Tuesday, January 3, 2012

Questions about Greece's foreign debt (including update!)

The Bank of Greece has recently published the external debt figures per Q3/2011.

The foreign debt of Greece is now at its lowest level since over 2 years ago. At Q3/2011, it stood at 405 BN EUR compared with 413 BN EUR at Q3/2009 (in between, it peaked at 434 BN EUR).

How is that possible? During this time, over 73 BN EUR were transferred as new offshore loans to Greece under the rescue plans. If foreign debt still went down, that would mean that all the new money from offshore (and more) was used to pay off existing loans, i. e. nothing left for Greeks.

What is really confusing is that sovereign bonds owed to offshore investors declined from 206 BN EUR to 101 BN EUR during this period. Since that is far more than the bonds which matured during this time, it would suggest that domestic Greek investors bought Greek bonds from foreign investors. And it seems that the whole thing was financed by the Band of Greece by taking new loans offshore (ECB?).

I hope my analysis is not correct because it would almost sound like the ECB saying to Greece: “Look, we have too many of your bonds on our books. We lend you the money so that you can buy them back from us”.

And here is the million-Euro-question: if foreign funding of Greece actually declined in the last 2 years, how was the current account deficit during this time (46 BN EUR) financed? How was the capital flight during this period (estimated well over 50 BN EUR) financed? How was the budget deficit financed?

I have posed these questions to the Bank of Greece and I look forward to their answers!



My thanks to Mr. George Zambanakis at the Bank of Greece who replied - overnight! - to my questions. And the answer is ---

Following IMF-guidelines, the Bank of Greece publishes the foreign debt based on market values and not based on nominal amounts. Details on the valuations were not provided but it would be fair to assume that only public bonds were revalued in such a manner (there is no "market value" for private loans). This would mean that sovereign bonds placed offshore did not decline from 206 BN EUR to 101 BN EUR nominally but were, for the most part, revalued in that amount. Put differently, the foreign debt of Greece would be about 100 BN EUR higher than published in the Bank of Greece statistics. Put differently: if a miracle happens and Greece manages a complete turn-around; it the economy booms; if the budget is in surplus; if the rating goes to AAA; well, then Greece's foreign debt will increase (through revaluation) by 100 BN EUR as a reward for that!

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