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Wednesday, July 19, 2017

Some Interesting Debt Issues

This article from the Ekathimerini suggests that the Yanis Varoufakis who had just become Finance Minister was quite different from the Yanis Varoufakis who had been seduced by fame only a few months later. The article quotes a document which Greece had submitted at the February 16 Eurogroup meeting (February of 2015, that is). In it, views were expressed by the Greek side which were reasonable and appropriate. Here is an excerpt:

"In this document, the debt-to-GDP ratio is calculated in terms of net present value and estimated at 135 percent. The document dating from just three weeks after the elections – and repeatedly citing the head of the European Stability Mechanism, Klaus Regling – states in a special appendix that: “The misunderstanding regarding Greece's solvency is owed to the fact that the blunt 175 percent debt-to-GDP number does not fully describe the actual burden of public debt over the Greek economy.” The borrowing conditions of the European Financial Stability Facility (EFSF) as well as Greek Loan Facility (GLF) loans (the latter being the bilateral arrangements of the first bailout) are characterized as highly concessionary."

I should add that in my communications with Varoufakis prior to his becoming Finance Minister, we had exchanged views along the same lines and I felt confident that he would pursue negotiations along these lines. Well, somewhere along the lines there was an abrupt personality change!

On a separate front, Bloomberg reported that the reason why Greece had to shelve the idea of returning to the markets with a new bond issue was that it would have exceeded the debt ceiling set by the IMF. Presumably, there will be a bit of an uproar about the fact that the IMF would restrict, prohibit and/or disable Greece from borrowing in international markets.

The uproar would not be justified. It is only natural that the creditors would put a ceiling on total debt which their borrower can accumulate. According to Bloomberg, Greece's creditors do not allow the country to increase its indebtedness beyond the levels set out in the program. The program provides for enough new funding to refinance maturing debt. If Greece can secure funding for the refinancing of maturing debt from third party sources, the creditors would be more than happy but then they would reduce their commitments in a corresponding amount. 


  1. Quote "“They will find a solution to allow Greece to issue bonds later this year,” Carsten Hesse, a London-based economist at Berenberg, said in emailed comments."

    I am sure everybody here agrees that these reckless lenders have to be stopped at once. ;-)

  2. I can't believe how misinformed you are and still wanting to observe Greece. Pretty soon we will be debating the highly scientific topic of whether blind people can observe anything other than their intuition, feeling and the Braille alphabet.

    Let's put aside the ridiculous argument that the Greek debt ought to be calculated on the basis of NPV and not its nominal value. I have news for you, such inventions in explaining german screw-ups are not allowed in conventional circles. So please you and reasonable Varoufakis go and sell such nonsense to your domestic audience somewhere in the Roman province of Panonnia.

    As to the ridiculous notion that Greece will not replace 5yr debt at 4.95% with new debt at a lower rate because of debt limits only idiots could raise such nonsense. Greece will access the markets no matter what and the lenders have no say whether Greece is entitled to lower its debt service or not.

    The issue is much simpler than the Bloomberg misinformed nonsense. The issue is this: Greece will probably raise new 5yr bond debt at 4.4%-4.5% replacing the Samaras fiasco of 4.95% 5yr bond issue which until recently was priced at 5% (5.35%) by the markets. The problem why Greece had to wait is that today the IMF will declare again the Greek debt unsustainable and it's an oxymoron to have unsustainable debt and want to issue new debt at better rates that you currently have. The unsustainability of the overall debt does not give you preferred pricing which is the whole purpose of this exercise.

    Oh, I forgot the secret weapon. While the IMF will be stating that the Greek debt is unsustainable and rubbing it on Schauble's face, we will reach out to the sewer Berlin newspaper Kathimerini and pull out the Varoufakis "reasonable letter" compelling the word to use the NPV of the Greek debt which is still unsustainable but something less than the IMF uber unsustainable levels. And that's how we will live from this point on. Every time somebody says something bad about the Greek debt we will reply "check your NPV". How nice from the geniuses of industrial innovation in Berlin. I guess we misjudged you people. You are not idiots but innovative idiots which is a new form of discounted idiocy.

  3. Btw.

    Kleingut here is a piece of advice. When you see a Bloomberg article written by 2 Greek reporters, it means that you just stepped into a swamp of ignorance and ND bias galore.

    If you like Bloomberg so much as your go-to source then please at least quote the right articles from Bloomberg so that you can build a false thesis from there with less glaring facts of ommision. Otherwise, you sound like what Syriza and Independent Greeks have so brilliantly identified as the "Troika of the Interior" propaganda machine.

  4. So the whole thing was about conditionally approving 1.6 Billion for Greece and the softer language on the DSA.

    "The use of AIP(Agreement in principle) would allow the IMF to be supportive of the progress that Greece has made on policies, even while release of IMF resources would be conditional upon Greece’s European creditors providing commitments for debt relief sufficient to secure Greece’s debt sustainability, and subject to Greece’s continued implementation of the IMF-supported program.

    Use of the AIP procedure will give confidence to creditors to disburse to Greece under the ESM program in July—thus reducing a potentially serious stress on the Greek economy and the overall financial system. It will also give confidence to investors on the prospects for the Greek economy to grow and for its people to prosper."

    Thank you, IMF. And the final issue is the DSA(debt sustainability analysis). Whereas back in February 2017 the IMF opined that the entire Greek debt was uber unsustainable, we now have a softer language which says the Greek debt is sustainable up until 2030 and not sustainable afterward.

    So, there you have it, folks. Greece can now proceed with its 5yr rollover debt issue at a better rate since the time frame involved is shorter than 2030.

    And you can tell on my behalf, to Kathimerini and its amateur journalists to get lost. But there is nothing new here. Kathimerini is a well-known factory of lies and propaganda whose only purpose is to spread fear and doubt.

  5. @kleingut

    In a world where you find buyers for the Snap IPO you’ll find buyers for Greek 5 yr. bonds with a less than 5% yield. Say thanks to Janet and Mario. All the liquidity has to go somewhere, why not to a broke country with an interesting credit history.

    1. Apparently the Swiss Alps altitude is cutting off oxygen to your brain (which btw apparently is no bigger than a common walnut).

      So, according to your little theory it's better to buy a negative yielding berlin bond and not a 5% Greek bond (which is a gift in this low bond yield world) when you know already for sure that keeping Greece solvent is a matter of survival for the entire eurozone?

      So, someone is giving you a bond gift and you say "no,no let me buy some miserable bundesbonds because I want to lose money"? Are you sure that you Swiss folk are actually qualified to handle money and do we need to ask you to pass a license test to prove that you are not?

  6. ... IMF officials estimate that, even if Greece carries out promised reforms, the nation’s debt will reach about 150 per cent of gross domestic product (GDP) by 2030, and become “explosive” beyond that point. European creditors could bring the debt under control by extending grace periods, lengthening the maturity of the debt or deferring interest payments, the IMF said in a report accompanying the announcement. .... IMF Managing Director Christine Lagarde said, 'A debt strategy anchored in more realistic assumptions needs to be agreed. I expect a plan to restore debt sustainability to be agreed soon between Greece and its European partners.' ..."
    In June, Moody's Investors Service upgraded the Greek credit rating one notch in junk territory to Caa2, after Greece got an 8.5 billion euro ($9.9 billion) tranche in bailout monies. Brown Brothers Harriman currency strategists observe:

    "We view Moody's upgrade as long overdue, as our model now has Greece at B+/B1/B+. The positive outlook bodes well. S&P Global and Fitch Ratings also have Greece too low at B- and CCC, respectively, and so we see upgrade potential there as well. "

  7. o.k. so now after we all read this article we begin to understand why Greece waited a few days befor accessing the markets for a 5yr bond:

  8. Here is Varoufakis' reply to the Ekathimerini article:

    1. And after reading his reply, don't you agree that Varoufakis kicked Palaiologos' ass when he proved that indeed no more than 1.5% surplus was required using own Troika's logic? I mean apart from the fact that eKathimerini journalists are low quality financial experts and more like propagandist trained dogs barking non-stop the Troika's and ND's nonsense, where exactly do you find the strength of the argument for a low class Palaiologos who builds up arguments based on misinformation and half-truths?

      If I started to quote selectively what you have said over the years on Greece, people would probably start thinking you are a german spy. But are you?

  9. BTW, may I suggest that you replace eKathimenini in your favorite links in your blog page with the uber superior and reliable Naftemporiki?

  10. There we go! Maybe Urs wants to contribute his "solid" opinions towards the steady flow of input to this wonderful project:

  11. o.k. let's get back to work. How can we shrink the public sector and by how much?