How the sovereign and municipal debt games always end. Everybody Becomes Greece.

Greece was a financial basket case long before it joined the EU in 1986 and the European Monetary Union in 2001.  For a complete monetary history on Greece, see Unravelling the Greek basket case. Greece paid  1.7 billion euros to join the EU but got back a whopping 6.5 billion euros, an astounding 270% return according to The Guardian that did a detailed report on the EU relative to who pays and who receives, here.  

If anything, Greece is a case study in the failure of statism, powerful public sector unions and the wholesale destruction of the economy by Keynesians, socialists and Marxists of all stripes.  Greece has been milking the EU for years and the EU has gladly piled on mountains of debt that can never be repaid.  As Greece is now spinning out of control with a devastated economy, the EU is losing patience with Greece.  It keeps loaning the Greeks more and more money backed by the promise to cut public spending and fire public employees that it can no longer afford. 

Public services have been cut, the garbage isn't always collected, public sector employees are constantly on strike to protest austerity and the Greek socialized healthcare system is being denied access to medical supplies and drugs because it cannot pay its bills.  While the situation is indeed ugly, it's about to get a whole lot uglier. 

The awful thing about debt is that it requires debt service and minimal debt service is interest only.  The Troika doesn't care about the Greeks.  The Troika does however care about getting paid and guaranteeing that banks and bondholders also get paid because preserving the European Monetary Union is its only goal.   As tax receipts dwindle due to the ailing Greek economy, the interest on the debt is piling up and the situation is so dire that loan proceeds are going to debt service, not government services.  A Greek blogger reports:

Greeks gets 1.6% of bailout loans – 98.4% goes back to Troika

Only a tiny 1.6% of the bailout loans goes to Greece’s state budget, the real economy and the people. The rest 98.4% goes to serve the international creditors International Monetary Fund, European Union member states and European Central Bank.

For the years 2010-20124, from the 236.8 billion euro bailout money and the 25.5 billion euro from privatizations, only 1.6 percent benefits the state and the economy.

98.4% is allocated for obligations to creditors.

And that my friends is precisely how governments die.  The irresponsible spending builds such a gargantuan mountain of debt that just about all revenues end up going to debt service.  It doesn't matter if its Greece or Italy or Spain or Detroit or numerous debt ridden US cities and states that are perilously close to a Detroit styled bankruptcy.  The debt game does end and statist dreams get flushed.

Folks who support governments and taxation do so because they perceive some level of value or a return on their 'forced' investment.  However, the value and returns on the taxpayer investments dramatically dwindle with debt because debt service starts eating up bigger and bigger chunks of taxpayer cash and at the expense of public services.  Ultimately, nearly all tax dollars go to debt service.

In the case of Detroit, Zero Hedge explained this phenomena in an article titled The Death Of A City: Detroit's Eulogy As Delivered By Kevyn Orr.  

Currently, more than $0.38 of every tax dollar that the City collects goes to service legacy debt and other obligations rather than toward providing services for the City's residents and businesses. If nothing changes, that number is expected to grow to almost $0.65 of every dollar in less than five years.

When public services start disappearing, when the street lights go black because there is no money to pay the electric bill, when the parks become weed infested crime scenes, when storefronts are boarded up and when the garbage is rotting on the streets, these are things that folks definitely notice.  At this point, the decrepitude and decay become clearly obvious which is why photos of Detroit resemble a bombed out war zone rather than a vibrant and flourishing city.  It's a tragic death for a city that was once the most prosperous city in America.

When the blame game and finger pointing starts, there are plenty of valid reasons that document the economic decline of a city or nation but at the end of the day the only reason economic death occurs is because of government corruption, the growth of the public sector, draconian anti-business regulations, the accumulation of mountains of unaffordable debt and high taxes.   Statism at its finest is indeed a big fail and a recipe for disaster.  But that won't stop the statists and bureaucrats and they are determined to scream for higher taxes and more debt, even when economic decline transitions to the death of city or nation. 

Does anybody profit from such carnage?  Only the banksters who somehow manage to extract their pound of flesh from the corpses of humanity.

Scranton, PA is Bankrupt, Wants 117% Property Tax Increase and the Scoop on the "Scoop".

Mish Shedlock has a great article on Scranton, PA, a city that is effectively bankrupt.

Scranton Needs 117% Property Tax Hike to Balance Budget; Simple Truth: Scranton is Bankrupt

Highlights:

Scranton taxpayers could face a 117 percent increase in taxes next year as the city's finances continue to spiral out of control.

A new analysis by the Pennsylvania Economy League projects an $18 million deficit for 2014, an amount so massive it outpaces the approximate $17 million the struggling city collects annually in just property taxes....

Mr. Joyce suggested that perhaps the city could refinance debt to implement a financial maneuver called a "scoop," in which higher debt service payments due next year are scooped out of the budget and swapped with lower payments due in future years. The city implemented such a scoop for the 2013 budget by refinancing debt to have lower debt-service this year than it otherwise would have had, Mr. Joyce noted.

"The city's definitely going to need help," Mr. Joyce said. "Maybe we can refinance debt to lessen the tax impact through a scoop. It may be viewed by some as kicking the can down the road, but it may prove to the state that we need a (countywide) sales tax."

I had never heard of the 'scoop' in municipal finance.  Apparently, if you have debt service payments that are coming due that you can't pay you just pretend that it doesn't exist!   Of course, all the municipal kicking the can down the road schemes always leads to higher taxes, the inevitable end game for the bureaucratic class that adamantly refuses to cut spending and government jobs.

But there's a limit to taxation, especially when folks are moving out of a geographic area because the economy stinks and lacks opportunity.  A few years ago, Forbes included Scranton in its list of America's fastest dying cities and Scranton was in the top ten, here. 

While Detroit may have raised the seriousness of the issue of municipal debt, it's only the tip of the iceberg. There are many cities that are in just as bad financial condition as Detroit.  Detroit stalled its bankruptcy for years but you can't stall it forever.  The US economy is stagnating and decades of public spending and debt will become a shocking new reality as municipal defaults accelerate simply because there is no money or even much of a tax base to plunder.