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Tuesday, October 15, 2019

Greek State Budget Out of Control!

The Ministry of Finance has reported disturbing developments in the Greek State Budget: since the beginning of this year, monthly results are clearly in excess of the targets. Below are the data for the last 4 months (in MEUR).


June: +1.954
July: +2.565
August: +3.178
September: +3.012

Given the history of Greece's fiscal excesses, one is likely not to be surprised that, once again, there are excesses. One would only wonder what type of excess it is. An excess over spending limits? An excess over deficit limits?

Surprise, surprise! The above figures are excesses of primary surpluses relative to their targets. Put differently: the creditors had imposed stiff primary surplus targets and Greece is over-performing by far. And this despite the fact that election presents were distributed this year!

This could literally get out of hand going forward. As the economy picks up, tax revenues will increase and surpluses will grow further. The Greek state will soon be swimming in cash.

Lucky Mitsotakis!

Friday, October 11, 2019

Borrow To Improve Your Credit Risk!

On Wednesday this week, Greece raised 487,5 MEUR in short-term debt (13 weeks) at an overall yield of minus 0,02%. A week before, Greece had raised 1,5 BEUR in ten-year money at a yield of 1,5%. What has caused this dramatic increase in Greece's creditworthiness?

The Greek state currently does not need to borrow to finance budget deficits. There is a significant primary surplus, large enough to pay interest on debt which means that the overall budget will at least be in balance, possibly even positive.

Neither does the Greek state need to borrow in order to refinance maturing debt. The amount of debt which matures in the next few years is minimal. Apart from the fact that the Greek state is sitting on a ton of cash in the first place (allegedly upwards of 25 BEUR).

So what is the investors' risk by making new loans to Greece? Virtually none as long as maturities stay within the next 10 years. During this time, Greece has very little debt maturing and the interest expense is very low, too. Given this situation and considering the high cash reserves, the risk of another external payments crisis in the next few years is virtually zero.

So why does the Greek state borrow?

There is an old saying that "banks like to lend money to borrowers who don't need it". Well, there is some truth to it in the case of Greece. As pointed out above, Greece currently does not need money. Greece could use money to voluntarily prepay more expensive debt with less expensive debt where loan agreements permit that or to increase its cash reserves. Even if cash reserves yield no interest income at this time, as long as the debt incurred to build up cash reserves is zero, there is no harm in doing that. Put differently, Greece can increase, at zero cost, cash reserves which, in turn, motivate investors to lend more money to Greece because Greece doesn't need the money and has enough reserves to pay the loans back.

And the moral of the story?

THE HIGHER GREECE'S ZERO-COST DEBT, THE BETTER THE COUNTRY'S PERCEIVED CREDIT RISK AND THE HIGHER INVESTORS' MOTIVATION TO LEND MONEY, PROVIDED THAT THE MONEY IS USED TO BUILD UP RESERVES WHICH, IN TURN, FURTHER IMPROVE THE PERCEIVED CREDIT RISK.

We didn't learn that at university...