Greece and the Eurozone met today to talk about a possible renegotiation of the bailout. Here is what we know:
“Greece’s bailout from the eurozone runs out on Feb. 28. At that moment, without an extension, it will lose its last €1.8 billion disbursement from the currency union’s bailout fund, €1.9 billion in profits from Greek government bonds held by the European Central Bank and around €11 billion still sitting in Greece’s bank bailout fund. The fate of a €3.5 billion transfer from the International Monetary Fund is less obvious, since the IMF’s program for Greece runs until the end of 2016. What is clear is that Athens won’t get any money from the fund without an agreed aid deal with the eurozone.”
Unsurprisingly, as of today’s conversations, no conclusion was met.
Government debt is a vicious cycle. If Greece were a corporation, they would either be in chapter 7 or chapter 11 bankruptcy. In the event of chapter 7 bankruptcy, they would be liquidating assets in order to pay off their secured debt to the most senior creditors, and would cease to exist. There would be a legal system with a court and a judge to oversee and enforce this process, and that would be that. Obviously, that is not the case. As a country, Greece can’t just liquidate itself and stop existing. Chapter11 bankruptcy would mean that, with the approval of a judge, they could continue operating and attempt to restructure their debt and reorganize management. They would use the cash flows from the newly organized company to pay down the debt in an ideal situation. If not, they would concede to chapter 7. However, the problem is that Greece is stuck in the limbo that is government bankruptcy. The problem is that there is not a legal entity to oversee the process or use force if necessary, which is why government debt is a vicious cycle. Greece is unable to meet its payment obligations, but there is no one forcing them to do anything about it, which means the only option is to borrow more money to pay off the old debt.
The question is what lessons can Greece and the Eurozone learn from corporate bankruptcy? One of the key features of corporate bankruptcy is organizational restructure. When a company is failing, leadership has to be held accountable, and organizational pivots must be made to address those failures. Without the presence of a legal body, this obviously cannot be mandated as it would be for a company. But why should Greece be left to its own devices to come up with its own strategy.