FinMin Varoufakis' New Plan

Now this is interesting! FinMin Varoufakis announced, according to this article, a new plan for Greece's return to borrowing from markets: "The plan called for the issue of a low-interest, 30-year loan from the European Stability Mechanism (ESM) to replace the debt currently held by the European Central Bank (ECB), while simultaneously restructuring the rest of Greece's debt."

Prior to the January election, I had quite a few email exchanges with Varoufakis. He seemed to be interested in my opinion on this, that or the other. On his first day as Finance Minister, I wrote to him the following: 

"Repay all debt over 60% with a new bond with a minimum maturity of 50 years, a rate adjustable to a very low base so that the real cost of interest is close to zero (or zero) and an interest moratorium for 20 years. Close the deal ASAP and get on to work on all the other things which are much more important for Greece’s (and SYRIZA’s!) future than a haircut which will be followed by another haircut in the future. The key is to REGULARIZE the debt issue so that it doesn’t pop up every few months and distracts from real work." 

What's the difference between the two? Well, contrary to Varoufakis who now proposes to only take care of the ECB debt and restructure the rest, I proposed that the ENTIRE debt over the Maastricht level of 60% of GDP should be restructured (in other words: most of Greece's debt owed to official creditors). Also, Varoufakis talks about 30 years whereas I talked about 50 years. And I included a generous grace period whereas Varoufakis does not.

The critial issue is debt service. Or put differently, how much of an annual primary surplus should Greece be required to have. The government has carved the 1,5% of GDP in stone, so let's work with that.

GDP was 179 BEUR in 2014 (see page 9 of this report) and 1,5% of that would be 2,7 BEUR. However, linking a state expense to GDP is a questionable approach, in my opinion, because GDP does not have a direct correlation with the government's revenue base. Thus, I had suggested to link the interest burden to government revenues (out of which interest has to be paid).

In 2014, the Greek state recorded 50 BEUR in ordinary budget net revenue before tax refunds and privatization proceeds (see page 2 of this report). 2,7 BEUR (the 1,5% of GDP) would have been equivalent to 5,5% of such ordinary budget net revenue. Thus, by committing to allocate 5,5% of ordinary budget net revenue, an amount equal to 1,5% of GDP would have resulted with the benefit going forward that actual tax revenues would determine the interest expense burden instead of GDP statistics. 

A good deal for creditors because ordinary budget net revenue (the base for the interest allocation) should increase as the economy improves and tax reform becomes more effective. And a good deal for Greece, too, because having to allocate only 5,5% of ordinary budget net revenue to interest expense is really an unusually low figure. Initially, the resulting interest amount would probably only cover interest for private creditors but, as things improve, it would also provide interest income to the restructured official lenders.

Which conditions should the Institutions impose for such a restructuring? Really only one: not to assume any further sovereign debt without the Institutions' explicit approval. Non-compliance with this condition should be made an event of default.

There is only one small problem. To achieve a restructuring as outlined above, as Varoufakis now proposes, would have required a negotiating strategy diametrically opposed to the one which Varoufakis pursued from day 1. Instead of attempting to divide and conquer, one would have had to build partnerships based on trust and personal bonds based on confidence. 

Do I think that the Institutions (which were then still called Troika) would have gone along with such a restructuring? That depends. Partnerships based on trust and personal bonds based on confidence alone would certainly not have done the trick. 

First of all, the Thessaloniki Program (which had called for 11 BEUR for certain new expenses to be financed by 12 BEUR of totally uncertain new revenues) would have had to be adapted into a credible longer-term economic development plan for the Greek economy. A plan not for a year or two but, instead, for at least one generation. My favorite would have been the McKinsey Plan of 2011 but SYRIZA had totally rejected it at the time. That, however, does not free SYRIZA from the responsibility to develop its own equivalent of such a plan. Back in January of this year, Varoufakis fully agreed with me that such a plan was desperately needed and he said that the preparation of such a plan would be one of his highest priorities. I have not seen such a plan todate.

Secondly, Greece should have proposed to make the EU Task Force for Greece the central catalyst of all reform efforts. Of course, the Task Force should have been renamed into something like "The Greek Task Force with EU Support" and put under the direct responsibility of the Prime Minister.

And that's about it.

I firmly believe that, in the context of trustful partnerships and bonds of personal confidence, the above two strategies would have been sufficient basis for an overall agreement on the debt. That, to me, would have been a New Deal for Greece! (and not the repeated 'kicking the can down the road').