Friday 16 March 2012

Assets and Default

If I owned a bunch of property and were going into default on some debts, the guys to whom I owed money might ask me whether I ought to consider selling some of those properties to pay my bills. And, if my kids were starving because of the austerity I'd otherwise had to impose on the family budget to keep the bondholders at bay, why wouldn't I consider a bit of asset divestiture?

Greece has somewhere around 6000 islands in one of the most beautiful parts of the world. Islands of legends and Greek Gods and stuff. Islands that, you'd expect, would be worth something to somebody. Some of them are privately owned and do trade. Here's one place you can go to buy one.

But all those islands are encumbered with Greek sovereignty. Own the island, own the  entanglements of the Greek state that make development, well, hard.
First of all, to date it is rather hard for someone to develop a private island because of the Greek state bureaucracy and the domestic Archeological Agency, which is stringent in its examination of every case that involves an island that may have antiquities of any kind lurking under its soil. 
And that's just for setting up the island as a holiday home. If you have to provide a stool sample to get through the regs letting you set up a web-based business, a Greek Island isn't going to be your first pick for doing anything innovative.

Imagine being able to bid on an island in the middle of the Mediterranean within a short flight of Europe, the mid-East, and northern Africa where Greece wouldn't just hand you title, they'd hand you sovereignty? There has to be a ton of value locked up in those islands that could be released by Greece being willing to relinquish sovereignty. Restrict it to the uninhabited islands to keep things simple, for starters.

Seasteading is cool. But imagine kickstarting it by letting a thousand sovereign islands bloom in the Aegean Sea? Keep the Americans happy by barring sale to anybody currently on terrorist watch lists.

There has to be some good reason that Greek bondholders haven't asked for sovereign ownership of Greek islands in exchange for debt writedown; the potential asset value just sitting there seems pretty obvious. Devilled if I know what's preventing it though. Surely most Greek citizens would prefer losing half their islands to the mess they're currently in. On the bondholder side - Bond debt, that's just money. Your own country in the Aegean? Priceless.

Potential obstacles:

  • Nobody trusts the Greeks not to renege by reasserting sovereignty somewhere down the line; most other countries would probably back them against sovereign individual property owners too.
  • Germans are reluctant to look at anything that seems territorial expansion.
  • The Americans might not let them.
  • The EU might not let them.
Does anybody know what the binding constraint is? 


  1. You say Greeks would surely prefer losing half their islands to the mess they're currently in, but I'm not so sure. Asking a country to hand over territory in order to pay its debts is a politically tricky thing, I could see lots of ordinary people getting pretty upset about it, even if trading uninhabited islands for debt relief is the rational thing to do. Imagine if the Chinese offered to forgive all US debt in exchange for Guam and some Alaskan islands. That would be a great deal, but can you imagine the response of the ordinary American voter, especially on the right, if we were seen as having exchanged territory to the Chinese for debt forgiveness? I could be wrong, I'm not an expert on Greek politics, but this seems like the sort of plan that could lead to a pretty massive uprising against the government.

    1. Greek voter inability to think rationally about such things could easily be a binding constraint here, but why more so than for other policy outcomes?

    2. I think ceding sovereignty over actual territory is different from other policy outcomes in the minds of voters. Look at the Maldives for example, Argentinians seem to have an irrational attachment to them. Germany, the ECB and the IMF may be steering Greek tax and pension reforms, but at least they're doing it through the existing Greek state. Seeing a foreign flag raised over what used to be your territory is something different. It would feel like an invasion, I imagine. Again, I think one has to think of this not from the perspective of an economist, who carefully weighs costs and benefits of each action, but from the perspective of an average Greek citizen.

    3. George, you mean the "Malvinas" (aka the Falkland Islands)? I don't think the Argentines have much attachment, rational or irrational, to the Maldives.

    4. I honestly don't know whether individual Greek voters would weigh the loss in national pride from giving up islands where nobody lives as being worse than giving up sovereignty by having Germany dictate fiscal policy.

    5. Yeah, the Malvinas, sorry about that. Argentinians have enough attachment that their government turns to agitating over the islands as a winning political strategy whenever they need to distract people from a bad economy, including now. Fact: people are irrationally nationalistic. Like I said, imagine the President exchanging a couple of uninhabitable Alaskan islands for debt relief, then imagine the next day's Tea Party rallies, Republican candidate speeches, etc.

  2. It's not a binding constraint, but the possibility of an insensitive owner destroying ancient artefacts has cost implications given the relationship between Greek history and tourism.

    And, dammit, I wouldn't like to see a brute bulldoze frescos or temples.

    1. Bill, do people buy Picasso paintings to... 1) hang them on the wall, enjoy them, and lord them over their neighbours... or 2) to draw mustache on them before lighting them on fire?

      Should we ban private ownership of art because of groundless fears of the latter?

  3. If ceding sovereignty dramatically increased the value of the islands, that would imply that Greek policies are highly damaging. Yes, you could rationalise this away to some degree ("it's only valuable because they exploit it!"), but it could still be uncomfortable a lot of Greek voters who prefer to cling to their illusions. Caplan's "rational irrationality" thesis may come into play here.

    1. Sure, but again, compare to the relevant real world alternatives.

  4. Eric says:
    "If I owned a bunch of property and were going into default on some debts, the guys to whom I owed money might ask me whether I ought to consider selling some of those properties to pay my bills. And, if my kids were starving because of the austerity I'd otherwise had to impose on the family budget to keep the bondholders at bay, why wouldn't I consider a bit of asset divestiture?

    I say, try selling a property in the T3 zone brother, see what you get, brother, what is the matter with you, why do you not see what is:

  5. There is a precedent:
    On September 2, 1940, as the Battle of Britain intensified, United States Secretary of State Cordell Hull signaled agreement to the transfer of the warships to the Royal Navy. In exchange, the U.S. was granted land in various British possessions for the establishment of naval or air bases, on ninety-nine-year rent-free leases

    Granted, this was country-to-country, but it seems to me this is more palatable that outright sale, while maintaining the commitment part better than a cheap talky "tax and red tape exemption".

    So (1) can probably be relaxed.


    Churchill at the time made the following speech:
    Presently we learned that anxiety was also felt in the
    United States about the air and naval defence of their
    Atlantic seaboard, and President Roosevelt has
    recently made it clear that he would like to discuss with
    us, and with the Dominion of Canada and with
    Newfoundland, the development of American naval and
    air facilities in Newfoundland and in the West Indies.
    There is, of course, no question of any transference of
    sovereignty – that has never been suggested – or of
    any action being taken without the consent or against
    the wishes of the various Colonies concerned, but for
    our part His Majesty’s Government are entirely willing to
    accord defence facilities to the United States on a
    ninety-nine years’ leasehold basis, and we feel sure
    that our interests no less than theirs, and the interests
    of the Colonies themselves and of Canada and
    Newfoundland, will be served thereby.

    This followed the telegram:
    Three days later I telegraphed to our Ambassador:
    [The] second alternative, i.e., [granting of] bases [in
    British possessions], is agreeable, but we prefer that it
    should be on lease indefinitely and not sale.

    All citations from The Second World War, vol. 2 "Their Finest Hour"

    1. I think the above provides a good illustration of the binding political constraint here. It's hard to imagine a situation where a country should be more willing to cede sovereignty over some territory than Britain in WW2. They were under siege, they desperately needed warships, and they were dealing with an ally and former colony of theirs, a fellow protestant anglophone nation with a similar culture and long history of cooperation. Yet Churchill felt the need to make clear that there would be no transfer of sovereignty. If such a trade is politically untenable even then, it certainly is now.

    2. But was anybody asking Britain for those islands in trade? They didn't need to give them up, so they didn't.

  7. If they hadn't ceded sovereignty over monetary policy they wouldn't be in this position.

    Seems to be a sort morality that stops creditors from marching in their and claiming assets like land etc. After all Greece probably couldn't afford a war to defend territory.

    However its not as though land was in the contracts as a form of collateral, bond holders will have to take losses.

    Maybe for access to finance markets greece could use some islands as collateral. In the same way Italy in the past has used their releatively large gold reserve as loan collateral. This way there is added incentive not to default because the collateral has national significance.

    1. If the bondholders can demand effective control of fiscal policy as condition of loan extensions, they could ask instead for islands as part payment; Greece could always say no if they prefer. But you're right that island collateral pledges could be a way of getting access to loan markets in future.