Saturday, September 26, 2020

Greece's Admirably Strong Financial Condition

As Greece prepared for its exit for the 'rescue program' back in 2018, two possible alternatives were discussed: (a) a back-up line of credit from the EU for the post-program period or (b) a cash reserve in lieu of that. The disadvantage of the back-up line was that it would have involved some kind of conditionality, the disadvantage of the cash reserve was that it would trigger incremental and unnecessary interest expense. 

I had supported the back-up line. Greece chose the cash reserve. It was funded through the last tranche of the program and through new debt issues subsequent to the exit from the program. Today, I must admit that Greece was right and I was wrong.

Owing to the collapse of interest rates, the cash reserve probably caused only minimal incremental interest expense for Greece. At the same time, the cash reserve assumed huge proportions and "cash is king and increases creditworthiness". 

Finance Minister Christos Staikouras is quoted in this article as “We, the Finance Ministry, have got the cash reserves to support any government decision. We have built strong cash reserves of 37.7 billion euros so as to support any choice made". It should be noted that these are reserves of only the Finance Ministry. It is safe to assume that there are further reserves elsewhere in the public sector which are not included here.

Prior to Corona, Greece's budget was more or less in balance (after interest expense) so that the cash reserve was indeed a reserve for future expenses. Corona has totally altered this situation and now the budget deficit for 2020 could reach 8-10 BEUR. Under normal situations, this would be a crisis scenario. With a cash reserve of 37,7 BEUR, it is not much more than a footnote. 

Greece's cash reserves will receive a substantial boost from the 750 BEUR Recovery Plan of the EU. At the same time, Greece is likely to take advantage of market conditions and issue new debt. In consequence, despite the cash outflow due to Corona, Greece is likely to increase its reserves substantially going forward. More cash reserves translate into better perceived creditworthiness which, in turn, will make the raising of debt even easier. A positive do-loop.

In sum, Greece's financial condition is admirably strong. There will be no major debt service until the early 2030's. Greece already has more than enough cash to sustain the expenses until then. There is no liquidity risk in the next few years.

This would certainly seem to be the time for investing in Greek bonds with maturities in the next few years!


  1. Do you believe that Greece will be eligible for QE in 2021 or 2022?

  2. Happy Christmas Klaus, hoping you and your family are well.
    LeaNder aka whatever by now.