Saturday, December 25, 2010

This crisis that looks like that crisis

I was spending my morning reading when I came across the following passage. See if you can guess what countries it is referring to and then scroll down to the bottom (after the jump) to see the answer.
The [debtors] argued that the collapse was proof enough ... that for them to pay the amount owed was impossible. The [creditors], by contrast,  saw the collapse as the evidence of capital flight ... How could it claim to be bankrupt when so many rich [debtors] seemed to be wandering around Europe? ...

Y took the approach that the simple and direct approach would not work. The total figure owed, $xyz billion, was too politically charged a number, particularly in [creditor A]. Tampering with it would inevitably lead to confrontation To challenge [creditor A] at this stage of the negotiations would bog them down in the sort of wrangling that has produced no results ... Instead, Y proposed that the committee focus on the very limited but achievable goal of reducing the amount [debtor] would have to pay in the immediate future to a more manageable level.

The committee would jettison the whole concept of "capacity to pay," he argued. It was impossible to know what this number was. Too many imponderables entered into the calculation, involving such questions as: How much could taxes be raised without triggering mass protest? How tightly could imports be squeezed without precipitating a collapse in production? How far could wages be reduced without provoking labor unrest? No one could agree on the answers to such cosmic questions. ...

In it's place, Y proposed an alternative criterion: the [debtor] public should be required to shoulder the same tax burden as [creditor] taxpayers. [Creditors] had to tap their tax revenues to pay interest on their own debts. [Debtors] had [devalued] away its internal public debt--the [debtor], therefore, had a natural surplus from which they could afford to pay their debt.

The passage is from Liaquat Ahmed's excellent book, Lords of Finance, and refers to the reparations owed by Germany to France and Britain after World War I. The "collapse" mentioned in the first line refers to the collapse of the Reichsmark during German hyperinflation in the early 1920s. Feel free to draw similarities to your favorite over-indebted contemporary nation, may it be the Southern European nations that struggle with constant tax evasion,  or maybe Ireland with a corporate tax rate much below it's EU member state neighbors. I wouldn't be surprised to expect any further aid to Ireland from the EFSF / IMF / EFSM alphabet soup to come along with significant pressure to increase the corporate tax level.

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