Tuesday, February 3, 2015

SYRIZA Will Always Do The Right Thing - After Exhausting All The Alternatives!

Once again, a Churchill quote describes the situation adequately. What Churchill said about Americans can now be said about Greece and its Finance Minister. Finally, they are embarking on a strategy which avoids the haircut issue (which would have brought hardly any cash flow benefit for Greece's budget but caused one-time pain for creditors) and they are moving towards a smart extend-and-pretend strategy (which has far greater benefit for the budget and allows creditors to spread the loss over time).

I have argued ad nauseum in this blog that the most important issue in a sovereign external payments crisis is that the debt gets 'regularized'. Since the debt can't be repaid, anyway, it should be structured on sound footings so that the problem doesn't pop up every few months and all resources can be devoted to other, more important things like getting growth into the economy.

There are really only 2 things to negotiate: (a) the amount of annual debt service (interest) which can be expected to burden the Greek budget and (b) the length of the interest moratorium. Once these 2 points are agreed upon, the matter can be passed on to financial engineers who will translate that into the optimal structure of new bonds. The annual interest burden should be linked to government revenues instead of GDP because, that way, the interest is linked to the revenues out of which interest must be paid. Also, the % of government revenues is optically higher than the % of GDP which would make it easier to sell it to foreign tax payers. Finally, the length of the moratorium is more important than the interest burden because interest doesn't get paid during the moratorium, anyway.

The third post I had made in this blog (June 18, 2011) was a letter which I had written to the then President of the ECB, Jean-Claude Trichet. Here is the key paragraph: 

"If handled well, it wouldn’t even take as long as 3 months to come to something like the following as an agreement: Greece will prepay the entire 410 billion EUR of foreign debt. In the absence of necessary cash, Greece will pay with 20-year bonds for 50% of that foreign debt; 10-year bonds for 30% and 5-year bonds for 20%. During the first 5 years, 2/3 of the interest will be capitalized in order to preserve cash. And needed Fresh Money will be in senior position to the bonds. No “haircut” whatsoever and everything so “unanimous” and so “voluntary” that no smart lawyer can construe an Event of Default".

Those would have been reasonable terms 4 years ago. Today, one has to talk about a maturity extension of 50 years or more (instead of 20 years) and an interest moratorium of 10 years or more (instead of 5 years). More importantly, all the time which has been wasted during the last 4 years with discussions/negotiations about debt could have been used for designing growth measures. And, last but not least, much of the damage to Greece's reputation would have been avoided.

Even Prof. Paul Krugman writes that "SYRIZA is making sense now". What a surprise! Not too long ago he argued that a Greek haircut was unavoidable!

PS: Whether it was smart to accounce the new strategy to third parties in London instead of first discussing it with major creditors is a different matter...


  1. You make sense as always. Ofcourse i do not know why your opinion is not weighed more into everyday implmentations. I would assume it is because you are balanced person and character who believes in normal honest growth versus toxic growth. I hope they heed your suggestion likewise Varoufakis's.

    As i have expressed a long time ago i do not believe this crisis was an accident. Especially in Europe. I believe the failure of the USA banks and bailing them out required more debt globally to sustain the USA from a total economical collapse. The USA offshored its debt, created perceptions of Europe's countries to be weak, causing things in the eu to spin out of control. This required huge bail outs. I sometimes believe that we as greeks taking on that huge debt deal of 100 billion or so to help revamp the usa economy. Obama's latest support is a recognition to this contribution. G PAP was apart of this and passed on to the people that we achieved to acquire the biggest loan, as if he succeeded in best thing possible.

    The above is all sketchy and i have no time to research but it is how i feel. In this total economical mess i can honestly say that i feel greeks have overpaid for their past faults. In retrospect it brought us back to earth though after the feast had for so many years.


  2. Your PS says it all!

    And I dare express again my concern that the northern political establishment will not even analyze suggestions made under such circumstances.


    1. Mr. Trickler,

      It's all about money. And as it is expected, the other side is german.

      (Bloomberg) -- Germany expects talks with Greece to drag on until after the current round of bailout funding runs out at the end of the month and is prepared to play a waiting game until April or May, when the country approaches a cash crunch, a person familiar with the matter said.
      Greece would not immediately go bankrupt at the end of February because it has resources to last beyond that point and Germany is ready to hold off until there is a more urgent need to strengthen its bargaining position, said the person, who asked not to be identified discussing internal talks.
      Chancellor Angela Merkel, who is still assessing Prime Minister Alexis Tsipras’s motives, is taking a tough approach with the new premier and wants to avoid being drawn into a duel with him, another official said. No one from the chancellery has met with him yet.


    2. @ Anonymous at 6.11
      If Greece has no liquidity pressure, why did Greece on Sunday - very quietly - apply to have its limit for the issuance of T-bills increased from 15 BEUR to 25 BEUR? Don't forget: some T-bills fall due in a few days and not all of them are held by Greek banks which can be pressured to roll over. A foreign fund is likely to call for payment.

  3. And why, have the Greek banks drawn 2 billion from ELA (and that window may soon close).