the technocrats in Brussels (where the EU is headquartered). The same can be said of Ireland, Spain, Portugal and many of the old eastern block countries.

It is hoped that the Greek government will stand firm against pressures from the likes of the taxi drivers and proceed with the unpopular austerity measures.

As for the United States, the rivalry of Republicans and Demo-crats is threatening to send the world into possibly the biggest depression ever as there is less than 10 days left before America defaults on that huge debt.

The Republicans, who control the House of Representatives are refusing to approve President Barack Obama’s proposed budget on the debt ceiling because they claim it would hurt the American economy (read the rich).

If they default, the entire world can look forward to decades of depression as lenders will panic and demand all nations to repay their debts immediately.

Our national debt stood at RM233.92bil last year or 34.3% to the Growth Domestic Product.

It used to be worse but some of the debts were repaid in the last decade when the ringgit gained in strength.

Yes, surprisingly our country’s debt is not a huge mountain as some people would like us to believe, but what is worrying is the lack of support for efforts to reduce it further.

A sure way of doing it is by reducing subsidies.

In 2009, it was reported that the Government spent RM74bil in subsidies ranging from social projects to energy and food. This translates to an annual subsidy of about RM12,900 per household.

Cutting back on subsidies would be unpopular with the people. The negative reaction to the floating of the premium petrol prices and the allowing of energy prices to rise are examples of the backlash the Government has gotten from its efforts to reduce its subsidy spending.

The most popular comments against Malaysia’s spending cuts has been to ask the Government to reduce the leakages before even thinking of cutting back on subsidies.

Of course, it does not help the Government’s plans that in the past there has been ample evidence of such leakages.

Something must be done to convince the people there is a total war against wastage including using unpopular means. Why not?

After all, the most important lesson from the Greece, Britain and United States stories is that being popular will only guarantee election victories that will eventually lead to financial disasters.

> Executive editor Wong Sai Wan has been through three recessions and fears the fourth the most.

To Repay or Not to Repay Debts?

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Jean Pisani-Ferry

BRUSSELS – For months now, a fight over sovereign-debt restructuring has been raging between those who insist that Greece must continue to honor its signature and those for whom the country’s debt should be partly canceled.

As is often the case in Europe, the crossfire of contradictory official and non-official statements has been throwing markets into turmoil. Confusion abounds; clarity is needed.

The first question is whether Greece is still solvent. This is harder to judge than is the solvency of a firm, because a sovereign state possesses the power to tax. In theory, all that is needed in order to get out of debt is to increase taxes and cut spending.

But the power to tax is not limitless. A government determined to honor its debts at any cost often ends up imposing a tax burden that is disproportionate to the level of services that it supplies; at a certain point, this discrepancy becomes socially and politically unsustainable.

Even if the Greek government were to succeed shortly in stabilizing its debt ratio (soon to reach 150% of GDP), it would be at too high a level to convince creditors to continue lending. Greece will need to reduce its debt ratio considerably before it can return to the capital markets, which implies – even under an optimistic scenario – creating a primary surplus in excess of eight percentage points of GDP. Among advanced-country governments, none (except oil-rich Norway) has managed to achieve a durable primary budget surplus (revenue less non-interest expenditure) exceeding 6% of GDP.



This is too much for a democratic country, especially one where the tax burden is very unequally shared. Greece is, in fact, insolvent.

The second question is how serious a problem it is not to repay one’s debts.

One camp notes that, for decades, no advanced country has dared to do this, and that is why these countries still enjoy a positive reputation. If just one member of the eurozone embarked on the debt-default path, all the rest would immediately come under suspicion. In any case, according to this view, contracts simply must be respected, whatever the cost.

On the other side are those who call for the creditors who triggered the excessive debt to be punished for their imprudence. Lenders must suffer losses, so that they price sovereign risk more accurately in the future and make reckless governments pay higher interest rates.

Both lines of argument are valid, but the fact is that countries that have restructured their debt have not found themselves worse off as a result.

On the contrary, far from being banished from bond markets, they have generally bounced back quickly: investors like a sinner who returns to solvency better than a paragon of virtue on the verge of suffocation.

Twenty years ago, Poland negotiated a reduction in its debt and came off better than Hungary, which was keen to protect its reputation. Debt reduction is not fatal.

The third question is whether a Greek default would be a financial catastrophe – and when it should take place. Two channels are at work, one internal and one external.

First, government bonds are the reference asset for banks and insurers, because they are easily tradable and ensure liquidity. Obviously, any doubt about the value of such bonds could cause turmoil. The Greek banking system’s solvency and access to refinancing would be hit severely.

Externally, in turn, other European banks would be affected. But more importantly, other debt-distressed countries – at least Ireland, Portugal, and Spain – would be vulnerable to financial contagion.

So this is a dire situation. But it does not explain the European Central Bank’s attitude. The central bank has motives to be concerned. But instead of trying to find a way to cushion the possible impact of such a shock, the ECB is rejecting out of hand any sort of restructuring.

Indeed, it is raising the specter of a chain reaction by invoking the collapse of Lehman Brothers in September 2008, and threatening to punish any restructuring by cutting banks’ access to liquidity.

But if Greece is not solvent, either the EU must assume its debts or the risk will hang over it like a sword of Damocles. By refusing a planned and orderly restructuring, the eurozone is exposing itself to the risk of a messy default.

Europe, however, is not obliged to choose between catastrophe and mutualization of debt. The best route – admittedly a narrow road – is initially to beef up the financing program for Greece, which cannot finance itself on the market, while at the same time ensuring through moral suasion that private creditors do not withdraw too easily.

This is what is being attempted at the moment. But this breathing space must be used for more than simply buying time.

It should be used, first, to allow other distressed countries to regain or consolidate their financial credibility, and, second, to pave the way for an orderly restructuring of Greek debt, which requires preparation. Gaining time makes sense only if it helps to solve the problem, rather than prolonging the suffering.

Jean Pisani-Ferry is Director of Bruegel, an international economics think tank, Professor of Economics at Université Paris-Dauphine, and a member of the French Prime Minister’s Council of Economic Analysis.