Sunday, January 4, 2015

No Realistic Way That Greece Can Ever Pay Back Its Debt?

The re-awakened discussions about a possible Grexit also bring back the discussions about the sustainability of Greece's debt. One of the more interesting conclusions I found in an article in Mish's blog:

"Even if the interest rate on the bailout was 0%, with a €3 billion surplus every year, it would take Greece 81 years to pay back that debt! There is no realistic way Greece can ever pay back €245 billion, so it won't!"

I would like to see a list from Mish of all countries which can pay back their sovereign debt in less than 81 years based on their current primary surplus. I doubt that there will be many.

My point is: sovereign debt generally DOES NOT get repaid nor does it have to be repaid. It just needs to be able to be serviced (i. e. interest must be paid and principal must be refinanced). Above all: sovereign debt must be regularized, that is to say: compliance with agreements must be assured.

And this is the real point: one cannot always force reality into agreements. Instead, agreements must be adapted to suit reality. If Greece cannot afford interest on 320 BEUR of debt and/or cannot refinance debt tranches upon their maturities, then the agreements must be adapted to reduce the interest rate and to extend maturities.

The two extremes would be a combination of Evergreen Bonds (no maturity) and zero interest rates. That would no longer be debt but equity instead. Offhand, I cannot think of a country which has issued Evergreen Bonds but Mexico, a few years ago, issued 99-year bonds. And I cannot think of a country which has issued debt at a zero interest rate (except perhaps Germany these days) but Greece comes close to it with part of its debt due to the Troika. If creditors don't like a zero interest rate, an alternative would be to make the rate adjustable (i. e. adjustable to GDP growth).

The day the Troika converts its loans into 99-year bonds and structures the interest rate in such a way that Greece will only have minimal interest expense (if not a moratorium for several years), Greece's debt problem will be regularized. Not solved, because the debt would still be there but what will 320 BEUR be worth in the year 2114?


  1. I have been able to retrieve the below comment from my email:

    Anonymous has left a new comment on your post "No Realistic Way That Greece Can Ever Pay Back Its...":

    a. Let's set it for simplicity's sake at a yearly ~2% of GDP; let's also suppose that there would be a 10 year interest payment moratorium and 99 years maturity on the principal:
    Good luck with that, convincing the lenders! However paradoxical it may sound, imo, judging from history, a default would be to them more acceptable. Because, for example, a real default would cause Greece to get out, so the the rest of the "club" wouldn't have to deal with her, at least not so much. The mess would have finally "ended" on their side after a short while. On the other hand by keeping her in, why wouldn't Spain or Portugal or... demand such a massive relief and treatment too? The same would be true even if the rest of the "South" were to default and exit.
    A 100 maturity (or anyway anything so long) is imo out of the question; it's practically a 100% haircut. Let's not even consider 100 years maturity plus a 10 year moratorium plus small interest payments henceforth! After all even after official, normal, outright defaults, countries often pay more and much sooner; see for example Argentina. I hate to imagine what Bild for example would read even at the hint of such a maturity...

    b.Even accepting a. as a working hypothesis, historically, empirically, countries predominantly recuperate from such events by inflation and growth, by immense government deficit spending, industrial policy, protectionism etc.. What are the chances of that happening? What would happen to the Greek "red", the non-performing private loans? Who would give jobs to the jobless? What would be happen during the 10 year moratorium? Would Greece be allowed to deficit spend its way to recovery, i.e. away with Maastricht? Or would the internal devaluation have to continue? And then after these 10 years, a 2%GDP yearly interest payment (siphoning out of Greece) would mean that the government would have how much leeway? Another 2% perhaps? Is that anywhere near the amounts necessary to function let alone really grow or recover?

    c. Do you really believe that the "North" would accept such a relief (however ineffectual imo) without endless additional conditions? What would these conditions mean to the chances of real future recovery?
    Do you really think that the Greek shipping magnates and/or German industrialists would finally invest then in really productive massively - actually producing tradable stuff, preferably if not necessary, high tech high added value ones - companies and factories in Greece? Do you actually believe that an e.g. Greek Mittelstand is waiting just around the corner, Greece being within the EU and EZ?

    a.A historical precedent of a country in general starting at such dire initial conditions and getting away without defaulting/devaluating/growing/inflating-out of the debt and the rest of the chaos.

    b.On the one hand Greece defaulted many a time in the 19th century. On the other hand those also were the times of gunboat diplomacy.
    Both are hardly in agreement with what you're proposing...

    1. Yes, Greece had defaulted 6 or 7 times prior to 2010 but as far as I know, never before did anyone have to forgive Greek debt. As regards the rest, I suggest we agree to disagree. Ok?

  2. The below article describes in much more detail what I have tried to explain.

  3. An for those who want to delve even further into the subject, read the article below.