BUENOS AIRES – There are two ways to look at Greece’s majestically unsustainable sovereign-debt mountain. There is, first, a pragmatic and short-term perspective, which focuses on ensuring some form of orderly restructuring (possibly for other vulnerable European states as well) without bringing down the eurozone. And there is a “moral” perspective, which focuses on the nature of debt and on the long-term economic consequences of failing to honor it.
Neither perspective is wrong; on the contrary, the problem is how to reconcile them. Indeed, failure to do so appears to explain why the official response to the Greek debt crisis has been so inadequate.
In these circumstances, the Talmud, the ancient repository of Jewish legal commentary – and one of the oldest sources of human thought on morality and economic activity – might hold the key. An oft-quoted passage provides a fresh, if not exactly new, perspective on Greece’s debt and the best way to address it.
The passage concerns sales, divorces, and offerings, and specifies that these acts are legally valid only if a person performs them voluntarily. Nevertheless, under certain circumstances, courts may force an individual until he says that he is, indeed, willing.
The verse says, literally, “We (the court) force him until he says that he wants to do it willingly.” So, “in divorces (if the man refuses to grant it), we exercise force on him until he says ‘I want to do it voluntarily.’” Similarly, if a court forces a person to sell his property, the sale is valid because it is considered to have been carried out voluntarily.
Understanding this apparent contradiction sheds light on the controversy surrounding the question of private bondholders’ involvement in the Greek rescue package. It is argued that, to avoid a default, private creditors should agree to shoulder part of the cost of the bailout. But how does one impose a financial loss on bondholders without it being classified by credit-rating agencies as a default? The prevailing answer is that one coerces bondholders to accept the deal “voluntarily.”
One could dismiss this dispute as being mere rhetoric. But, using the Talmudic logic, one can also show that there are mechanisms that can – and should – be used to place pressure on the parties in the interest of obtaining superior voluntary outcomes.
There are two preponderant interpretations of the Talmudic passage. One argues that coercion can change minds. When a court forces an individual until he surrenders and says that he wants to follow orders, his compliant actions are to be considered voluntary, because, ultimately, he has made the conscious decision to agree.
While technically correct, this is a ruthless interpretation, since this type of “willing” behavior is bound to leave resentment.
A more benign interpretation, based on the collective-action principle, envisages the court as instrumental in attaining a superior welfare equilibrium. Individuals know fundamentally what is good for them and for society, but they are often hesitant to act accordingly, owing to fear, embarrassment, or, very often, the belief that their actions will not be worthwhile if others do not follow in their footsteps.
The court, according to this view, provides the coordinating mechanism, eliminating free riders and forcing all parties to an outcome that makes everybody better off. Thus, individual decisions, though extracted under pressure, become, when assessing the outcome, truly voluntary.
Seen in this light, unilateral schemes, such as the original German proposal (forcing maturities on Greek debt to be voluntarily extended for several years) are only voluntary under the ruthless interpretation. In initiatives of this sort, agreement is obtained reluctantly and pressure could provoke harsh responses. Rating agencies are right in considering them a “selective” default that is bound to result in contagion – and, eventually, in widespread debt restructuring.
The alternative is to seek a cooperative resolution, consistent with the benign interpretation of “forced willingness.” This can be achieved by adopting some features of the model used in Eastern Europe, known as the “Vienna Initiative.”
Some of the current proposal to deal “voluntarily” with the Greek debt goes some way in this direction. But the initiative is insufficient, because the three pillars of the Vienna model are basically missing.
The first pillar of that model is simultaneous involvement all parties – the sovereign, bondholders and their governments, the European Central Bank, and international organizations – in designing the scheme from the start. The second ingredient is proper incentives to participate, including direct financing from bondholders’ governments, using the resources that today finance the transfer of Greek debt from private to official hands. The third component is the exercise of suasion on bondholders to achieve maximum participation, obtain binding pre-commitments, and eliminate free riders.
Since this scheme would imply losses for bondholders, substantial official muscle and peer pressure is needed. But gaining time for a more orderly resolution, mitigating contagion, and reducing the size of an eventual write-down do indeed add up to a superior outcome.
Therefore, under this model – and despite the initial pressure – the behavior of bondholders could be considered truly voluntary. And, while rating agencies might still regard a Vienna-type outcome as a default, the Talmudic sages show us why a more thoughtful classification is required.
Mario I. Blejer is a former Governor of the Central Bank of Argentina and former Director at the Bank of England.
Copyright: Project Syndicate/Institute for Human Sciences, 2011.