Previously by Charles Hugh Smith: The Future of Work
The only solution to bad debt is to write it off – renounce it all. Why aren’t those who took the risks for their own private gain being forced to absorb the losses?
We all know some 3 trillion euros of debt in Europe is uncollectible. So why isn’t anyone talking about the one and only solution, which is writing off all that debt? Since nobody knows how much bad debt there actually is in the Eurozone – care to guess on the market value of all those underwater mortgages in Spain or the true size of Italy’s debts? – that 3 trillion is just a guess, but it’s probably a reasonable starting point.
Let’s start with the most basic fact about all this uncollectible, impaired, bad debt: every euro of debt is somebody else’s asset. Wipe out the debt and you wipe out the asset. That’s why there’s no willingness to accept the writedown of debt: somebody somewhere has to suck up 3 trillion euros of loss.
Can we please dispense with the fantasy "solutions"?
There is no way Europe is going to "grow its way out of this debt." How much of the eurozone’s "growth" was the result of rampant malinvestment and risky borrowing? More than anyone dares admit. It won’t take austerity to crash the euroland economy, all it will take is turning off the debt spigot.
"Restructuring" is a code word for writeoffs. Here, let me "restructure" the euro bond you bought at a 4% coupon yield. Now you’re going to get 2%, and you’re going to like it. Bang, your bond just lost half its market value, but everyone gets to keep it on the books at full value. Nice, until you have to sell it to raise cash. Oops, the euro has slipped in value so you lost more than 50%.
Printing euros to buy the bad debt is just a shuck-and-jive game of transferring the losses to unsuspecting holders of euros or taxpayers. Allow me to reprint a quote from yesterday’s entry, The World Is Drowning in Debt, and Europe Laces On Concrete Boots: as Nobel prize winning economist Thomas Sargent noted: "There’s a fundamental truth that everyone has to understand: what the government spends, the public will pay for sooner or later, whether in taxes or inflation or having their debt defaulted on." (Source: BusinessWeek 11/20/11).
In other words, if the European Central Bank prints 3 trillion euros to bail out the banks and bondholders, holders of euros will suck up 3 trillion in lost purchasing power, or split the loss with taxpayers who have to pony up cash to give the ECB a threadbare sheen of solvency.
There is no free lunch. And since there’s no free lunch, then we have to ask: who should suck the losses when 3 trillion euros vanish in a massive renunciation/writeoff? Answer: those who took the risk. I know this is a shatteringly obvious conclusion, but it reveals the central flaw in the global financial system: risk has been disconnected from return.
Those who made the risky bets have diverted the risk to others: taxpayers or the general public who holds currency. The gains from the bets are private, and theirs to keep, but all the losses are distributed to the public via government bailouts or money-printing. The first shifts the losses to the taxpayer, and the second shifts the losses to everyone holding the currency being devalued.
Not only has the risk been palmed off onto unsuspecting chumps, the returns have been concentrated into the few hands that control the big bets. This is the ideal setup for the stupendous gains and zero risk that characterize crony-capitalism: make the big bets with leverage and borrowed money, and skim the vast profits. Then when the bets sour, demand a bailout from the Central State, the ECB, the Fed, etc., which promptly socializes the losses and distributes them over the entire populace of taxpayers or holders of currency.
It works beautifully until the debt-serfs rebel. The EU’s politicos are begging to start the printing presses, as that is the only way they can retain their power in the face of the debt-serfs’ revolt. But at least one populace of tax-serfs (Germany) is rebelling against sucking all the losses via a massive reduction of purchasing power.