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Monday, November 3, 2014

Beware of Repaying Sovereign Debt!

Here is a most interesting article about the repayment of sovereign debt, or rather: how sovereign debt often gets repaid only centuries after the fact, if ever. A couple of points:

* the UK government announced recently that it will repay £218 million from the £2 billion of debt that it incurred during WW1. Note that this is debt from roughly 100 years ago!
* incredibly, some of the debt which will now be repaid goes back as far as the 18th century! It includes "the capital stock of the South Sea Company originating in 1711, which had collapsed in the infamous South Sea Bubble financial crisis of 1720", according to the UK Treasury.
* Germany paid off the last portion of its debt stemming from WW1 in October 2010! Ponder this: a country which had experienced decades of "Wirtschaftswunder" and which had become extremely wealthy had still been owing debt from 100 years ago during all this time!
* and, of course, Greeks will argue that Germany still hasn't paid the forced loans from WW2 (and they have a point there, in my opinion!).

This reinforces a point which I have tried to make forever: the principal issue with debt, not only sovereign debt, is not that it gets repaid. The principal issue with all debt is that it gets 'regularized'. Sovereign debt in the Eurozone presently stands, I believe, around 90% of GDP and everyone is concerned that this indebtedness may even go up. Markets are nervous; many predict a collapse caused by this debt. But suppose, for a moment, this debt would be increased, in one stroke, to 120% of GDP with the only proviso that the entire debt would be structured in such a way that it doesn't have to be repaid for the next 100 years. Put differently, the debt would be totally 'regularized'; that is: no one would have to worry about pending defaults, etc. I would bet that everything would return to normal rather quickly.

Another point which comes across in the above article is that too early a debt forgiveness may not be smart. Suppose Germany, back in 1953, had not been forgiven its debt but, instead, repayment of that debt would have been extended to 50 years or so. There can be no doubt that the Germany of the 1990s or the 2000s could easily have handled what now seems to be a relatively small amount of WW2 debt. After all, this is a country which could afford to spend more than 2 trillion Euro, so far, in the aftermath of unification.

I have a vague memory of New York City's financial crisis back in 1975. The City was facing bankruptcy and the Federal Government under President Gerald Ford refused a bail-out (newspaper headline: "Ford to City: Drop dead!"). There was a financial alchimist, Felix Rohatyn from Lazard's, who advised NYC and managed to avert bankruptcy. One day, the 'rescue of NYC' was announced; everything was fine again. I was wondering at the time how NYC could find so much money so quickly to repay its debt. Well, the City hadn't repaid a single dime; it had simply restructured and 'regularized' its debt.

There are probably only few countries in the world whose sovereign debt today is lower than, say, 20 years ago. So, from the standpoint of cash flow, most countries have added to their debt and not repaid any of it (whenever they paid debt on maturity, they did so with new debt which they could raise). As a result, sovereign debt always has a sort of perpetual character. The real issue as regards debt sustainability is whether the payment of interest is within the borrower's capacity. But even if that were not the case, there are alchimistic solutions for it. For example: the interest rate can be set below market and a good portion of it can be capitalized, if not all. As long as the debt gets 'regularized'...

Perhaps the even greater problem than sovereign debt not getting repaid is when sovereign debt does get repaid. In the last years of the Clinton presidency, the US started to accumulate very large budget surpluses. In 1999, Clinton announced that the national debt would be totally repaid by 2015. There was great worry in financial markets: What should the world's liquidity do when there were no longer risk-free US Treasuries to invest in? What would that mean for the stability of financial markets? President Bush then solved that problem in a hurry by making tax cuts for the rich and by starting two wars. And the world seems very happy today that there are so many US Treasuries in the market, safe havens for flight capital in times of nervousness.

13 comments:

  1. It looks like the esteemed author had some strangely inspiring experiences in the past three days without any publication?

    H. Trickler

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  2. "....* and, of course, Greeks will argue that Germany still hasn't paid the forced loans from WW2 (and they have a point there, in my opinion!)......"

    thank you for pointing out the above but that is simply the tip of the iceberg. consider the stolen surpluss of good and stuffs, minerals & ores and the total destruction of the country Germany owes something over 160 billion. take a read below if you can find in english.

    http://bibliagora.co.uk/Kai-ena-marko-na-itan.html

    i am not a leftist but ever since the crisis i have found many books and articles on the funds never repaid to Greece. Now whether some kind of behind the door deal was made that the public is unaware of ok. Let us know, so we know who to hang. Even if half the money was given in 2008 we would have been debt free.

    I loved clinton for what he did and hated Bush for what he did. ok some debt is needed, but this obscene debt is ridicules. It is just silly and to be honest it does not propel society into new technologies and new ways of doing things. It is simply scam to harbour the wealth into a few hands. Furthermore, it is the access "crap" society creates for people to "need things" as to have and own which propels us into debt.

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    1. I have read quite a bit on the subject and I can tell you this: anything under the caption of "war reparations'" can be forgotten; pursuing that is like beating a dead horse.

      Different is the case with regard to the forced loan. A loan is a loan and a loan survives generations and governments. A loan disappears only when it is repaid or forgiven. The consens on this matter is: if Greece could prove that this was a 'loan' and not any war destruction, Greece would have a fair fighting chance to succeed.

      The numbers regarding the loan have been highly exaggerated and you exaggerate, too. There is, of course, no single way to calculate what the claims under the loan would be today but I have seen various calculations and they were all in the single-digit billion Euro range. So forget the 70 BEUR or even 300 BEUR which have been spread around by lunatics.

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    2. Hi Again,

      Yes, I understand point on beating the dead horse on "war reparations," something Germany did with all other countries with exception to Greece. It is nice to hope though even though there is no reason too. And i will tell you why.

      On the most part Greeks and Germans, as people, get along quite well. I have many German friends and Colleagues. It is the media and politicians which create anamocity between people. My point is it would greatly help relations between Germans and Greeks if some kind of FORMAL ackknowledgement was made. Informally, many German groups come to greece every year in different areas to commemorate greeks and germans fallen in a difficult period.

      The way i see it is if we are friends we need to settle our differences and not choose to ignore what is there "underneath". Owed or not. Otherwise it will detriment or be a burden of future growth. Unfortunately governements do not act like normal people.

      As of late, based on my experience, i have seen that Germans both Northern and Southern can develop quite good relations with Greeks. In a sense both societies of people have opposites and these opposites compliment each other. (Opposites attract) I have worked with many German companies and together we have created unimaginable things. It is this difference which lets us excel together. Imagine if there were no underlinings to hinder us what could be achieved.....

      Overall, for the loans, whether it be 2, 10, 30, or 160 BEUR (with interest) it should be addressed by the German government. The next day exports to Greece would increase 5%. The only reasons I believe no German Governments do not do this is because they are concerned if they offer a hand Greeks will ask to take the arm. And the money would come from the German people which from my understanding are fed up with still paying out for the mistakes of there grand parents.

      ......

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    3. The issue of war reparations is not one of emotions but, rather, of principle and precedent. If I recall, Germany did enter into some partial agreements as regards reparations (including with Greece in the early 1960s) but, back in 1953, it was agreed that the overall issue would be tabled until such time as there would be German reunification (on the grounds that reparations were a matter for all Germans and not only for the West Germans). Since nobody really expected unification at the time, that issue was considered as closed. And when unification did occur and when some countries started making noises about the 1953 agreement, Helmut Kohl simply told them to go fly a kite.

      Regardless whether Germans are nice or not; regardless whether Germans like Greeks or not --- Germany as a country would open a pandora's box if it entered into some kind of a reparations agreement with Greece. Germany simply can't afford to set such principle and prececent. Whether that is morally right or wrong is a separate issue.

      As I said, the loan is a completely different thing in my mind because a loan has nothing to do with nice feelings or nice emotions. A loan is a contractual agreement subject to law. Since Greece does seem to have a good case, I have never understood why Greece would not legally test its case before some international court and/or mediator.

      If Greeks were to raise the issue of war repapartions now, 70 years after the fact, I think a good part of the world would shake its head. If Greece were to raise the issue of a loan agreement, just like US hedge funds raised that issue with Argentina, that would be a business proposition unrelated to any emotions and/or prejudices.

      I can only guess that Germany has suggested to Greece that they should never raise this issue, OR ELSE...

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    4. " Since Greece does seem to have a good case, I have never understood why Greece would not legally test its case before some international court and/or mediator. "

      The answer to your question has been explained in great detail, citing the opinion of the vice president of the greek supreme court. In one sentence: Germany does not recognize juristiction of the international court of Justice in Hague, responsible for inter-state disputes, for facts that arise prior to 2006. Greece cannot unilaterally have a litigation with Germany in said Court. Moreover, Germany refuses to separate the loan from the war reparations. It's a lost battle for Greece, because the legal ways to pursue the loan is barred by Germany.

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    5. @AnonymousNovember 5, 2014 at 3:28 PM

      Why not prior to 2006?

      I just can not imagine that Germany could uphold such a position towards the rest of the world?

      H.Trickler

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  3. The German people are not so much fed-up with paying for the mistakes of their grandparents as they are fed-up paying for the mistakes of yours.
    Berliner

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    1. You do not need to go down this road of argumentation.... it only ends in complete disagreement. Had the country of Greece was not unilaterially destroyed in WW2 we would not be in the situation we are today. On top of that....the below does not help gemany's case.

      ".....The answer to your question has been explained in great detail, citing the opinion of the vice president of the greek supreme court. In one sentence: Germany does not recognize juristiction of the international court of Justice in Hague, responsible for inter-state disputes, for facts that arise prior to 2006. Greece cannot unilaterally have a litigation with Germany in said Court. Moreover, Germany refuses to separate the loan from the war reparations. It's a lost battle for Greece, because the legal ways to pursue the loan is barred by Germany....."

      Ultimately in the end many society's at many times have made mistakes and i do honestly look to forgive and move on. On the most part i do not believe the general public tries not to take prejudice positions directed by propoganda. It is the gerneral public's responsibility to read between the propoganda open discussions and find new ways to improve life in general.

      The system needs to change and the only way to change it is through dialogue....

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    2. @Anonymous at 12.16 PM
      You obviously know more about this than I do but I find it hard to believe that simply because Germany says it doesn' recognize the international court, another party which has a due claim has to forget its claim. Perhaps Greece should hire Paul Singer as a consultant. With his hedge funds he is showing Argentina what a creditor can do if the debtor doesn't play ball. I am surprised that, after so many years, the documentation wouldn't be made public. After all, there must be a loan agreement and whatever it says in the loan agreement is what needs to be complied with.

      Again, my suspicion is that there is a different reason. Germany has probably told Greece loud and clear that they do not wish to have any trouble with this issue and Greece probably, with some good reason, does not want to alienate a partner without whose financial assistance things could get very bad.

      I agree with your point on dialogue. Frankly, if there has been a lot of dialogue on this issue, it has escaped my attention. Mostly monologues in Greece.

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    3. Mr. Kastner,

      I am not the anonymous 12.16PM, but the 6:46AM. Such Courts, exist exactly when one side says 1 and another says "-1". I will also add, that the law exists to protect the weakers, not the powerful ones, as they can use their power to enforce their will. What you say, is political speculation. What i say, is a legal reality. Goverments and situations change, thus also the the political will for action. Legal obstacles however, don't. If the situation was as simple as "i don't want to bother my powerful partner", Greece would have simply stopped any diplomatic attempts on the issue, don't you think? Because the german reply has always been the same, that there is nothing to discuss. So i don't know how you intend dialogue when the other says there is nothing to discuss...

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    4. https://www.youtube.com/watch?v=qCHBw_TrOm4

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  4. @ H. Trickler.
    You are too good as a person, mr. Trickler, you need to be more suspicious in politics. For the same reason that USA doesn't recognize the jurisdiction of the Court at ALL for itself. When you go around the world in wars often, you don't want to be sued for war actions, "collateral damage" and similar things your troops may do.
    http://www.icj-cij.org/jurisdiction/?p1=5&p2=1&p3=3

    You are right though, pardon me, it's prior to 2008, not 2006. In this way, because Germany can't afford to open a reparations case by anyone, anything prior to 2008 does not exist for Germany, as potential dispute.

    st May 2008

    [Translation from the German]

    With reference to Article 36 of the Statute of the International Court of Justice I have the honour to formulate on behalf of the Government of the Federal Republic of Germany the following declaration:

    1. The Government of the Federal Republic of Germany declares that it recognizes as compulsory ipso facto and without special agreement, in relation to any other state accepting the same obligation, the jurisdiction of the International Court of Justice, in conformity with paragraph 2 of Article 36 of the Statute of the Court, until such time as notice may be given to the Secretary-General of the United Nations withdrawing the declaration and with effect as from the moment of such notification, over all disputes arising after the present declaration, with regard to situations or facts subsequent to this date other than:

    (i) any dispute which the Parties thereto have agreed or shall agree to have recourse to some other method of peaceful settlement or which is subject to another method of peaceful settlement chosen by all the Parties.

    (ii) any dispute which
    (a) relates to, arises from or is connected with the deployment of armed forces abroad, involvement in such deployments or decisions thereon,
    or
    (b) relates to, arises from or is connected with the use for military purposes of the territory of the Federal Republic of Germany, including its airspace, as well as maritime areas subject to German sovereign rights and jurisdiction;

    (iii) any dispute in respect of which any other Party to the dispute has accepted the compulsory jurisdiction of the International Court of Justice only in relation to or for the purpose of the dispute; or where the acceptance of the Court’s compulsory jurisdiction on behalf of any other Party to the dispute was deposited or ratified less than twelve months prior to the filing of the application bringing the dispute before the Court.

    2. The Government of the Federal Republic of Germany also reserves the right at any time, by means of a notification addressed to the Secretary-General of the United Nations, and with effect as from the moment of such notification, either to add to, amend or withdraw any of the foregoing reservations, or any that may hereafter be added.

    Berlin, 30 April 2008
    (Signed)
    Frank-Walter Steinmeier
    Minister for Foreign Affairs
    http://www.icj-cij.org/jurisdiction/?p1=5&p2=1&p3=3&code=DE

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