No Realistic Way That Greece Can Ever Pay Back Its Debt?

The re-awakened discussions about a possible Grexit also bring back the discussions about the sustainability of Greece's debt. One of the more interesting conclusions I found in an article in Mish's blog:

"Even if the interest rate on the bailout was 0%, with a €3 billion surplus every year, it would take Greece 81 years to pay back that debt! There is no realistic way Greece can ever pay back €245 billion, so it won't!"

I would like to see a list from Mish of all countries which can pay back their sovereign debt in less than 81 years based on their current primary surplus. I doubt that there will be many.

My point is: sovereign debt generally DOES NOT get repaid nor does it have to be repaid. It just needs to be able to be serviced (i. e. interest must be paid and principal must be refinanced). Above all: sovereign debt must be regularized, that is to say: compliance with agreements must be assured.

And this is the real point: one cannot always force reality into agreements. Instead, agreements must be adapted to suit reality. If Greece cannot afford interest on 320 BEUR of debt and/or cannot refinance debt tranches upon their maturities, then the agreements must be adapted to reduce the interest rate and to extend maturities.

The two extremes would be a combination of Evergreen Bonds (no maturity) and zero interest rates. That would no longer be debt but equity instead. Offhand, I cannot think of a country which has issued Evergreen Bonds but Mexico, a few years ago, issued 99-year bonds. And I cannot think of a country which has issued debt at a zero interest rate (except perhaps Germany these days) but Greece comes close to it with part of its debt due to the Troika. If creditors don't like a zero interest rate, an alternative would be to make the rate adjustable (i. e. adjustable to GDP growth).

The day the Troika converts its loans into 99-year bonds and structures the interest rate in such a way that Greece will only have minimal interest expense (if not a moratorium for several years), Greece's debt problem will be regularized. Not solved, because the debt would still be there but what will 320 BEUR be worth in the year 2114?

Withdrawal and/or Expulsion from the EU and the EMU

DER SPIEGEL cited a senior member of Angela Merkel's party as saying that a Grexit, voluntary or not, may not be provided for in EU treaties but 'resourceful lawyers' would find a way.

Below is what the ECB has to say about the subject in a Legal Working Paper authored by Phoebus Athanassiou (who I presume is Greek!).

Legal Working Paper #10

Greek Debt - The New Testament Has The Answer!

"In New Testament Greek, debt means 'sin'. But, though it might be sinful to go into debt, Matthew 6:12 supports absolution: 'Forgive us our debts, as we also have forgiven our debtors.'"

Prof. Robert Skidelsky in The Guardian.

The Cost of a Grexit

We live through amazing times! Not too long ago, the mere mentioning of the word 'Grexit' was considered anti-European or irresponsible. Today, however, there is hardly an article about Greece which DOES NOT mention the word. The German government which made history by declaring that a bail-out of Greece was 'without alternative' is now - according to DER SPIEGEL - expressing the view that a Grexit wouldn't be a big problem.

On the political side, George Papandreou, who made history by personally guaranteeing that all of Greece's debt would be paid but who never lived up to this personal guarantee, is returning with a new party. He has learned from Alexis Tsipras that positive soundbites are important. It's no longer "There is money!". Instead, he is now onto "Let's go!", "We'll write history!". Papandreou is now talking about values. He is calling for solidarity. He is choosing beautiful words like "wanting to express politically a social alliance between Justice and creativity, emphasizing that the 'post-dictatorshiop era ends in Greece and now the new struggle is to free democracy that has been imprisoned by economic and media interests that are supported by the clientist state'". And, for that, pundits predict that he will get up to 5% of the vote!

Everyone agrees that a Grexit would impoverish Greece in the short-term and only few voices warn that a Grexit might not be smooth sailing for the Eurozone. But no one seems to remind the Northern champions of a Grexit that a Grexit would entail great costs for Northern tax payers as well.

Early on in the bail-out game, EU politicians warned their tax payers that not bailing out Greece would entail enormous direct and indirect costs for their economies. Is anybody making such estimates now? If so, why are they not informing the public about it?

DER SPIEGEL reports that the maximum damage to Germany of a Grexit would be 70 BEUR. Since that would only be the starting point for negotiations, the actual damage would be much lower. I presume this is assuming that Germany's damage is limited to its share of the bail-out financing; no more.

But even if the actual damage to Germany were 'only' 50 BEUR, that amount could not be hidden like much of the bail-out financing has been hidden from the budget so far. Instead, that amount would sooner or later have to flow through the budget and, at that point, German tax payers would awaken to the fact that a Grexit was not free of charge to them.

Only a few months before the Lehman bankruptcy, it was considered inconceivable that Lehman would be allowed to fail. For the simple reason that the cost would be prohibitively high. As Lehman's demise progressed, talk about their possible bankruptcy intensified. At first, that talk was a warning that bankruptcy should be avoided at all cost. At some point, the 'crying wolf' lost force. I still remember the week before Lehman's bankruptcy: everyone had basically agreed that a bankruptcy could not be avoided and that was that. No one 'cried wolf' any longer.

And then the wolf showed up...

Mario Draghi: "I Believe That Fulfilling One’s Obligations Is Not a National Peculiarity of the Germans"

Here is a very long and interesting interview with the President of the ECB.

SYRIZA Should Focus On Interest Rates and Not on Nominal Value of Debt!

Given the multiple sources of information (with differing numbers, I should add), let me first clarify that I am looking at the Ministry of Finance's latest State Budget Execution Monthly Bulletin which shows an interest expense for 2014 of 5,7 BEUR. The same Ministry of Finance reports in its Public Debt Bulletin that Greece's public debt stands around 320 BEUR.

It could well be that these two numbers are not directly comparable to each other because an interest expense of 5,7 BEUR on debt of 320 BEUR would represent an interest rate of 1,8%. I know that Greece's debt to official lenders is very cheap but there is still other debt due to private creditors and the interest rates there are much higher. An overall rate of 1,8% seems very low. Perhaps the 5,7 BEUR is not the entire interest expense which Greece pays on its entire public debt.

A significant debt forgivensess is a pillar of SYRIZA's economic plan. Let's just assume that the Troika were prepared to forgive Greece enough debt so that the remaining debt is within the Maastricht level, i. e. within 60% of GDP. In exchange, the Troika would likely insist that the remaining debt must be priced at market rates, say 6%.

Assuming that 60% of Greece's GDP is around 110 BEUR, which would be the remaining amount of Greece's debt, then the annual interest expense on that reduced amount of debt at 6% interest would be 6,6 BEUR annually, or quite a bit more than Greece is paying now.

I think SYRIZA is making a mistake by focusing exclusively on the nominal level of debt and ignoring totally the equally important elements of maturities and interest rates. What matters for Greece is how much debt service flows through the budget and, thereby, reduces government revenues which could be used for other purposes.

The interest rate has a far greater impact on the debt service in the budget than the nominal amount of debt. To wit: if all of Greece's debt were at 0% interest, Greece could easily double its indebtedness without a budgetary problem. Greece would still have a maturity problem but that could be solved by stretching maturities way into the future.

One can assume that it is easier for the Troika to give in on interest rates than on the nominal value of debt. For Greece, the interest expense should matter much more than the nominal value of debt. One thing is clear beyond any doubt: both sides will have to be prepared to make a compromise. If they are adamant about the current positions, there will be no solution.

A good compromise allows both sides to declare victory. The Troika's victory would be that they did not forgive any debt (the lowering of the interest rate to something close to zero would only be a footnote in the press release). SYRIZA's victory would be that they brought down the interest expense to an extremely low level. So low that there wouldn't be much difference between the primary balance and the overall balance of the budget. Thus, SYRIZA's press release would state that Greece managed to keep the entire primary surplus for its own benefit (with only a footnote saying that the nominal amount of debt would remain unchanged).

Greece - False Hopes Better Than No Hope?

I must admit that, back in June 2012, I thought one would have to be kind of nutty in order to vote for SYRIZA. Beyond wonderful soundbites, that party seemed to have nothing but destruction on its agenda.

But then I came across an article which a blogger by the name of Heidi (a young American married to a Greek teacher) had posted on her blog HomeInGreece. The fact that I remember this article well to this day proves how much it had emotionally touched me. An excerpt of the article is below.

The essence of the article was sadness, disappointment and hopelessness after SYRIZA had missed the win by a small margin. I had not been aware how much hope had been riding on SYRIZA’s campaign, particularly among the younger generation. When I read Heidi’s comment that “a false hope is better than no hope”, it dawned on me that there had been much more to the election than party programs and policies.

Heidi discontinued her blog shortly thereafter without any comment whatsoever. When she started the blog, she had said that she wanted it to be a positive, upbeat place. I suppose she lost the strength to be positive and upbeat.

Which brings me to the upcoming election. If, two years ago when they seemed to be a bunch of crazies, SYRIZA could unleash so much hope among hopeless Greeks, one can only guess how much more hope they are unleashing now when they have become much more mature and when the hopeless have increased in number. When a very large part of the population would rather have false hopes than no hope at all.

This makes me wonder what would happen if there were a repeat of June 2012. If the scaremongering during the campaign succeeded in, once again, making SYRIZA a close number two. If a large part of the population had to, once again, realize that, instead of possibly false hopes, they were cheated out of any hope altogether.

When pondering this, I am beginning to wonder whether it would not be best if any form of hope, even a false hope, carried the day on January 25.

 

Heidi on June 19, 2012

“I started this blog because I wanted it to be a positive, upbeat place. Greece has a government now. A government almost identical to the government it has had for the past several years/decades. Is there a reason why things should have changed? Is there a logical, common sense reason why voters might have chosen a different party to form a government – a party that has not been the direct and foremost cause of the domestic factors leading to the crisis? Apparently the answer to these questions is “no, we’re happy with those parties. They represent us well. We trust them. Their leaders are honest, ethical, above corruption, and clearly work for the best interests of the Greek people.”

ND and PASOK campaigned, and came to power, on the platform of “renegotiating the agreement with the Troika.” While the campaign was going on, European political leaders and the German press sent constant inappropriate messages toward Greek voters, telling them that they must vote for these parties. (Inappropriate because voting in a national election is a domestic matter.) But as soon as the government was formed, the message changed dramatically: “no renegotiation is possible. You can ask all you want, but the answer is ‘no’.”

The nice thing about the campaign season, despite the annoying ads, is that people say nice things. Candidates make promises that people want to hear. Bad stuff is put on hold. But now the elections are over and, for the first time in two months, they’ve started again with the constant news reports on the new austerity measures starting in July. My husband is expecting another pay cut. We’ve lost our prescription drug coverage, but the number removed from the paycheck for health insurance hasn’t gone down at all. We just found out how much we owe (yes, owe – for the first time in our entire lives, we owe) for income tax – and it’s a four digit number.  A kind of large four digit number.  Every last one of those four digits is more than we can afford. But we have to pay it, because if we don’t, we get fined even more. And eventually thrown in jail.  [We owe even though we made much less than the year before.  It’s because the standard deduction was reduced to much less than half of what it was before, and pretty much all tax write-offs and credits were eliminated; there are also several new taxes that were added.  Everyone in Greece is dealing with this same thing right now.]

I have nothing but disgust and distrust for the new government. Their campaign tactics repulsed me. The demography of their voters (retirees for the most part) doesn’t impress me. They are proven failures, every one of them. There is no hope for Greece with this government. False hope would have been better than no hope.

It might seem hard to believe that in Greece in 2012, people would actually vote for “politics as usual,” but it isn’t. There are two explanations: 1) the Greek public was the victim of a campaign of terror launched by the old political parties, the European political and banking community, and the mass media (although only the media were really honest about doing it); and 2) old people tend to be conservative. Greece has a lot of old people.

I did, however, see one small glimmer of hope. I have a friend in Thessaloniki who voted (like everyone in my generation) for Syriza. So did his two brothers. His parents – retired now, one from coal mining and one from working in a factory, who went to Germany to find work after the war when Greece was destroyed but Germany was booming, and who have remained illiterate throughout their lives – have voted for ND in every election since ND was formed, for reasons that they themselves cannot articulate. This year, for the first time ever, they didn’t. They couldn’t bring themselves to vote for a different party, but they decided to stay home. “This is your future… you have to decide,” my friend’s father told him. Despite this gesture, Thessaloniki – due to a last-minute terror campaign by a local ND politician – experienced a massive increase in elderly voting, and was the only major city in Greece that voted for ND – even after voting for Syriza in May".