Sunday, August 21, 2022

Greece's Gross External Debt hits 565 BEUR! (300% of GDP!)

The Greek financial crisis began when foreigners brought new lending to a halt and began calling in existing loans. That is a process which normally starts rather slowly at the first sight of clouds over the horizon but which rather quickly accelerates as foreign financial agents watch the conduct of their competitors and then start doing what they are doing. The culmination of the process is called "Sudden Stop". That is when no one makes voluntary loans to Greece any longer.

It is fair to say that voluntary foreign lending came to a halt in early 2010 (the first memorandum was signed in May 2010). At that time, Greece's gross external (foreign) debt was around 430 BEUR.

"Gross foreign debt" (not to be confused with "sovereign debt") is the total of all monies which have entered the country as debt (as opposed to foreign investment), regardless of the borrower. At that time, Greece's foreign debt was roughly 50:50 with the government and with the banking sector. A small portion was with individual borrowers such as large Greek corporations. 

By the end of the first quarter of 2022 (March 31), Greece's gross foreign debt stood at 565 BEUR. What? That would represent an increase of 135 BEUR in a period where Greece was most of the time restricted by memoranda with the Troika! Well, the number of 135 BEUR is indeed not correct. The actual number is even higher!

In 2012, foreign creditors gave the Greek government a 'haircut' of 100 BEUR, roughly 60 BEUR of which were foreign debt. Thus, the increase of gross foreign debt between early 2010 and March 31, 2022 was actually 195 BEUR! That's about one year's worth of Greek GDP!

The overall interest expense on the total of 565 BEUR of foreign debt is not known to me. If the weighted interest rate were 1%, the annual interest expense would be 5,65 BEUR. If it were 2%, it would be 11,3 BEUR annually.

Interest expense it accounted for in the country's current account. In order for the country overall to pay 5,65 BEUR in annual interest, the current account needs to have a surplus of 5,65 BEUR. If the interest expense were 11,3 BEUR, the surplus in the current account must be in the same amount. Otherwise, Greece would have to borrow from abroad in order to pay interest due abroad (unless there are cash reserves).

In my previous post, I have outlined that Greece not only does not have a current account surplus but, instead, a massive current account deficit which means that Greece has to borrow abroad not only to pay interest but also to finance the rest of the current account deficit. Well, not quite. Greece currently has substantial cash reserves which can be used for foreign payments. 

Whichever way one analyzes the above, those are staggering figures! A gross foreign debt of 565 BEUR represents close to 300% of the annual GDP. There cannot be many countries in the world which have a higher ratio. 

Also, it is a quite staggering development when an economy aims at bringing down foreign debt after a crisis while in actual fact increases foreign debt by 195 BEUR! It certainly raises the question of what happened to all that money? Was it invested prudently and economically or was ist spent?

If this process continues, it won't be long until Greece hits 600 BEUR in gross foreign debt. Perhaps when that staggering number is published, the eyes of creditors will once again start looking at Greece's financials.

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