Are Greeks Too Sophisticated to Default—or Not?
Senior Editor, CNBC.com
The uprising in Greece today demonstrates one of the gravest flaws in so many discussions of government debt crises: They ignore domestic politics.
Most financial models and discussions of government debt—whether it’s sovereign debt or municipal debt—assume that the borrower is a unitary actor able to weight the costs and benefits of repayment or default to the entire political unit.
We tend to overlook the fact that whether or not a default occurs or doesn’t occur depends not just on negotiations between the borrower government and its creditors—but on negotiations between domestic political groups, as well.
One exception from this tendency is a 2004 study of political opinions about default in Argentina. In “Voter Sophistication and Domestic Preferences Regarding Debt Default,” Michael Tomz of Stanford University found that different domestic groups feel the effects of debt repayment and default differently—and, not surprisingly, form different opinions about the correct policy.
This paper has offered the first systematic analysis of citizen preferences about foreign debt. It has documented the diversity of opinions in the electorate and explained them with two clusters of variables: The distributional effects of default, and the level of citizen sophistication.
The evidence, based on a unique collection of Argentine surveys, reveals a clear pattern. Support for repayment is lowest among citizens who stand to lose from the fiscal adjustment that would accompany repayment, but highest among those who value future access to foreign capital.
So, basically, public opinion about debt default is controlled in large part by self-interest. Those who would lose out from austerity—government workers, the poor, businesses dependent on government contracts—tend to favor default. Those who would lose out from default—bankers, exporters, owners of large businesses dependent on foreign capital—tend to favor repayment.
Fascinatingly, however, Tomz finds that the link between economic self-interest and policy preferences depends on the sophistication of citizens. The more financially sophisticated the individuals, the more likely they are to support the policy that would benefit them.
So the question is: Do you think the Greeks protesting today are sophisticated or unsophisticated?
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