Opinion     

Applying the Talmud logic to restructuring

Updated: 2011-08-26 By

• There are two preponderant interpretations of the Talmudic passage.

  One argues that coercion can change minds. When a court forces an individual until he surrenders and says that he wants to follow orders, his compliant actions are to be considered voluntary, because, ultimately, he has made the conscious decision to agree. While technically correct, this is a ruthless interpretation, since this type of "willing" behavior is bound to leave resentment.

  A more benign interpretation, based on the collective-action principle, envisages the court as instrumental in attaining a superior welfare equilibrium.

  Individuals know fundamentally what is good for them and for society, but they are often hesitant to act accordingly, owing to fear, embarrassment, or, very often, the belief that their actions will not be worthwhile if others do not follow in their footsteps.

  Coordination

  The court, according to this view, provides the coordinating mechanism, eliminating free riders and forcing all parties to an outcome that makes everybody better off. Thus, individual decisions, though extracted under pressure, become, when assessing the outcome, truly voluntary.

  Seen in this light, unilateral schemes, such as the original German proposal (forcing maturities on Greek debt to be voluntarily extended for several years) are only voluntary under the ruthless interpretation.

  The alternative is to seek a cooperative resolution, consistent with the benign interpretation of "forced willingness." This can be achieved by adopting some features of the model used in Eastern Europe, known as the "Vienna Initiative." Some of the current proposal to deal "voluntarily" with the Greek debt goes some way in this direction. But the initiative is insufficient, because the three pillars of the Vienna model are basically missing.

  The first pillar of that model is simultaneous involvement all parties. The second ingredient is proper incentives to participate. The third component is the exercise of suasion on bondholders to achieve maximum participation.

  Since this scheme would imply losses for bondholders, official muscle and peer pressure is needed. But gaining time for a more orderly resolution, mitigating contagion, and reducing the size of an eventual write-down do indeed add up to a superior outcome. Therefore, under this model - and despite the initial pressure - the behavior of bondholders could be considered truly voluntary.

  And, while rating agencies might still regard a Vienna-type outcome as a default, the Talmudic sages show us why a more thoughtful classification is required.

   

Copyright © China.org.cn. All Rights Reserved