If the indebted entity, like the government of Greece, will choose the second option, which is to ask for bail out from the European Union and its big economies like Germany and France, then it must abide by the conditionalities. After all, the German, French and other governments who will lend it hundreds of billions of Euros of new loans, will be taking those money from their own citizens. So it's effectively the German and other European taxpayers bailing out the Greek government personnel and other welfare dependents, the money is coursed through their respective governments.
After the "successful" EU summit a few days ago where EU will lend more money to Greece government, and banks who lent to Greece will have to suffer a 50 percent cut in debt collections from that country, many Greeks are even angry at the result of the bailout. See this news report from NYT today.
GreeksDirect Anger at Germany and European Union
Nikolas Giakoumidis/Associated Press
By RACHEL DONA28, 2011
Athens - Every Oct. 28 Greece celebrates “Oxi Day,” or “ ‘No’ Day,” a national h. oliday commemorating Greek resistance to the Axis powers during World War II. On Friday, those celebrations took on a greater weight. As Greeks suffer from harsh austerity measures, there is growing popular sentiment here that the country has ceded key parts of its sovereignty, and its pride, to its foreign lenders...I was wondering, do debtors have wide choices when they are the ones who need more money from outsiders? Their government has no more money to pay for the salaries and perks of many government personnel, their government has no more money to pay for the healthcare of the sick and pension of the retirees, the other European governments lent them money so that their lives can move on, and they are angry.
The best alternative actually is to stop borrowing. They have been living beyond their means, been borrowing for many years, for many decades, the problem was never solved but only exacerbated. If their government will stop borrowing and it has little or no more money to pay for the huge public spending each day, where to get the money?
All governments have lots of assets -- government-owned corporations and banks, vast tracts of land, parks, universities, and so on. Privatizing many of these will raise money while at the same time, reducing the fiscal bleeding due to continued subsidies for these government-owned entities.
Besides, by stopping borrowing even for just one year, the government will be able to save tens or hundreds of milions of dollars each year in interest payment alone. Citizens and government personnel including high elected officials will also be disciplined to live within their means. To spend only when actual revenues can finance them, and not over-spending then borrowing whatever financing gap even when interest rates are becoming higher and higher.
High cost of borrowing actually should be an opportunity for the heavily indebted entity to say, "Ooppss, they want to charge me even higher interest rate; instead of haggling for lower rates in exchange for some conditionalities that they will impose on me, I might as well stop borrowing from them even for one or two years."
Unfortunately, we seldom see such kind of attitude in many governments. Fiscal and personal irresponsibility of the past is addressed by more current irresponsibility. It is true that Greece has been imposing many austerity measures, been slashing many of the expensive welfare programs to government personnel and private citizens. But it seems that these were not enough. It seems that large-scale privatization of many government assets would be needed soon, not later, if the Greeks do not want more conditionalities, more imposition from the EU and other lender governments and banks.
See also Fiscal Irresponsibility 17: Cut Spending and Borrowing, September 19, 2011