Roland Dürre
Sunday September 18th, 2011

About the Moral Obligation to Declare Yourself Insolvent

If a system is so stuck that it will not even be able to save itself in the long run, it has to face the consequences. That is true for enterprises, countries, communal departments and also for private citizens.

Consequently, there is a moral/ethical obligation to accept the bankruptcy situation. Mind you, we are talking both sides: the one who is indepted and the environment.
The damaged system must be courageous enough to declare itself insolvent and accept the consequences.
The environment must be prepared to accept the bankruptcy and give the failed system a fair chance towards righting itself.
I see only one exception to this rule. If, for instance, out of ten systems nine are totally healthy and only one is ailing. That is a situation where I could imagine the wealthy and generous nine saving the tenth. Still, I am not really sure if this would be a good solution, both for the tenth and the nine others.
For our financial crisis, this means:

If Greece is indebted to an extend where all help is in vain, then they must be courageous enough to declare bankruptcy. And they must be prepared to face the consequences. And the other countries must accept this insolvency and give Greece a chance to make a fresh start.

This can, however, certainly never happen in a Europe with one currency and without protective customs duties or similar concepts, because otherwise countries like Greece have no chance. The structural differences and success criteria in the various European countries are just too huge. Besides, the additional achievement parameters, such as mentality, climate, education, infra-structure, technological standards and many more, are also too diverse. Perhaps you have to start thinking about ”special economic spheres with their own currency“ or similar concepts in cases like these.

But still, it would not be possible for us to “save” Greece. Because in the EU, circumstances are not such that the majority of countries are rich and without debts and thus can afford to be generous and gratious towards Greece by ”saving“ it. And, as I see it, guaranteeing for Greek debts and assuming that they will economize enough to some day be able to pay back their debts seems a concept that is beyond reality and therefore both naive and native.
According to Wikipedia, there are 23 EURO countries. Three of them are “passively“ using the Euro and three more are associated Euro users with their own Euro coins.  Greek is one of those. The 16 ”true“ EURO-countries, however, are all but rich and wealthy.

On the contrary. All EURO countries, with very few and not really relevant exceptions (Estlonia  and Monaco) are hugely indebted. Even the highly-praised Austria and the very respected Netherlands suffer under their national debt and the interest rates they have to pay. The situation in the bigger countries, such as Italy, Spain and France, is even worse. To be sure, they still manage to pay their interest rates, but it is totally utopian to assume they will be able to repay the debt.

The main guarantor (and absolutely major debtor) Germany is not so well off even without considering the guarantees we have given. Even as it is, we cannot sufficiently invest into education and infra structure. The next economic weakness can (and will) have very undesirable consequences for us. And even today, our business life looks like a permanent tight-rope stunt with constantly shorter cycles of “ups” and “downs”.

If the guarantee gets due, we will look really old. It is something you must realistically expect. If you guarantee for insolvent debtors, you never end up unharmed. And if the guarantee situation is complete, the German debt will climb by more than 20 %. In that case, we will be at the top of all European countries, both absolutely and per cent.

This is just simple reality if you consider the European systems.

The insolvency rule must also be applied to banks and enterprises!

Here, too, the only acceptable exception would be if, for instance, the banks have a solidarity fond with which they save or merge with the fallen bank. But even here, it will only work if all other banks are healthy and the sickly bank is the exception. However, that is not our situation.
The obligation to declare yourself insolvent is, however, not just a moral-ethical one. Rational thinking, too, demands it. It is the only way to minimize detrimental effects on the common good. That is why, for enterprises, we even have a punitive law against delaying insolvency. Incidentally, the same is true if you give guarantees with money that is not yours to spend.

If you use insolvency with reason, you will help to accept and repair the damage, thus preventing additional, even more serious damage.

As they say:
“Better a miserble end than endless misery!”
This is almost always true.

Consciously and actively accepting an insolvency also makes the time factor of a crisis more predictable. You will no longer have a faulty situation growing out of proportion by itself and constantly getting more dangerous. It is the only chance to prevent the really BIG BANG.

Perhaps our current motto should be: “It is better to have Lehman Brothers Holdings Inc. once each year for several years” and in exchange have a halfway stable system. Thus we would be prepared to live with many small crises, every one of which will be extremely painful. But this option is still better than preventing insolvencies at all costs – and then pay the price for constantly growing amplitudes and faulty situations. In the end, they will cause the total collaps.

Our current political activities remind me of how we cope with floods. Except that the water level will always drop by itself after having reached ist peak. Debts will do no such thing. In case of a flood, you can always hope that enough sacks full of sand will be available until the water level drops. At least this was true before the climate catastrophe.

With debts, that is not possible. They will not behave like water and get less by themselves. Interest rates on interest, along with the economic cycle make it impossible for the debt flood to drop. Neither will it be any help to economize, because all you will then do is strangle your business. And then everything gets even worse. Consequently, you have to keep indebting yourself more and more, just in order to maintain the status quo. At the same time, servicing your debt (interest rates and payments on the main debt) takes away all the room for manoeuvering. It is a vicious circle. The only thing that soothes the pain a little is inflation.

So we are currently trying to fill the gaps, but instead all we are doing is increasing the pressure. We sit on a powder keg that gets bigger and more explosive all the time. A small spark will suffice to make everythng explode in our faces.

The very idea that we demand thriftiness in Europe while the USA ask us to instal programs for promoting the economic cycle (which, after all, can only be financed by more debts) and that, basically, both sides are right, gives me pause because it is such a contradiction.

But perhaps it is of no consequence, anyway. I learned in life that innovation always also means creative destruction. And perhaps it is time for everything to be destroyed – in order for new things to start growing.

RMD
(Translated by EG)
P.S.
There is no doubt that there is still plenty of demanding work waiting to be done for our politicians.

6 Kommentare zu “About the Moral Obligation to Declare Yourself Insolvent”

  1. Chris Wood (Sunday September 18th, 2011)

    An excellent analysis of the situation! But it is not clear that Greek bankruptcy is the only solution. Ireland has worked its way out of similar problems, taking a considerable drop in living standard. One difference is that Ireland’s problems were caused largely by bank speculation. Greece’s climate is unpleasantly hot (unless you are on holiday), Ireland’s is unpleasantly wet. Both will worsen due to CO2.

    The chase after “growth” is a large part of the problem. Why should Germany have growth, with a declining workforce, depleting world resources and increasing world competition? But of course we are frightened to take a back seat and trust in the help or even fairness of rivals. Contributions to this “growth” come from many people earning well, without contributing to the overall good. The same is true of countries. Are the people of the world really helped by German exports of luxury cars and weapons? Further worthwhile growth can come from increased knowledge and sensible investment, but not from increased consumer demand.

    “dass Griechenland durch Sparmaßnahmen seine Schulden zurückzuzahlen kann, erscheint mir ein sehr realitätsfremdes und dementsprechend natives Konzept”
    When I read this, I guessed that “natives” was a typo. But it fits the current native German attitude quite well.

  2. rd (Sunday September 18th, 2011)

    Chris, Du hast Recht! Nativ war ein Tippfehler. Ich lasse es mal, weil es so gut passt und ergänze es mit naiv … Danke!

  3. Chris Wood (Monday September 19th, 2011)

    Remember that Greece is not bankrupt in the sense of its net assets being negative. I estimate that the total assets of Greece and its people are more than ten times its national debt. But the cash flow problem is very serious.

  4. rd (Monday September 19th, 2011)

    @Chris:

    Staaten waren kreditwürdig, weil die Volkswirtschaftslehre davon aus ging, dass ein Staat aufgrund seiner Assets nie Konkurs gehen kann.

    Aber was sind Assets wert, wenn kein Käufer da ist? Wer also soll die griechischen Assets kaufen (und bezahlen?).

    Wer würde z.B. für die griechische Inseln relevante Summen aufbringen wollen? Findet man hier Privatinvestoren oder andere Staaten? Man könnte ja die Türkei fragen 😉

    Für eine Autobahn oder ähnliche Infrastrukturen wird der Investor nur zahlen, wenn er in absehbarer Zeit (3 – 5) Jahre sein Investment wieder mehr als drin hat. Wie hoch müsste dann die Maut sein? Ist das realistisch?

    In Afrika verkaufen Länder ihren fruchtbarsten Boden. Ist das sinnvoll? Gibt es überhaupt ähnliche Lösungen für Griechenland?

  5. Chris Wood (Tuesday September 20th, 2011)

    Of course you are right Roland! The value of some assets can decrease suddenly when you try to sell them. A new car loses maybe 10% of value as soon as it is bought. Some housing developments in USA became ghost towns, losing practically 100%. A time-share week that we bought could only be sold for 10% of its price, (but we have been happy to have it). We bought some shares that became worthless when the bosses landed in jail.
    The Greek population must accept a significant drop in living standard, to get out of the mess; I guess 20% to 30%. But this is hard to organise. It is relatively easy to reduce imports, but takes longer to increase exports. If they wait a few years before reforming, they will end up like Rumania or even worse off.
    They should be grateful to Germany for trying to help, even if we are not trying very hard.

  6. Chris Wood (Tuesday September 20th, 2011)

    But one more point: an investor should not expect to regain his investment in less than five years, (as you suggested, regarding an Autobahn). Such a return implies gambling. Big companies often say they want projects to bring in 10% p.a., regaining the investment in 7 years. But even here they are allowing for some optimism in the project planning. A project that returns 7% is a success.

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