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Sunday, June 24, 2018

"The Greeks Can Now Smile!" - After Having Benefited From The "Biggest Solidarity The World Has Ever Seen.”

Government spokesman Dimitris Tzanakopoulos is credited with the promise that the Greeks can now smile following the successful settlement of Greece's exit from the 3rd program in August and ESM chief Klaus Regling reminded Greeks that they had been the beneficiary of the world's biggest solidarity effort ever. No better way for Alexis Tsipras to celebrate all this than by putting on a red tie.

It would be unfair to spoil the party by diminishing Greece's accomplishments. Only 3 years ago, the vast majority of politicians, commentators, analysts, etc. expected chaos for Greece's future: declaration of default and perhaps even repudiation of debt; exit from the Eurozone; breakdown of domestic stability; etc. It is unquestionably to the credit of Alexis Tsipras that all of this could be avoided and that now, 3 years later, the political establishment is celebrating Greece as a great success story. The fact that Tsipras accomplished this by essentially accepting just about everything, without resistance, that was put before him is a moot point. The end justified the means. I would further venture to say that no non-leftist government could have gotten away with accepting just about everything the creditors demanded.

If Tsipras celebrated with a red tie, the EU and Eurozone leaders celebrated with an effusion of self-praise. That, I think, was inappropriate, to say the least. The way the EU handled, beginning in the spring of 2010, the external payment crisis of Greece was a blunder of historical proportions and here is a compilation of articles I wrote about the subject back in 2012.

So how good is the new agreement which was reached a few days ago?

I propose that in any debt crisis, be it personal, corporate or sovereign, the borrower is faced with 2 principal issues: (a) the amount of interest he has to pay and (b) the amount of loan instalments he has to repay. The unique character of sovereign debt is that loan instalments never really get paid, i. e. nominal debt is hardly ever reduced. Instead, loan instalments are always refinanced. As a result, to offer an overindebted borrower like Greece an extension of maturities is nothing other than the recognition of reality. Those who consider this substantial debt relief should explain why they would prefer to waste time and effort every few months to renegotiate individual debt maturities.

So the crux of the matter is interest expense. Interest expense flows through the budget which means that it comes out of government revenues. Every Euro of interest payments is a Euro which is not available for other government expenditures. Pensions may have to be cut in order to pay interest. The point is: if one wants to give a sovereign borrower debt relief, one has to reduce his interest expense.

In 2016 and 2017, Greece's interest expense was stable at 5,6 BEUR. Back in 2011, Greece's interest expense had been 15,0 BEUR. The enormous reduction in interest expense, particularly when considering that debt was increased during this time, reflects that Greece has received substantial debt relief in recent years.

If the new agreement reduces Greece's interest expense below the 5,6 BEUR, then it is debt relief. If it doesn't, it is no relief at all.

The published information does not allow me to pass judgment on this. There are references about not applying the step-up interest margin on a certain portion of the debt which only means that interest expense would not increase; neither would it decrease. There are references about a further deferral of EFSF interest which would also hold interest expense stable but not reduce it. There are references about finally distributing to Greece SMP profits which had so far been held in an escrow account. This would be a significant reduction of interest expense. And there are references about replacing some expensive IMF debt with cheap ESM debt. This, too, would reduce interest expense.

At the same time, Greece is taking on quite a load of new debt for the primary purpose of building up a cash buffer. That cash buffer, of course, would increase interest expense.

In short, the principal benefit for Greece seems to be that its debt has now been regularized. That is in and by itself a very significant benefit because only if one's debt is regularized can one begin to commit time and resources to things other than debt negotiation. Whether or not Greece's budget will be relieved of interest expense as a result of the agreement remains to be seen.

11 comments:

  1. Mr. Kastner, i think you miss a great point. One is that no country has ever produced primary budget advance of 2,2% for 40 years. Another is, that IMF doesn't believe that the debt is sustainable. Now how would you explain this and why don't the Germans want to believe the IMF? In 2010, you said that the Germans didn't listen to the IMF, not because they wanted to save their banks, but because they weren't ready for such crisis. What about now? Could it be, because of internal politics they preferred to prepare another round of damnation for Greece? Germany was the country that insisted on the rejection of the frensh proposal, linking debt repayments to growth. No, Mr. Kastner. The greek debt is not viable. It's 40 years of austerity that no country has ever done before, only to go bankrupt again, as the IMF predicts.
    According to EU's DSA, with 2,2% primary surplus up to 2060, the greek debt will be at 127% in 2060 and average growth 1%. Average borrowing cost at 5,1%. With primary surplus at 1,1%, debt in 2060 will be at 234,8%.

    http://www.capital.gr/oikonomia/3300993/komision-anaptuxi-mono-1-stin-ellada-meta-to-2022

    Oh, father, what a german relief! And wait for IMF's DSA which will not be as rosy.From article by Prof. Baroudakis (economics Professor at Strassburg University, former World Bank and OECD): "These targets (for primary surplus) are never seen before, since there is no prededent of country in modern economic history to have imposed austerity for so long. This requires the continuation of overtaxation and the restriction of productive expenditure, which will keep growth low, putting into question the debt repayment. From this point of view the debt is not sustainable...Besides, for these reasons the IMF expressed its reserves".
    https://www.naftemporiki.gr/story/1364157/xreos-diaxeirisimo-den-simainei-xreos-biosimo-omos-prosferei-ena-parathuro-eukairias

    Ah, Mr. Kastner, your german heart betrayed you once more...

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    1. Ah, Mr. Kastner, your german heart betrayed you once more...

      Klaus Kastner isn't German. So whatever a German heart may be, he cannot have one.

      LeaNder

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  2. Good Morning Mr. Kastner,

    I saw on Friday about 2 minutes of Tsipras's speech on the above "success story." I sent him a "moutza" and changed the channel. The only reason I had ERT on was i was watching the world cup.

    I hope my fellow country men reacted the same way. Not in the sense that we should not take our responsibility of the mess we made, but for the biggest hypocritical traitor this country has ever seen.

    And on the most part I can say i can excuse the majority of his lies based on the fact that he is a garbage politician, equivalent to the rest of the worlds politicians. He goes beyond that and all that served him and the "AGENDA."

    He sold the name of Macedonia one week earlier, and by the way here is some "debt relief," one week later. (EU spokesmen said neither issue have nothing to do with each other.) On the contrary both have very much to do but we will never know behind closed doors.

    I credit this abortion of history to this peasant leader of ours and the people of the "AGENDA," and the EU sold politician. As this peasant Tsipras tried to pass to us that we got debt relief. And because mainstream media has been hushed, the masses have no clue. Even not knowing or being informed he will be known as the man who sold his heritage for "debt relief" which is non existent as, as you state above, never goes away. In 10, 20 and 100 years Greeks will remember him for this.

    I am a peaceful man, however if these people, these leaders, were lined up and were summerly shot, I would have no remorse for them. I pray only, that there is only a hell equivalent to Dante's Inferno where treacheries of country, are deemed the worst crime an man can make. An eternal life in the 7th circle of hell, submerged in a molten vat of S***.

    .....

    Now back to austerity more taxes more selling off the country, meanwhile public workers will get some increases after there hard work after so many years.

    Sincerely,

    V

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    1. Dear V,
      Last time i left a message for you, in case you recall, was at the eve of the referendum, where i urged you not to trust the charlatans of SYRIZA. I also told you, that time would come to return to the drachma, but it was not then and it was not something to do with SYRIZA. I had also warned you, if you recall, that the Germans use the debt as a carrot and that they don't intend to solve the problem. I am sorry to say, that i was right. But knowing SYRIZA and the german psyche, it was not a surprise. There is now good news and bad news.
      - The bad news, is that Greece by 2060 will be a barren wasteland or rather Europe's wasteland for unwelcome migrants, if you follow the german route.
      - The good news is that SYRIZA and the left have now been demystified and sooner or later, non left parties will appear with "another solution".
      - The bad news is that Germans will never stop blaming you for everything, you will still be lazy, incapable of anything.
      - The good news is that at least, they won't be able to call you profligate anymore, since in a few years already, you will be World Champions of Austerity. Since according to IMF's 2016 report, only 15 countries out of 55, in the last 200 years have ever produced primary surplus of 2% after 5 years of recession and by 2023, Greece will be producing surpluses of 3,5% after 7 years of recession and for 7 years in a row. So, don't let any German tell you that you are profligate anymore!
      - The bad news, is that Germany never cared about making Greece economically healthy anymore. Germany wants Greece as an eternal scarecrow for the others to see and remember what happens to the "rule-breakers". Greece is like the beheaded foe, put on a spike above the city gate for everyone to see and remind them of what happens to the defeated.

      Good luck, dear V.

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    2. Go back under the rock you came from....

      V

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  3. "If the new agreement reduces Greece's interest expense below the 5,6 BEUR, then it is debt relief. If it doesn't, it is no relief at all."

    You're missing the point. The reduction in interest payments was given in exchange for primary surpluses (i.e. restrictive fiscal policy) until 2060. Couple this with a zombified banking-sector and an over-indebted private sector and the true picture starts to emerge: Greece will remain strangulated for the next 40 years in a monetary union with a too high exchange-rate, a hostile central-bank, bad monetary policy for it's domestic needs, and lacking a wealth recycling mechanism from the North to the South.

    So, thanks for "saving" us but.. no, thanks. Can we exit the euro and revert to the drachma now?

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  4. To put the 2,5% primary surplus requirement into perspective, I have received the following information from Agenda Austria, an Austrian think-tank.

    "Since 1976 (when good records are available), Austria had 25 primary surpluses and 17 primary deficits. ONLY ONCE did a primary surplus exceed the 2,5% requirement for Greece (2,9% in 2001)."

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  5. Perspective on the primary surplus? By all means, and if you want to broaden it here goes:
    Denmark 1983 to 2008, average 5,3%.
    Finland 1998 to 2008, average 5,7%.
    Belgium 1994 to 2004, average 5,4%.
    Even Italy 1995 to 2000, average 5,1%.
    All these periods were triggered by over borrowing during crises, but Greece over borrow in bust as well as boom. Alas, primary surplus is not kismet, fate or destiny, it is something you decide to create. To reach that decision requires that you accept that living standards and productive capacity will eventually adapt to each other.
    Figures courtesy of ECB paper 2011. Government debt dynamics and primary budget balance developments in the EU member states.
    Lennard.

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    1. Oh yes, the very definition of cherry picking.
      Chose out of the total dataset a sample of extreme outliers and assume that that is normal, that it's something anyone can if one simply choses to do without respect to conditions, internals or externals.
      And then forget that Greece is supposed to do that for double to triple the period of the already highly biased sample.
      After a collapse and without a environment of internal or external demand whilst deflation still rules and without the possibility of a flexible XR correction.
      Oh yes, you know , science.

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  6. My intention was not to prove the mentioned nations were the norm, it was, as stated, to widen the perspective of our host. Another reason was to show that what high class Greek economists have agreed to is doable. The prevailing impression in Greece is that when the coming year's show that she has not stuck to her commitments regarding to surpluses it is not her fault, it is because it is impossible. Quotes of all sorts are given as proof, none of them valid, all of them negative proofs. In this blog and elsewhere I have found "pearls" like , "no country has ever kept a surplus of 2,2% for 40 years", maybe so, maybe no country needed to. Be that as it may, Greece will not succeed, she decided not to compete, and I can hope it is for fear of losing. I can fear it is sheer dishonesty, having cashed in on the deal and then cheating out on her part.
    Out of the 2 important parameters for Greece, growth and surpluses, the latter is the one that only Greece can control.
    Mount Everest was identified by Europeans 1840 and first time scaled 1953. I that long century a lot of people said "nobody ever scaled Mount Everest". Only simpletons and losers considered it proven that she would not be.
    So, what about the growth? Growth depends on global growth and Greece's attractiveness as investment destination. Even with global growth low Greece could improve her business climate so much that she would "steal" investments from other countries. But I am getting ahead of myself, just with the signal the she will not try to achieve the agreed surpluses she has disqualified herself from serious investors.
    PS. There are other thing that make comparison with Greece difficult, these nations chose to compete, and were/are net contributors to EU. Greece, on the other hand, chose not to compete, and are net receivers of 2,5% of GDP, slightly more than the agreed surpluses.
    As for the fixed exchange rate that is a similarity, you see these nations did it with their currencies pegged to the ECU, and without devaluation.
    Lennard.

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    1. Your first comment is simply dishonest.
      Your second one is some next level pick-yourself-up-by-your-bootstraps moralistic nonsense.
      All in all, i enjoyed how you resorted to the same fallacy you were so proud to reject and then you topped it all with your climb-mount-Everest "pearl"

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