In the endless negotiations about Greece’s approach to bankruptcy, EU leaders suggested last week that a “fund of experts” might take over $200 billion or more worth of Greek state assets, with a view to speeding their privatization and repaying much of Greece’s staggering debt load. The idea has some merit, as it reverses the recent erosion in creditors’ positions in national defaults. It would also be applicable in much larger cases, notably including that of the United States.

Whereas national bankruptcy laws have for centuries provided creditors with solid rights against individuals and corporations (though the U.S. 1978 Bankruptcy Act damagingly weakened those rights) enforcement in bankruptcy against sovereign states has always been more problematical, because of the military power those states possess. Mediaeval monarchs in both Britain and France took aggressive action against creditors who pressed their claims too vigorously. In the seventeenth century, Charles II’s 1672 Great Stop of the Exchequer bankrupted several leading London goldsmiths, although notably on that occasion the state paid much of the claims in full, albeit with lengthy delays.

In the nineteenth and early twentieth centuries however, with Britain both a leading naval power and the center of the world’s money market, creditor attitudes were admirably robust. When Venezuela defaulted in 1902, it believed that the Monroe Doctrine would bring U.S. protection to bear against any aggressive action by its creditors, primarily British and German banks. However President Theodore Roosevelt proclaimed “if any South American country misbehaves toward any European country, let the European country spank it.” After Kaiser Wilhelm II visited Sandringham, Anglo-German agreement was reached and a naval flotilla from both nations sailed for the Venezuelan coast, blockading the country for four months and bombarding coastal forts adjacent to Caracas and Maracaibo.

The postwar Keynes-White architecture of international finance, with the IMF and World Bank involved in most defaults, sapped the robustness of creditor attitudes. By the 1970s, creditors were in denial with Citibank chairman Walter Wriston notoriously proclaiming that “countries don’t go bust.” Needless to say this was nonsense, and the 1980s Latin American defaults came close to sinking Citibank itself, even though the lending banks under Citi’s Bill Rhodes were able to retain overall control of the debt restructuring. More recently, as IMF participation in defaulting countries has become larger and the IMF’s own attitudes less reliable, creditors have found themselves pushed way down the totem pole by massive loans from the IMF and other agencies, all of which are deemed to take precedence in bankruptcy.

The IMF’s $40 billion loan facility to Greece is an extreme example of this tendency; by it the position of European banks who lent to Greece has been irrevocably weakened. In today’s world, defaults are negotiated by the international agencies, and private commercial banks’ positions are far worse than in even a U.S. private bankruptcy. Only the GM and Chrysler bankruptcies, where the newly inaugurated Obama administration fiddled the legalities to favor the automobile unions over private lenders, were equivalent to state defaults and restructurings in their playing field tilt.

You can see the effect of this in the Greek negotiations. The Greek government, admittedly newly elected but with a strong connection (the prime minister being his son) to the most dishonest and spendthrift of all Greece’s postwar prime ministers, was allowed to promise modest reforms in return for huge dollops of money, and was then permitted to water down these reforms still further in the face of violent protests by the bloated beneficiaries of the country’s public sector excess. Consequently a year later Greece’s finances remain unreformed, and “austerity fatigue” has set in, with the country making only minimal gestures towards further reform.

The real problem is that massive EU subsidies allowed Greece’s living standards to soar far beyond the productivity of its ill-educated and idle citizens, so that only by imposing truly draconian cuts of 30-40 percent in living standards, as well as increasing the Greek retirement age close to 70 from what currently appears to be an average of little more than 50, can the books be balanced. Whereas in 1900 creditor action would probably have knocked a few more chips off the Parthenon, today the Greek debtors are allowed to continue their extravagant lifestyle to the detriment of the remaining value of the creditors’ holdings.

The one possibility for repaying some of Greece’s debts is a sale of state assets. In the original bailout deal, Greece had promised to sell $70 billion of these by 2015, but in the intervening year no progress has been made, as sale would upset too many vested interests. The EU proposal would now transfer to a “fund of experts” control of these state assets, which may be (but probably aren’t) worth as much as $300 billion, a substantial fraction of Greece’s debt obligations. By forcing Greece to accept a creditor committee as manager of these assets, the EU could in principle produce a genuine restructuring, selling perhaps $150-200 billion of the assets over the next 3-4 years, thereby eliminating close to half Greece’s debt obligations.

In reality of course, any committee appointed by the EU would be likely to contain the same kind of socialist bureaucrats as got Greece into trouble in the first place, and so its control would provide very little additional security for creditors. However in principle, if the international bureaucracies would back genuine creditor control of Greek state assets, the country’s debt problems could be resolved and the legal position of creditor interests strengthened to a level at which rational lenders would provide funding.

The other obvious candidate for creditor intervention if current conditions continue is the United States. There are two possible scenarios for this. One is a political scenario in which the current Congressional impasse continues through the date in August when the debt ceiling is reached, causing a technical default on U.S. debt and (more dangerously) a massive loss of confidence in the Treasury bond markets. The other is an economic scenario in which the deficit remains unaddressed, real interest rates start to rise and the bond markets eventually panic, preventing the Treasury from funding the ongoing deficit.

The conventional approach following such an occurrence would be a massive roundup of international banks and aid institutions to provide the U.S. with bailout funds. However the amount of funds required would be very large and the major creditor nations, China and Japan, may be unwilling to fund the profligacies of the U.S. political system any further. Presumably in the second scenario if they had been willing to provide further funding, they would have already done so through the ordinary Treasury bond market. In the first scenario their refusal to provide funding might be caused simply by cool Asian exasperation with U.S. woolly-mindedness and ineptitude.

In either scenario, the only approach would then be a sale of U.S. assets. Unlike in Greece there are few U.S. nationalized industries, although there are certain assets such as the air traffic control system that might be valuable. Other public assets, such as airports and subway systems, are generally owned by states and municipalities rather than by the national government directly, so would not readily be available for sale. Still others, like Amtrak and the Post Office, would fetch very little money because of their chronic loss-making status – Britain managed to sell its nationalized industry “dogs” in the 1980s, but they had first been given a period of firm management to bring them back to profitability. This has not been done, or even seriously attempted, in the United States so a sale in the short-term would be impossible. Naturally, if creditor management were imposed for a period of several years, even the Post Office (which should be managed by Chinese cost-cutters) and Amtrak (maybe run by German management, ruthlessly upgrading the efficiency of the system while closing unprofitable lines in key Congressional districts) could be forced into profitability.

However the greatest “quick hit” realization from creditor management would come in financial assets. According to their latest financial statements, there are $3.1 trillion in mortgage assets on Fannie Mae’s balance sheet and $2.1 trillion on Freddie Mac’s (these totals are sharply up over the past year, as both institutions have been buying mortgage debt to support the market.) Of course, the government guarantee on this $5.2 trillion of long-term paper would be worth very little. However, each asset represents a housing loan, and even today the great majority of these housing loans are perfectly solid credits. With firm management from retired senior executives of British building societies, the good quality paper could readily be sold back into the private market at only a modest discount, since “prime” mortgages are as they always have been an attractive banking asset. By realizing say $4 trillion from these sales (while retaining outstanding the long-term Fannie Mae and Freddie Mac debt, which would remain backed by the government guarantee) the liquidity position of the U.S. government would be revolutionized.

Provided appropriate budget cuts were then made under the watchful eye of Singaporean fiscal managers, the United States would emerge from the process humbled but solvent. Even more important, it would have learned the advantages of a private un-securitized housing market from the British building society managers, how to run a railroad from the Germans, the uses of cheap sweated labor from the Chinese and sound fiscal management from the Singaporeans.

There wouldn’t even be any need to burn the White House again…

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)