Short-term solutions for a life-long problem

Just like a big playoff game, a forced shot in the last seconds has made it possible for the US Government to reach an agreement on raising the debt ceiling, see Reuters coverage. It has been, as basketball fans would call it, a buzzer beater.

However in this case, there is no real reason to high-five your teammates or to have even the smallest grin on your face. Because this is not a win, this has only been a disaster-avoiding move. Maybe the markets will see it differently during the first hours and recover some of the ground lost last week (gold is already down a little), but the situation is still critical, and the rating agencies' threat to slash USA's AAA rating is still there.

The last minute deal that has helped avoid the possibility of the US defaulting on its debt includes a 2.4$ trillion spending cuts package to be applied for the next ten years (no extra details are known yet about how and where they will be placed). However these cuts will not be introduced until at least 2013. The reason behind that? Sadly a partisan one, as 2012 is election year and neither Democrats nor Republicans want their chances of winning the presidential race altered because of something as ugly for voters as these spending cuts. Of course spending cuts are never popular or welcomed decisions, it is far easier to "buy" a vote by promising new social measures or tax reductions than by being responsible with your country's finances... but these cuts are sure needed and someone has to do them. Once again short-sighted and selfish political interests take the upper hand and put everyday's problems and the future of the economy to the background.

I must say something to justify Democrats and Republicans decision to delay the cuts until 2013 though, the US economic recovery is being quite weak and slow as of today, so applying extra spending cuts now could definitely stall said recovery. And the last thing the US needs now is an economic contraction, as it would be devastating, specially regarding unemployment. But once we have reached this point we can say that this is (once again) delaying the problem, not solving it. 

We are in a situation where people should already notice that a great part of the economic growth of the pre-2008 years was debt-based rather than real growth. Financial irresponsibility has been the most common behavior regarding government spending and debt issuing, not only in the US but elsewhere. Now the time to pay the bills has come, but nobody seems to be up for the challenge.

Too public to fail? The moral hazard with public institutions.

Although it copes most of the headlines lately by being the most extreme case, the financial problems of Greece's public institutions are not one of a kind... If you have a quick look worldwide you will see cities, councils, regions... having similar problems to pay their bills. You can find near-bankrupt cities in the US (specially in California and Florida) Italy, Spain, Ireland, Portugal, Japan... Public management at its worst seems to be the common factor, with some institutions walking on the edge of default.

We are not talking about having trouble finding money for new investments or projects, as this would be a totally normal (although not desirable) situation in the actual environment. They are struggling even to pay the most basic of services, like electricity or waste disposal. This problem may not be totally evident to citizens because said services are still being provided, but it is serious enough for everyone to be concerned about it. 

The question is, why are services still being provided if they are not being paid? Well, because public institutions enjoy preferential treatment from their suppliers and vendors. This preferential treatment is not precisely earned by being a good customer, but because of their size. The public sector represents a very big part of the total earnings for some of these suppliers and vendors, so they can not afford to stop providing them. They prefer the prospect of being paid ten months later (and this is not an exaggeration) than losing such a big client. They simply have no other option but to bear this load, specially when talking about local companies whose only client is the city council.

This creates a big problem though, as the inability of public institutions to pay their bills creates a highly destructive domino effect. Suppliers and vendors do not enjoy the same preferential treatment with their own business partners; they must pay on time as specified on their agreed terms or otherwise their partners will immediately stop serving them. As they do not get the money public institutions owe them, the disruption in their cash-flow creates a need for factoring or other ways of financing. And while this can be good for the financial sector, it is devastating for the companies being forced to use it. Some companies get strangled by those extra financial costs to the point their business is no longer profitable. In the end, this companies are forced to close or go bankrupt, leaving their employees jobless just because they had the worst client possible, a public institution.

When rescue packages are not enough, a Greek tragedy in the making.

The astonishingly beautiful deep blue waters of the Aegean sea must be starting to boil as of now, with the economic situation in Greece heating up even further. Debt-to-GDP ratio has reached 143%, Credit Default Swaps are at 1371 basis points, S&P downgraded (once more) Greek debt to B rating from BB-, taking it only two steps about the C rating, which effectively erases one from financing and flags you as someone waiting to default. To make matters worse, often-violent demonstrations are stopping the country's already ailing economy day after day. I truly can understand the frustration the situation causes, but halting economic activity is clearly the worst thing to do in the actual situation...

Another rescue package, combined from both the European Union and the IMF (with or without Dominique Strauss-Kahn), seems to be in the way but its effectiveness is already in doubt. A recent poll shows almost everybody thinks this would be artificial life support for Greek debt. Sooner or later a default or a painful debt restructuring process seems to be coming. Not being a debt restructuring expert, just based in common sense I can only say: make it sooner rather than later.

Extending this situation is bad for everybody, it is bad for Greece's future, bad for Portugal and Ireland debt prices and bad for the whole euro area's stability. Stop being stuck in the actual situation, a situation that slowly built the hole where you are now. Just change everything! 

First thing, go out and make the people understand why spending cuts and privatizations are basic, unavoidable and necessary to have a future. You can not afford to have your people burning policemen, destroying everything that comes close and shutting down air transport... Tourism is a keystone in Greece's actual economy, so flying stones and burnt buses are not the best of promotions for the country. In fact any company thinking of investing in Greece as of now would be held back but the situation on the streets.