Saturday, May 4, 2013

Greek cash - where it came from and where it went

There is a very interesting Statement of Sources & Applications of Funds for the Greek government from 2010-12 (source: IMF) in this GreekDefaultWatch article. Highlights are:

* the Greek government raised 247 BEUR in the period 2010-12
* 206 BEUR thereof, or 84%, was ultimately devoted to Greece's debt
* put differently: only 41 BEUR thereof, or 16%, went to finance the government's primary deficit and other government operations

One can't find a better example than this to show how imprudent the Troika's rescue efforts for Greece were. Had EU-elites listened to people who had experience with countries confronting external payment crises, they would have learned, back in 2010, that a rescheduling of sovereign debt has been the most natural thing in the world for decades. What would that have meant in the case of Greece?

Tax payers in lending countries would have seen that Greece would require 'only' 41 BEUR for the period 2010-12 to stay afloat. It’s one thing for tax payers of the lending countries to hear that Greece needs 200-300 BEUR; quite another if that figure is 41 BEUR.

Tax payers of the lending countries might still have had to come up with most of the rest of the money but then they could not have been fooled that it was ‘help for Greece’. Instead, they would have seen that is for the bail-out of their banks. And for that bail-out, they would have gotten something in return; equity in those banks, that is.

I don’t think I have ever seen a major restructuring in my 40 years of banking (and that includes 2 sovereign debt restructurings) which did not involve a rescheduling of debt. The maturities of principal and interest are moved into the future; interest is divided into a cash portion and a portion for capitalization to ease the borrower’s cash requirements. There would have been various ways of doing that (terming-out; new bonds to repay maturing debt, etc.). There wouldn’t have needed to be a PSI so quickly.

For Greece it wouldn’t have made all that difference because Greece needed Fresh Money and Fresh Money comes only with terms. But the overall perception that Greece is a bottomless pit requiring hundreds of billions would have been put into perspective.

There would have been a tremendous benefit for the Eurozone overall. The Greek solution would have served as a template for all other countries. The Eurogroup could have justifiably said: “We’ve got the template; who wants to be next?” That, perhaps, would have motivated banks to make more of an effort to find solutions among themselves without any EU-template.


  1. It's something I don't understand about that article. Greek PSI was a debt restructuring and rescheduling. Exchange short-term, high yield bonds for long-term, lower yield bonds, with deferred payments.

    It just took a long, long time to negotiate, with a lot of brinkmanship by all actors. And still faces many critics. But that's the nature of an intergovernment organisation linked to a common currency. Long negotiations.

    The history of the latin currency union is instructive in this regard. Lots of threats and arm-twisting (mostly by france, as the leading member) to keep it on the road, until WW1 finally killed it.

    There was a greek aspect to the latin monetary union too (it was expelled in 1908, readmitted in 1910). Although in fact it was the Papal States that were the first member-state to use the currency union as a cover to debase the coinage, at foreigners expense.

    1. Yes, the PSI was a form a of debt rescheduling, only: too little, too late and erroneously involving a haircut. If, instead of a haircut, the 100 BEUR had been rescheduled out 30 years with interest capitalized, it would have been economically equivalent to a haircut for 30 years. Difference? Greece could have continued to argue that "we will honor our debts in full" and tax payers of lending countries could have been told "we haven't forgiven Greece one cent of principal and interest". Only moot points? No, very real points!

      The haircut forced banks to forego claims right away. In the alternative scenario, banks would have retained their claims. Perhaps not very worthy claims but certainly worth more than zero. And one wouldn't have had to find out about their real worth until much later.

      One of the principles in a rescheduling is that "risk takers must remain risk carriers". In fact, that's one of the major reasons why reschedulings work in the first place (no one can find a quick exit at the cost of others). By not going for a rescheduling in the spring of 2010, a lot of risk takers could take an exit at the cost of others and the 'others' were those who became the new risk carriers.