Saturday, April 20, 2013

The Stupid Cruelty Of The Creditor

It used to be customary in the UK to put debtors who failed to pay their bills in prison.  That was not good for either party.  A debtor in prison is less likely to pay back the creditor.  Moral hazard was reduced by the threat of prison, but that did not enable creditors to collect payment from those that defaulted.

This article argues that the penalty being imposed on Greece by creditors is much like putting the country in prison.  The debtors and their children are suffering and the structural changes imposed on Greece are making it less likely that the creditors will be repaid.  Economic growth is necessary for debt repayment.  There are examples from recent history where debtor nations were allowed to eventually repay debts after their economies had the opportunity to recover.

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