Wednesday, October 28, 2015

The Farce Of Greek Sovereign Debt

A very interesting paper by Carmen M. Reinhart & Christoph Trebesch. Of the many points they make, one of the overriding themes is a theme which I have made since the beginning of this blog, namely:

The critical issue is not necessarily the sovereign debt of a country. Instead, the critical issue is the foreign debt of the entire country, not only the foreign debt of the state. What the state (and others) owe domestically is one cup of tea which can be solved domestically. An entirely different cup of tea is what the state (and others) owe cross-border. 

If all of Greece's sovereign debt had been owed domestically (technically, this would have been possible back in 2010 because there were then enough domestic savings to finance the entire sovereign debt), there would have been only little excitement between Paris, Brussels, Frankfurt and Berlin. And if all of it had been owed to banks on Mars, no one in Europe would have cared.

It is the cross-border debt which matters! That is the debt which becomes worthless to the lenders if and when Greece were to fall into the Aegean. It may well be that the state has its household in order and that all the cross-border debt is owed by the private sector. If push comes to shove, i. e. in the case of a 'sudden stop', the private sector's cross-border debt becomes cross-border debt of the state (witness Ireland, witness Spain).

The farce of the Geek sovereign debt is that literally everyone in the world is financing the Greek state --- except the Greeks themselves. The Greeks put their money into Greek banks, into Greek shares and, most of all, into foreign accounts (and under mattrasses). But virtually none of the Greek sovereign debt is held by Greek citizens and only a little of it is held by Greek banks. The Greeks seems to be saying to foreigners: "You finance our bankrupt state, por favor, because we have better things to do with our money!"

Greek bank deposits are now around 130 BEUR. Five years ago, they were 130 BEUR higher. It is still not certain that these bank depositors will not be bailed-in. They should not be bailed-in. They should be kept whole but their deposits should be replaced by bonds of the Hellenic Republic. That way, the Greeks would truly become stakeholders in their own state!


  1. Well then Europe should tell Greece that they will only finance then to the extent they do themselves, match them Euro for Euro, that should encourage investors. Or am I oversimplifying it?

  2. Farce is one word. Blackmail is another (pay our debt or we turn into a new Syria at your door step). Stubborn attempt by Greeks to take revenge on their government (sounds stupid but many argue that way). All of the above. In other words politics as usual.