Tuesday, November 27, 2012

EU - still trying to be just a little pregnant?

I used to think that one couldn't be just a little pregnant. The EU has now been trying for over 2 years to prove that one can: they don't have the guts for an abortion but despite all their care for the pregnancy, they don't want to go for a delivery. And they certainly didn't achieve delivery earlier this week!

"Let's do something but just as much as absolutely necessary at this time!" - That kind of sums up what happened on Monday.

Interest rate reduction - absolutely the right strategy but, again, half measures. Instead of saying 'we'll stay interest for the next 10 years on official debt', they have have said 'we'll stay some of the interest on some of the official debt'.

Debt buy-back - perhaps it works, perhaps it doesn't. Let's believe it when we see it. But why make something whose outcome is uncertain a major pillar of a so-called new deal? The authorities may already have secured commitments from enough sellers at the price of 30% of nominal. We don't know. But if they haven't and if the whole success of the new deal is dependent on private bond holder's selling at 30% when the chances have risen that they will eventually get 100%, well, then the debt buy-back is a fairly chancy proposition.

Lending countries try to jerk tears by wailing how much the interest rate reduction and foregoing of ECB-profits will cost them. Well, the interest rate reduction is not going to cost anyone a thing. All it means is that lending countries have to make less new loans in order to pay themselves interest. And regarding the lesser pay-out of ECB-profits (to national Central Banks who would then pay out more to their governments): are governments of the lending countries really trying to suggest that the stability of their budgets depends on the collection of fictive gambling profits on the part of the ECB?

What would have been much nicer to see?

I would have preferred to see an interest rate reduction to zero on a specified amount of official debt for 10 years. That would have been a signal! What 'specified amount'? Well, I would have tied the interest expense of Greece to Greece's primary government expenditures. The latest calculation I made suggested that 6% of primary government expenditures should be allocated to interest expense (variable basis). That would have definitely assured the payment of interest to private creditors and those private creditors better be kept at bay after what we are presently witnessing with Argentina. Perhaps some money would be left to pay interest to official creditors. All other interest should have been stayed for 10 years. And the same should have been done with debt maturities coming up in the next 10 years.

That way, the Greek budget would have been relieved of much of the debt service during the next 10 years (except for the debt service due to private creditors).

And then I would have hung out a huge carrot for Greece in the form of a promise that, in ten years from now, a final reckoning would be made. The entire debt would be reduced to a 'sustainable level' (and I am thinking more like the 60% of Maastricht than the 120% of the IMF) with the rest to be forgiven. All of this against Greece's commitment to achieve a well-functioning economy by then. This huge carrot would have had to be coupled with a huge stick: if Greece did not achieve a well-functioning economy by 2022, all bets would be off and previous commitments would be rolled back.

The debt buy-back I would have titled as a 'try' to see what it brings. No more.

The return of ECB-profits I would have restricted for a specific purpose. At the lower end of Greek society, there are extreme hardships by now. True European solidarity would call for a fund to be structured in such a way that those hardships can be dealt with outside the Greek budget. The ECB-profits would have been a good source for funding such a fund.

Finally, the most important point: growth measures for the Greek private sector. If there were any included in the latest deal, I certainly didn't see them. Without such growth measures, it is hard to get the feeling that the EU really wants to help Greece.

From the beginning of this blog, I have made these two arguments: (a) Greece is entirely responsible for the mess which it got itself in until about 2009/10; and (b) the EU is entirely responsible for the mess by which they have turned the Greek mess into a European mess. For over two years now, both sides seem to have been competing with each other as to who can make the mess worse: the EU by pursuing a policy of denial, and Greece by dancing around Troika-measures.

Of late, I would say that Greece has earned the benefit of an "earnest boker". The EU has lost it (if it ever had it).


  1. I have a couple of related questions:
    a) Is debt buyback a complete no-no in cases of sovereign debt?
    If yes then why? I can see a moral risk (borrow the money, engineer a crisis, buy debt at 50c to the dollar, which countries can do much easier than companies)but is there some other reason?
    If the answer is no, ie debt buyback is common, then any ideas why it was not applied to the Greek case earlier?

    1. There is nothing immoral or otherwise with a debt buy-back. Companies buy back their debt often (just like they buy back their shares when they think the value is low).

      A debt buy-back for a country can make eminent sense (Greece could be a case), provided it's all voluntary. In other words: Greece offers to buy back at 30 cents on the Euro; those who wish to sell will do so; the others won't. Some parties might even be thankful to Greece for that (because they might not be able to unload their paper to anyone else in large amounts).

      The trading volume in Greek bonds is not high. Thus, the 25% or so market value today does not necessarily represent at which price large volumes would go over the table. That's why I am saying that the 30% might work, or not.

      I object to making/calling such a chancy thing a 'major pillar of the deal'. It may become a major pillar, or it may not. In my opinion, it should have been called 'we'll give it a try and see what happens'. One has to avoid that its possible failure becomes another crisis point.

      What would really be questionable is if authorities 'leaned' on private creditors to accept the deal. The private creditors have already taken a huge hit (much larger than in any other country before). To again lean on them would be rather silly, in my opinion.

    2. One more thing: why it hasn't been applied earlier? Well, someone needs to finance a debt buy-back and in the past no one could be found to finance it. Remember: if Greece borrows 10 BEUR to buy back 40 BEUR from private creditors, Greece's debt goes down from 40 BEUR to 10 BEUR. However, the 10 BEUR is a NEW loan from official lenders

    3. Inspired by your wonderful words about Europe's pregnancy I would like to bring in another view: Europe is not pregnant, Europe is in development as a child, with the diseases which belong to growth and with the learning how to walk.

      At the same time Europe is there as a family of children with several ages and as usual the teenagers know it the best, thinking that they are much more wise, complain the most, fight against rules and asking for money all the time because all the time they are broke.
      They manipulate and know the weak spots of their parents, and other brothers and sisters. Pretending that they suffer. Drama, if they do not get what they want.

      A lot of young people get lost in life because of weak parents: I do not talk about small problems, I speak about young people who "meet" drugs, alcohol, sex, criminality. It takes more to raise up children, to guide them and protect them in the right way, to teach them, than to give them what they ask.

      Greece has proved to be in the same age as teenagers are.
      Europe has proved to be a very very bad "parent". Weak.

      I agree completely, fully, totally, with all my brainwork and heart-thinking, with your words, Herr Kastner:
      "From the beginning of this blog, I have made these two arguments: (a) Greece is entirely responsible for the mess which it got itself in until about 2009/10; and (b) the EU is entirely responsible for the mess by which they have turned the Greek mess into a European mess. For over two years now, both sides seem to have been competing with each other as to who can make the mess worse: the EU by pursuing a policy of denial, and Greece by dancing around Troika-measures."

  2. Hedge Funds who bought at 20 will sell at 35 - heck who wouldn't. Greek Bonds turned into Gold - I guess that's the Midas Touch.

    What politician ever said "we'll give it a try and see what happens" - I can't think of any, they couldn't survive the ridicule. I recall a FinMin saying "this is the recession we had to have". He's never lived it down, despite of the fact that his country is the only OECD member not to have had a another recession since he said it more than 20 years ago.

    Kicking the can is all we can expect from the EU. Its a multi-lateral political institution of 27 states, which hold 'contestable' elections. That's all you're ever going to get, muddle through and kick the can. Mitterand is rumoured to have said of the EMU :-

    "...yoking Germany to the rest of Europe in this way is sure to lead to imbalances, and the imbalances are certain to lead to some crisis, but by the time the crisis strikes I'll be dead and gone — and others will have to sort it out."

    What more initiative should the **EU** take regarding growth. Other than lending more money, to be paid over more time, with no requirement for structural reform - i.e. back to Friedman's quasi petro-state.

    There were Billions of unspent Structural Funds (I assume they are no longer available), the EIB has made Billions available to Greek Banks to lend to SME's and the self employed - very little of which has been borrowed. The EIB also lends money to Greek private industry if they have a decent proposal.

    Maybe EU national governments could direct their agencies to Buy Greek First, maybe the EU could issue Directive to enforce it. Maybe Germany could give incentives to its medium size businesses to relocate to Thessaly. Maybe the EU could move the Commission to... Mykonos. None of which, or anything like them is going to happen.

    Growth initiatives must come from within Greece, when the EU blocks or doesn't offer reasonable support to reasonable initiatives then we should start complaining. But its unreasonable to expect the EU to actually be Greece. I have a picture in my mind of an army of EU bureaucrats scouring the Greek landscape looking for Solyndra like things into which to invest EU taxpayers money.


    1. My return mail to you was 'rejected by the recipient domain'. What now, expert?