Greeks can pay, Greeks will pay

Most normal blogs' favourite countries to rant about is US, or Israel, or China, or something like that. Not on this blog - my number one target, at least for the last month - is Greece. And I'm really shocked that some of the otherwise sane people I know buy into the whole "can't pay, won't pay" nonsense, so I wrote this short post explaining how it all really works.

Basics of money lending

Let's get back to basics. Why would anybody lend anybody else their money? The most common reason is they want to get even more money back. Now this is in no way the only reason - people routinely lend money to their family members and friends, IMF lends money to countries facing collapse, USA and Soviet Union lent money to support whichever dictator seemed more aligned with their interest, Europe lends money to shit-poor countries out of pity, AIG lent itself taxpayers' money by bribes and threats, and CIA lent money to Osama bin Laden because they're idiots - but while these are all very important cases, most money in the world is lent for profit motive.

This profit-motivated lending is not only largest in volume - it's also most reliable. Political will can evaporate overnight - ask South Vietnam or Cuba if you don't believe me - but speculators can be reasonably counted on to keep lending as long as it makes business sense. Even in the middle of the latest recession and the Great Depression solvent borrowers had no trouble getting loans - the problem was sudden decrease in solvency, not disappearance of the profit motive.


Political and charitable lending is highly complicated and varied form case to case, but for-profit lending is quite straightforward from game theoretic point of view:

• Lender decides to give borrower money or not
• Then borrower decides to repay or not
• Because borrower would much rather get money, and not repay it - no lender would be willing to lend anything without some pretty hard assurance of seeing their money back
• On the other hand, as repayment might be impossible due to objective circumstances, borrowers would be unwilling to provide too much assurance
• Level of assurance is based on balance of these two factors.

And what forms of assurance are available? For private individuals there's debtors' prison - a barbaric institution which is still used in child support and tax cases - not coincidentally both being the kind of "debt" which is incurred unwillingly, where the "borrower" has no leverage whatsoever.

Another assurance is forceful confiscation of property, and various kinds of physical abuse - these were routinely used as international debt collection in 19th century, see Egypt, and Haiti for examples - but these rarely happen these days.

Yes, lenders could try to sue Greece or another unwilling country in foreign or domestic courts, but it would be mostly a PR stunt, and they wouldn't even get enough to cover their legal costs. If a country doesn't want to pay, lenders cannot do shit.

Hamster showing what debtors' prison looks like

The final assurance

So what keeps borrowers repaying and lenders borrowing? It's lenders not being stupid. They know very well that if someone didn't honour their debts in the past, they're unlikely to do so in the future - so if you tell the banks to go fuck themselves, you saved yourself a huge pile of money, but you have no chance of getting any money from them in the future. 

When you think about it - it's a pretty weak assurance - it only works when the country is moderately-screwed-up:

• If country's economic situation is truly screwed up - they won't be able to repay - so banks lose
• If country's economic situation is bad but not horrible (like most countries now) - they cannot afford losing their credit lines - so they keep repaying - and banks win
• If country's economic situation is some awesome they don't care about future loans - they can tell banks to go fuck themselves - and banks lose too!

Fortunately for banks, the last case is very difficult to achieve - not only you need zero deficit (before interest) now - something already very hard - you need to be certain of being able to keep this zero deficit essentially indefinitely. Recessions, commodity price fluctuations, wars, terrorist attacks, aging population, floods, tsunamis, volcanoes, epidemics, electing Conservatives, and plenty of other natural disasters can screw your budget essentially overnight - all sending you crawling back to the banks begging for money. And bankers will remember what happened to their old loans.

I cannot think of any country in the world which is financially healthy enough to pull that off. What makes it even less likely is that countries with most balanced budgets tend to have lowest debt levels and borrowing costs as a rule (debts are results of past performance, and past performance is the best predictor of future performance there is) - so for them repaying debts is nearly painless, and provides good insurance in case something screws their economies in the future.

Essentially the only case in which a country can tell the bankers to fuck off, and has debts high enough to make it worthwhile - is one which used to be horribly mismanaged for many decades, and then turned into one of the healthiest economies in the world essentially overnight.

Does it sound like Greece? If you believe so, I have some sovereign debt credit default swaps that you might be interested in.

Greeks simply cannot afford not paying. They can negotiate better terms of repayment, and get some help from EU and IMF, but essentially they will have to get their country in order - cut their bloated civil service and bloated military, cut - and repay their debts, because they simply cannot afford losing their credit lines. And so they will pay.

The real cost of oversized military

In one of my previous posts I pointed to the elephant in the room - Greek economic problems are largely due to its oversized military - this confused people a lot.


Let's do some calculation, pulling all assumptions out of Google. These numbers are actually very noisy year to year, but let's just take some long term average.

• Annual economic per capita growth 2.1% - this is world average since 1950
• Annual population growth - 0% - most developed countries we speak about here have little in terms of population growth
• Annual economic growth - 2.1% (by two above) - this number might seem low, but that's the facts, and there's not much we can do about it
• Starting debt level - 50% GDP - fairly typical for a developed country
• Interest on debt is 3% above inflation. This I base on historical rates of series I federal bonds before the recession, and adjust it a bit because most countries are less safe than States, so would need to pay somewhat more.
• Baseline size of military is 1.7% GDP - EU average
• Budget has 1% surplus before paying interest.
• This results is interest payment of 3% (interest on debt) * 50% (debt to GDP) = 1.5% GDP.
• This leads to deficit of 0.5% GDP.
• Because economy keeps growing - 0.505 / 1.021 = 0.4946 - so debt level will very slowly fall as percentage of GDP even as total debt keeps rising.
• Over 50 years, debt will fall to just 16.3%

This is all very reasonable. Now let's assume this country decided to have Greek style ridiculously oversized military - 4.3% of GDP. This is extra 2.6% spending. What happens in 50 years? Their debt grows to  175.5%.

Assuming anybody was still stupid enough to lend them money at the same rates, oversized military costs them 2.6% GDP (original spending) + 4.78% due to excess interest relative to baseline scenario. Imperialism costs far more than it seems to - and it has been a very long time since anyone made big money on empire building - usually the only benefactors are bankers and arm manufacturers in countries not engaged in hostilities.

A few inb4s:

• This reasoning applies only to excess military spending.
• Normal civilian government spending is typically useful, and if government slashed spending on healthcare, education, pensions, disability insurance etc., people would simply buy more or less as much of such services on private market.
• Even worse - if government slashed spending on research, basic infrastructure and so on, where benefits are diffuse, it would be very likely that nobody would pick up the tab, and it would hurt the economy significantly.
• Yes, there is some outright waste in civilian government spending, but similar waste exists in private sector as well.
• Baseline scenario already includes EU average military spending - and even if you argue that optimal level of military spending is higher than 0% (something I won't be arguing one way or the other now) - I cannot imagine in what kind of bizarro world EU average is far below the point of rapidly diminishing returns.

I'm not done yet. Let's assume interest rates are not constant, but vary depending on country's prospects. So at 0% debt you only need to pay 1%, then it grows linearly to 3% at 50% (like in scenario), and so on. There is some evidence this growth might be ever faster than linear, but let's stick to that.

• In 50 years of baseline scenario debt diminishes to 6.35% and nobody cares any more.
• In imperialistic scenario, debt after 10 years is only 73.43% (as opposed to 70.89% with constant interest rates) - it doesn't make a big difference yet.
• In 20 years debt reaches 110.62% as opposed to 93.7% - it start to get ugly.
• In 30 years debt increases to 189.96%, as opposed to 118.61%, but the glorious Greek empire keeps borowing.
• In 40 years debt reaches 531.73%, as opposed to 145.79%, and the interest rates are completely ridiculous over 22% per year.
• When the imperial scenario ends in 50 years, debt stands at 738747192.9% GDP, interest rates are almost 5% a day, and everybody is looking for the new suckers into this Ponzi scheme.

Of course Greece had to either collapse or change its ways long before that happened.

The real reason behind Greek economic problems

According to CIA, right now Greece has GDP of $405.7bln, and debt of $552.8bln (136%) - not even counting debt hidden thanks to Goldman Sachs shenanigans. It got into massive debt by spending too much and taxing too little. But everyone seems to forget what it spent so much money on. Here's the real reason:

Greece spends far higher percentage of GDP on military than any EU country; higher than US, Russia, and any even remotely sane country in the world.

Greece spends completely insane 4.3% of its GDP on military - that not even counting forced unpaid labour system - if every soldier was actually paid the number would be even higher - and it definitely severely damages economy by taking people at their most productive age away from useful activities like studying or working.

And what's their track record?

• They obviously lost during the Second World War, but so did everyone else, and then they proceeded to...
• Have a Civil War 1944-1949! The first major success of Greek military was murdering fellow Greeks, with British and American assistance.
• The Civil War being won, the army still felt like shooting some people but didn't have balls enough to face another real army, so not soon later, in 1967, they overthrew the government to kill even more Greeks (they especially loved killing students). With CIA involvement of course, like most Cold War right wing military coups.
• What did the military junta do after they ran out of people to kill in Greece? By sponsoring a military coup attempt in Cyprus with annexation of it into Greece as the ultimate goal. That failed spectacularly, as Turkey would have none of it, and moved its army to annex Northern Cyprus. The fiasco caused collapse of Greek military regime.
• So what did Greeks do after that? Dissolve or at least drastically reduce the army whose only occupation was shooting at their compatriots and unsuccessfully trying to occupy other countries? Of course not - they kept spending insane amount of money and forced unpaid labour on it!

Let's look at list of countries by military expenditure, some notable cases.

• Greece - 4.3% - way too fucking high, never won a war, killed fuckloads of Greeks
• USA - 4.06% - while being involved in countless genuine wars
• Russian - 3.9% - you're clearly spending far too much if even Russia is saner than you
• South Korea - 2.7% - and they're next to a nuclear-armed madmen just waiting for the best time to hit them
• France - 2.6% - second highest in EU, manage to have built third largest nuclear arsenal for that
• UK - 2.4% - and that includes nuclear arsenal and they even manage to win a war every now and then without American support
• Taiwan - 2.2% - they clearly don't care about Chinese
• EU average - only 1.69%
• People's Republic of China - 1.7% - they're clearly all hippie peaceniks!
• Japan - 0.8% - being in reach of North Koreans nukes? We just love our animes and do not care about such things!

There is absolutely no reason why the miserable failure that Greek military is should cost anywhere near as much as it does. And don't even try to mention of Turkey - Greece is part of NATO and has all the NATO guarantees; Turkey was never remotely interested in invading Greece; and their Greek-military-initiated confrontation over Cyprus already resulted in massive failure of Greek military.

Imagine that instead of insane 4.3% of GDP Greece spent only 1.7% of GDP in it, like a typical EU country. Over the last 20 years (before that there was Cold War, which was seriously overrated but let's excuse that), it would save them 52% of GDP - moving them from the list of bankrupt countries to the list of fairly average countries struggling with the recession. But there's more! All that 52% of GDP incurred compound interest. Average long term interest rates are about 6%/year nominal, so 1bln drachmas spent in 1990 grew all the way up to 3.2bln drachmas now (or however many euros that is). Even worse - countries which are deeper in debt have to pay much higher interest rates.

Now exact calculations would require far too much data gathering, so I won't bother at the moment, but one thing is clear even from this:

The only reason Greece is in such crisis now is because they have ridiculously oversized army. The main requirement of any bailout package should be massive reduction in size and cost of their armed forces.