Friday, April 21, 2017

On One Hand... And On The Other...

My return to Greece after a 4-month absence coincided with 2 articles which nicely sum up what the 'Greek problem' is all about. The first one was the following comment in the Ekathimerini:

"Foreign investors and international markets are awaiting tangible results from Athens in order to be convinced that the country is, finally, turning a corner, and that something is moving after years of frustration. Their wait has been a long one and the economic pressure on the country has been unbearable. But the deals regarding the old airport, and the new one as well, could do the trick. However, if foreign investors are to be convinced of Athens’s commitment to change, it will need to make some bold decisions that will allow the country to circumvent, and essentially neutralize, the naysayers within the administration and within the state that are doing everything in their power to stand in the way of the growth Greece so desperately needs. The problem is that those opposed to progress are determined as ever to keep standing in the way."

And the second article was written by Bill Rhodes, the doyen of sovereign financial crises. I had written about Rhodes on several occasions in the early years of this blog when I lamented that no one was listening to his advice (had they listened, the crisis would have been resolved within 2-3 years, in my opinion). The gist of Rhodes' message is summarized in the following sentence:

"Debt relief really means softening the terms on interest rate payments on the outstanding debt as the Greeks have no requirement for many years to come to start repaying principle."

We have now observed a song-and-dance around the above two positions between Greece and its creditors for months and it is likely that it will continue for even more months. Bill Rhodes once said exasperatingly: "We are in a sense of gamemanship here and everything is being played out in the public rather than getting in a room, something that I was accustomed to for 25 years with so many debt restructurings around the world, and to say 'Let's get it done!'"

In case of doubt, one is well advised to take the advice of those who have the most experience and the best track record. Between the Eurogroup, the IMF and Bill Rhodes, there is only one party which has a good track record; an excellent one, for that matter! And that party is not the Eurogroup nor the IMF!

As a starting point, it would be helpful to do some public educating that there are various kinds of debt relief. The key available elements are: forgiveness of principal, extension of maturities and reduction of interest. Greece so far has had a bit of all but never in a truly consequential manner. And the big mistake is that many understand debt relief to be a forgiveness of principal. A forgiveness of principal of official debt is totally out of the question in a year with several important European elections.

And - a forgiveness of principal is really not necessary because principal debt only matters to the extent that it carries interest and has maturities for repayment. If, for example, interest is brought down to close to zero and if maturities are extended into the next century, debt assumes the character of equity.

So far, the IMF has taken a huge profit on its 'help for Greece' because its lending margins are in the area of 2-3% and, as a super senior lender, it faces no credit loss. With the Eurogroup, the situation is a bit different because they now have a large portion of their loans on zero interest and they certainly face the risk of credit loss sooner or later. Neither is the IMF's 'help for Greece' recognizable with their maturity structure because all their loans mature in the foreseeable future. The Eurogroup, on the other hand, has already extended some maturities substantially.

Perhaps it is wise to have the IMF in there with maturities in the foreseeable future because, that way, one always has some leverage over the borrower. However, there would have to be some explanation why the IMF is not lowering its interest rate to the lowest they have ever charged a country because, as they have stated, they have never had a country in as bad a shape as Greece.

The Eurogroup should restructure its maturities in such as manner that there are no maturities for at least 10 years. And on the interest side, they should reduce the rate to their funding cost and lock in as much of the rate for as much of time as possible. That would be some 'help for Greece' without really costing anything. As a final 'gift', one could offer the deferral of interest for, say, 5-10 years.

If Greece were a company with the benefit of bankruptcy laws, its creditors would already have given debt relief involving massive forgiveness of principal, significant extension of maturities and zero interest rates on large portions of the debt. All that because it would still have been a less costly affair than a bankruptcy.

The only reason why Greece has not gotten such debt relief is that there are no bankruptcy laws for countries. But that should not be a free ticket to get away with bloody murder.


  1. The false narrative that investors and international markets behavior is based on Athens deliverables is total BS. Here is economics lesson 101: no one would ever invest in a recessionary economy such as Greece when austerity is controlled outside the investment target country. No one and I mean NONE.

    The debt restructuring is another total BS. Greece just recorded a 3.9% primary suplus to GDP. It did so under the wrong advice by both the IMF and the eurozone clowns. These criminals we refer to as lenders only pushed Greece into a further recession in order to achieve targets that it needed not to (in other words not the agreed upon targets) because Greece could have easily achieved the agreed upon performance without more brutal taxation and further austerity. Which goes to show you that those magnificent idiots who pretend to advise Greece have no clue what they are talking about. Which also means that Greece has a primary responsibility to her own citizens to totally ignore these euroclowns in the future.

    I hope this is perfectly clear, n'est ce pas?

  2. You fail to address the argument that "the threat of Grexit could be essential to maintain incentives for reform and adjustment in Greece. This argument cannot easily be dismissed. There is little doubt that it was the experience of July 2015 that brought the present Greek government back to the negotiating table and created the political basis for the current program". The Peterson Institute (quoted above), in their recent excellent analysis, readily admits that they cannot answer that question either. You seem to dither between "Greece will never change" and "give them another chance".
    PS. "If Greece was a company" is not a good comparison. Yes it would have received debt relief if deemed viable, but it certainly would not have been allowed to elect its own management, and 4 times at that.

    1. So you argument is that Grexit which is horrible for Germany but uber beneficial to Greece is a lever for Greek reforms?

      Your logic is very flawed. It's exactly the opposite of you believe it is.

  3. "The problem is that the IMF’s basic charter does not enable the Fund itself to give debt relief and the Eurogroup, driven to no small degree by German finance minister Walter Schäuble, opposes all forms of debt relief on ideological grounds, as well as on the cold calculation that explaining this to the German electorate before elections this year may be tricky."

  4. @ Phoevos.
    It worked in July 2015.
    It worked in this month's negotiations.
    It is logical to assume it will work as long as a majority of Greeks don't want Grexit.

    1. What do you mean the majority of Greeks don't want Grexit? What are the figures?

  5. The comparison between Greece and a bankrupt company is an interesting albeit not really fitting one. With a bankrupt company you have essentially two choices. Either you restructure the debt when you believe in the company having a chance to turn around or you liquidate and close it when the business model has no chance for thriving.

    How about the Greek business model of avoiding any reforms of the public administration or of the pension system while at the same time taxing the private sector to death? Is that worth a debt restructuring or is liquidation the way to go?

    1. You point to another key difference between a company and a country (which, in my opinion, is the explanation why there are not bankruptcy laws for countries), namely: a bankrupt company eventually disappears. See Enron. A country cannot disappear. There will always be a Greece and Greeks living there. Put differently, there will always be someone against whom the creditors can try to execute their claims.

  6. Restructure or liquidate? It's a rhetoric question. When you have not been able to install a management that could present a viable business model, what should you restructure to?