Monday, December 2, 2013

Experts Favor Debt Re-Profiling!

Back in 2011, I had written a whole series of articles on how the debt problem of Greece (or any other country, for that matter) should be handled whereby my views reflected the experiences which I had as an active participant in the debt reschedulings of Chile and Argentina in the 1980s. Interested readers can look up the respective sections in my blog inventory.

International finance and insolvency experts recently discussed this issue at a meeting in Santa Monica, California. The group included Lee C. Buchheit, often referred to as the laywer with the most experience with sovereign debt crises (Buchheit was legal counsel to Greece with the issue of the haircut). Here is the report of the meeting.

The report addresses the role of the IMF specifically but it would apply to official lenders in general (ECB, Troika, etc.; essentially the tax payers). The report summarizes the options available to officaldom as follows:

1. "Full Bailout" - Lend the country the amount needed to repay in full all obligations maturing during the program period.
2. "Pre-Emptive Restructuring" - Require a full restructuring of the country's debt at the outset of the program in order to remove any doubt about the sustainability of that debt stock.
3. "Re-Profiling" - Require a milder form of restructuring that pushes maturities out of the program period without imposing haircuts.

Back in 2011, I had argued ad nauseaum that Greece's debt should not be refinanced or forgiven but that, instead, it should be 're-profiled' ('rescheduling' was the term used in my day). I am glad to see myself supported by the views of the above experts who note the following benefits of a re-profiling:

* reduce the call on tax payers' resources
* allow time for diagnosis
* allow time for adjustment mesures to take hold
* lock in the private lenders
* allow time to hedge
* incentives for debtor countries

A very important benefit, not mentioned above, is that the country can continue to say that 'we will honor our entire debt' (regardless of whether eventually it will be able to do that or not, but 'eventually' is a long time off).

What does a re-profiling mean? That depends on how it is structured. In the extreme case, it could extend all maturities of principal and interest for, say, 10 years or more. In practice, this would be equivalent to a haircut for 10 years (or more). The debtor country has no debt service during this time and the lenders retain all their legal claims.

There is one major problem with that, and the report mentions it. There will always be holdout's. There will always be a small creditor and/or a hedge fund who will blackmail the majority (and legally he can do that!). The report does not offer a solution to that question, it only stipulates that the question of how to treat holdout's must be agreed upon at the outset.

My suggestion would be: pay them off and tell them that they will never do business again with any lender participating in the re-profiling!


  1. Klaus, I think, the question of a debt restructuring, haircut or whatsoever should be solved - but is not the solution. Not in the long run. I would like to draw your attention to this post

    As long, as Greece has a currency, that does not fit it's economical capabilities, a solution is just postponed. What do you think?

    1. Yes, I have always argued that the debt is, at best, a secondary issue. Why? Because, until recently, the debt and debt service were exactly zero burden for Greece. As long as Greece had a primary deficit, the entire debt service was paid for by foreign lenders; i. e. they paid themselves from the left pocket into the right pocket.

      This changes now that Greece has a primary surplus. Now decisions need to be taken whether the surplus Euro is used to service debt or for domestic purposes.

      The debt problem CANNOT be solved. In can only be - and it SHOULD be! - regularized. 'Regularized' means that the structure of the debt must correspond to reality. If reality is that Greece, for a LONG time, can only repay debt by taking on new debt, one should simply extend maturities on that debt to avoid the quarterly merry-go-round with all the panic. And if reality says that, for quite some time, Greece can only pay a portion of the interest it owes, then the rest of the interest should be capitalized into the future. In short, 'regularization' means to postpone issues which cannot be solved short-term way into the future without forcing anyone to take haircuts or other types of losses.

      If the Euro is a currency which doesn't fit Greece's economic capabilities (and the culture of Greeks!), which I have felt for some time now, then there are only two options: (a) get Greece's economic capabilities so that they fit the currency or (b) change the currency to fit Greece.

      It would be better for Greece, long-term, to get its economic capabilities to where they fit the Euro but I have given up hope that Greece can do that.

    2. Herr Klaus, which is the clue, the sense which indicate for you that Greece cannot improve it's economic capabilities? The fact that 9 out of 10 new businesses are cafes, gyros restaurant etc? Or the fact that government does not give a direction in order Greece to create more added value, products that people outside Greece might want to buy them ?


  2. Klaus, if we take a look at this PWC-Study we might come to the conclusion, that it is completely irrelevant, what Greece does, gets - or not. 1,2 Billion Non-performing-loans in the EU. Who would want to restructure those? We see the end of the chain letter "credit money system", to my humble opinion. And: If this unwinds, we would rather be in Greece at the end, wouldn't we :-)

  3. Yes Klaus, like MS I would also like to know why you, and other doubters, say "Greece is not going to make it in the EURO zone". I realize that there are always a lot of things that influence our opinion, but for most of us there is ONE clue, event, happening, that tips the scales. I think that the event that triggers it is widely different among people who come to the same conclusion.
    For me it was certainly not that 9 0f 10 new businesses were cafes, I had expected it and my conclusion had been reached before that. The other suggestion by MS, that the government did not formulate a plan of action for Greece, but relied entirely on outside forces (national or divine) to help them, worried me from early on, but it was not THE event. My conclusion came, out of the blue, while I was re-reading, after 10 years, Nikos Dimou's book "On the unhappiness of being Greek". While reading his loving and succinct description of Greece and Greeks I realized again how unique they are. With their stubborn, unreal, illogical, inconsequential ways, they can not live within a rational and logical world.That was a bit scary for me because I realized that I had not concluded that they were incompatible with the EURO zone, but with the global world as we know it today.
    PS. I wrote this before I saw your re-run of the Encyclopedia Brittanica. Nikos Dimou is not the only one with profound insight, what makes him unique is that he wrote it as a Greek and as a declaration of love.

  4. MS and Lennard

    1 of 2
    Not specific hard facts, rather soft facts influence this judgment of mine (which, I agree, may be totally wrong in the view of others). And it is a judgment which has grown over time (‘riped’ so to speak). Every once in a while, I find myself backtracking in this judgment but such periods usually don’t last very long at this point of the game.

    I, too, think that a lot of answers can be found in Dimou’s booklet because I think it is really a question of mentality, national character, etc. I don’t want to put a value judgment on mentality and/or national character; I just want to recognize and accept that such things do exist. Alexis Zorbas lead a life which, from a value structure standpoint, was about the opposite of the values which I have been raised with. From that standpoint, I should fully criticize the man’s conduct. And yet, I – like probably many people – envy him more than my mind can pull itself together to the rational conclusion that he should be criticized. Why should he be criticized? Because if everyone behaved the way he did, society would fall apart. The point is, however: life would be so much more boring if there were not people like Zorbas; if there were no Greeks, for that matter.

    Let me quote Dahrendorf (from 1996): “For Italy, periodic devaluations are much more useful than a fixed exchange rate and for France, higher government expenditures are more meaningful than a rigid adherence to stability criteria (which are, above all, an advantage for Germany)”. That’s what I try to say about Greek mentalities and value structures. There are apples and pears in life; thank God there are! Apples may fit the Euro; pears may not.

    Strangely enough, most of the Greeks I meet in day-to-day life are as ‘normal’ as everyone else in Central Europe of elsewhere. We have rational discussions and where we disagree, we agree to disagree. When I am with such people (including some very smart university grads), I come away with the (temporary) hope that Greece will eventually make it in a ‘normal’ world. Those are experiences with individual Greeks. My experiences with Greeks as a collective quickly bring me down to reality (by ‘collective’ I mean mostly what one hears, reads and observes through the media).

    So, contrary to you, I don’t have ONE single event. Instead, it is a gut feeling that, after 4 years of rather dramatic crisis, one ought to feel a tendency, a wish for real change. Frankly, I don’t see Greece all that different today than 4 years ago (except a lot poorer) and I don’t sense much of an energetic wish to change something running through society.

  5. 2 of 2
    However, there is ONE experience I had many years ago which I am now reminded of very often. The American bank where I spent my first career had 3 large units in Greece and I was supposed to take over country management in 1986 (shortly before that happened, my bank sold the Greek operations to NatWest and that was the end of my wife’s dream of returning to Greece, but that is a different and very complicated story…). We were in Argentina then and I once had the visit of a colleague/friend, an American who had been country manager in Greece in the 1970s. He felt he had to coach me a bit as regarded my future job in Greece and said some like this: “You know our job application form has sections on ‘personal strengths’ and ‘areas for improvement’. You will find that Greek job applicants leave the ‘areas for improvement’ blank. When I first noticed this, I thought they were inhibited to put anything in writing and would prefer to discuss this in the personal interview. The strange thing was that, even in the personal interview, they would not volunteer any ‘personal areas for improvement’. Not because they seemed inhibited or embarrassed or anything like that. No, they were quite natural about it. They simply could not address the issue that they might have ‘personal areas for improvement’”. I should add that we never had anything but the best experiences with local staff!

    A good friend of mine, a Brit who is now retired, spent the last 10 years of his career as a bank consultant based in Greece (his wife is Greek). His projects would always take him to far away places. I once asked him why he wouldn’t seek consulting mandates from Greek banks. His answer? “That would be masochistic! You cannot consult Greeks because they already have all the answers. They will not accept your advice. They will, instead, pretend that, whatever you tell them, they knew it already, anyway”.

    In my early years of schooling in Austria, we learned about ancient Greeks themes like ‘know thyself’, ‘accept yourself’, ‘know that you know nothing’, etc. etc. Somehow, it seems that these themes got lost through the centuries.

    One of the key aspects of the Greek mentality, to me, is this ‘susceptibility to flattery’. It is referred to in the Encyclopedia article but also in a briefing which a former US ambassadador once cabled to Washington (published by Wikileaks). He said: “The Greeks are susceptible to flattery and quick to be offended by a perceived slight”. This susceptibility to flattery, one might also think of it as a bit of gullibility, is, to me, a landmark characteristic. Greek voters seem to fall for politicians who are good at playing on these susceptibilities. Someone like Alexis Tsipras strikes me as an expert at this game.

    I have visited, as a guest, all 5 or 6 Rotary Clubs in Thessaloniki. Between them, I could easily form at least one complete Greek government of responsible and professional leaders who know what they are doing. Add to that the thousands and thousands of Greeks who have the same capabilities. Consider that against the certainly millions of decent Greeks who would like to be governed by decent leaders. The resources are there! They just don’t seem to come together.

    The widely spread ‘Greek irrationality’ is part of the great charme of Greeks and it can be a lot of fun to watch; in relaxed times, I hasten to add. In stressed times, they can take one’s nerves apart (and I say this after close to 40 years of marriage with a Greek…). Colleagues at my first employer who had spent time in Greece would crack the joke that “Greeks gave the logic to the world. The only problem is that the world never gave it back to them”. Good for a lot of laughter. When it plays out in serious reality, it can drive someone nuts.

    In conclusion: since I didn’t have a short answer to you question, I had to write this long piece but I, nevertheless, hope that you can understand what I am trying to get across.

  6. MS and Lennard
    I just remembered this article which I find quite fitting the subject:

  7. Thank you for your writings to give an answer with a very, very detailed and accurate way! I think you are right in your antilipsis.I have wrote before months to the blog something but its not easy to find it. Herr Klaus, it's a pity that banking have attracted you professionally, probably you could become a great behavioral analysis expert or a psychologist!
    Our deficiencies, the roots for my point can probably explained as a result of a major absence. US had the Founding Fathers which build a new state with some simple "founding principles" (simplistic for some) but very efficient rules.Germany was together with UK (Anglo-Saxons) and northern countries (Sweden,Switzerland, The Netherlands,Norway, Finland, etc) the incubator of modern sciences-education, i can't remember the number of scientific discoveries in europe in modern history. France also all the above plus it was the "benchmark" for the Democracy and civil rights, one of the best places to live.
    Japanese and even N Korean develop their own unique perception about their identity which enable them to build succesful states.
    Why not Greece? Well, we have never achieve that for my view because this is not happened by concious choice and rules. People had a strong"will" -"voulisis' for a common future, which may explained as an emotional need and not as a rational and elaborate approach. Also with no laborious and detailed effort. Not by choice but as a need, this is the way we vote even today, but 9 to 10 times our needs does not meet our expectations.
    However many, many Greeks believe in Europe the idea of Europe, what represent Europe, not as need but as an idea, as something we've didn't experience in modern history.
    So in 1830 we had "rousfeti"- meritocracy, also in 1930 and the same in 2013.
    To answer to my question the accountability is an issue and the political system does not promote that, to cooperate -with good will -when we've seen a problem.
    N Dimou is a rational Greek, he was educated in Germany.
    Education -even social education- or as representations according to western perception is more than a need, keeping aside good characteristics.