Is Greece a Template for U.S. State & Local Government Debt Crises?
The template of over-indebtedness as a response to soaring obligations is scale-invariant, and it always ends the same way: default.
When you can’t pay your bills, you can either cut expenses, borrow money or if you’re extraordinarily privileged, print money. If you borrow money without cutting expenses, the interest on the borrowed money piles up and you can’t pay that, either. Then not only do you have a spending crisis, you have a debt crisis, and so do those who lent you the money.
Because the funny thing about borrowed money is it’s a debt to you but an asset to the lender.
Not only is your debt listed as an asset on the lender’s books–it’s collateral that supports whatever financial leverage the lender might engage in.
If you default on the debt, not only is the lender’s assets impaired–all his leveraged bets built on the collateral of your debt are suddenly impaired, too.
The preferred solution nowadays to a spending/debt crisis is to borrow your way out of the crisis: if you can’t pay the interest and debt that’s due, just borrow more to cover the interest payments and roll the old debt into new loans.
In a variation that we can call The Japanese Solution, the lender decides not to list your defaulted loan as impaired–he places your loan in a special zombie debtcolumn–it’s neither a performing loan nor a defaulted loan; it is a zombie loan.
The other solution (again from Japan) is to roll the defaulted debt into new loans at near-zero rates of interest that allow the borrower to pay a nominal sum every month, just to maintain the illusion of solvency. If you owe the bank $10 million, the bank loans you $11 million at .01% rate of interest and you promise to pay $100 a month.
There–problem solved! The loan is now performing because the borrower is once again making payments. But is either the borrower or lender actually solvent? Of course not.
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