Sunday, November 18, 2012

Wipe out all of Greece's sovereign debt?

The Head of Business Treasury, Global Banking and Markets at Royal Bank of Scotland is quoted as follows:

"They would try as much as possible to kick the can down the road with respect to Greek sovereign debt and if they can do that, they will. I can't imagine that we will get an agreement on the Greek debt reduction next week. If you really are serious about getting the Greek economy back on its feet and also about Greece staying in the eurozone, you need to cancel its sovereign debt. It is as simple as that. Otherwise, they would keep contracting, more people would be laid off work, and they won't be able to raise their tax revenue. That is the only way". 

Well, I am not surprised that RBS failed so spectacularly when it has executives saying such nonsense!

So far, the level of sovereign debt has had exactly zero to do with Greece's recession/depression. Why? Because every single cent of Greek debt service has been paid by foreign creditors. They have basically paid out of their left pockets what they collected with their right pockets. Every profit they took on lending margins and guarantee fees, they have paid to themselves. What is the evidence for that? A primary deficit is the evidence because a primary deficit means that one has to borrow in order to pay interest.

If Greece's debt had been 100% forgiven 2-1/2 years ago, the country would still have required very substantial Fresh Money. Now one could argue that, if Greece hadn't had any debt 2-1/2 years ago, it could have borrowed Fresh Money in capital markets. Correct, but all that would have meant is that the borrowing wheel would have been put into motion once again with you-know-what-kind-of-results in 10 years from now.

It is the Fresh Money requirement which made Greece dependent on the Troika. That Fresh Money requirement has now been reduced significantly: the primary budget balance is approaching break-even and the current account is approaching tolerable levels. Everything fine now?

No! The price for all of this has been over one million unemployed. This would suggest that the structure of the Greek economy is still such that it can only employ its people if it gets new funding from abroad all that time. Since the latter is more or less out of a question, the Greek economy has to be restructured in such a way that more employment is generated without new funding from abroad. Only more domestic manufacturing, also for exports, can solve that problem (i. e. create new jobs).

Thus, instead of forgiving all the debt and hoping that things will be fine (which they wouldn't be), all resources should be devoted to the issue of how Greece can increase its manufacturing. That should be the top priority, and not the playing around with abstract 'debt sustainability' ratios.  It is the 'economic sustainability' which counts in the first place.

If it were necessary to put all of Greece's debt service on hold for, say, 10 years in order to achieve that, then this should be done. Only if and when Greece reaches 'economic sustainability' is the right time to talk about debt forgiveness.

Put differently, debt service should be put on hold for, say, 10 years with the proviso that this time is indeed used to achieve 'economic sustainability'. The incentive for Greece's doing that should be the commitment that, once 'economic sustainability' is reached, the debt will be restructured/forgiven in such a way that it becomes sustainable.


  1. As well as telling Greece the benefits of creating a sustainable economy under a 10 year debt servicing moratorium - debt forgiveness & restructuring - it must also be told the consequences of failure.

    I can't think of anything other than expulsion from the Eurozone.


  2. Remarkable insight, Herr Kastner.

    I would caution about any ideas entertaining industries. In our modern age, industries are only effective when in large conglomerations. Everything is either very big - the 10.000t container train, or very small like the lorry. There is little room in between unless you have people who are dynamic enough to handle the stresses of being pulled in both directions at once.