Thursday, October 27, 2011

Greece After the Haircut: Numbers and Politics

A haircut, as any woman will tell you, can be rejuvenating or it can be a disaster. As Greece parades its new haircut, which one will it be? To answer this question, I want to look first at the numbers and then at the politics.

Let’s start by looking at some numbers. Greece’s finance minister said this deal alleviates the country’s debt burden by €100 bn and reduces annual debt service by €4.5 bn. But Greece’s gross debt was €353 bn on June 30. A 50% haircut would be much greater than €100 bn. So what is going on?

The Greek finance minister said the deal covered the country’s tradable debt held by the private sector, which he put at €206 bn – hence, the 50% haircut would lower debt by €100 bn. But even that number seems low: in its latest Public Debt Bulletin (here), the Ministry of Finance put the country’s tradable debt at 79.8%, or €282 bn. Even allowing for €9.3 bn in amortization (as per the same bulletin), and for €26 bn in intra-government liabilities (as per the government’s 2012 budget) we’re still short ~€41 bn (€206 bn versus €282-€9.3-26=€247 bn). The finance minister said there are other categories of bond holders that will be dealt with separately. Either way, this by no means a 50% reduction in Greece’s total debt: if we go by the €100 bn this is, in fact, a 28.3% reduction (€100/€353 = 28.3%).

Now, by 2014, the official sector will have loaned Greece up to €240 bn: €110 bn for the first bailout, €100 bn for the second bailout and €30 bn to facilitate the bond exchange with the private sector. But if you look at the forecasts done by the IMF in July 2011, Greece’s gross debt was supposed to be ~€389 bn in 2014. If you take that number and shave off €100 bn from the private sector (as per the finance minister’s remarks), you get €289 bn. That would leave only about €49 bn of private sector debt (€289 bn minus €240 bn). Is there a scenario under which the EU and the IMF will own, by 2014, 85% of Greece’s debt? Does that make sense and what will that mean?

I ask these questions because when assessing what this deal means for Greece, details matter. Greece had forecasted €17.9 bn for debt service in 2012 so a €4.5 bn reduction in debt service is a big deal, although this is a 25% reduction, not a 50% one. The government had budgeted a 1.5% of GDP primary surplus in 2012, which this deal could boost to 3.6%. What is less clear is debt amortization: Greece needed €35 bn to amortize debt in 2012 and €37.6 bn in 2013. Presumably some of that debt is either shaved off or pushed into the future. But we do not know how much yet – that can make a big difference on how much of the second €100 bn official sector tranche goes to merely replace private sector debt.

So much for the numbers: what does this mean for Greece? My feeling is that this is a major victory, a major defeat and neither of the two. Let me explain.

It is clearly a foreign policy victory. Greece was able to default without defaulting – it got strong multilateral support and was able to engineer a “voluntary” haircut without going into official default. It was also able to retain the 21 July agreement and it was able to resolve all questions (for now) about staying in the Eurozone. It gets more time to implement reforms and it gains some of the closure it wanted. As a foreign policy matter, this is a success.

It is also clearly a major political failure. It underscored the government’s inability to implement the initial program and it highlights the government’s deteriorating credibility with both markets and Europe’s leadership. A second bailout is needed because the first one did not succeed in important ways and now a haircut is needed because the second bailout was unlikely to succeed before it even started. So this is a victory via defeat – a strong showing that emerges from weakness.

It is also neither a victory nor a defeat. The math indeed looks slightly better and the deals follows my own view of what needed to happen – but the true test will be what the government does with this windfall. The finance minister has said there are no additional measures needed for 2011 and 2012. So is that extra €4.5 bn just going to repay debt? If so, does it provide any relief for the Greek taxpayer and consumer? And if this extra cash is merely used to repay debt, how does the Greek economy bounce back from its consumption-led recession? The economy needs a stimulus that will generate growth – how do these better debt dynamics create such stimulus? The government has yet to answer that question.

So the reason I think this deal is “neutral” is the same reason that I have always considered default a non-solution: it does not fundamentally alter the main dynamics in the Greek economy or Greek society. Public administration is still dysfunctional, the state sector is still too big, tax evasion is still pervasive, the courts are still erratic, education and health are still broken, and competition is still limited. This is what needs to change. Ideally, the government can put this windfall to good use by providing some tax relief that can stimulate consumption and hence economic growth. Or, it can waste the chance by only relaxing its resolve to reform.

Aldous Huxley once said that, “experience is not what happens to you. It is what you do with what happens to you.” Similarly, Greece’s test will be not what kind of reprieve it got, but what it does with that reprieve. It can put it to good use or it can waste it. Greek history is hardly reassuring where guessing which of the two it will be.


  1. It's typical of the Europeans. This is not the saviour of Greece. It is AGAIN delaying the inevitable. This will put off default for 1, maybe 2 years and then they will be in an even worse situation.

  2. Another excellent article once again! Congrats for your analysis.

    Since you point out that your governments does not carry out reforms, or at least not fast enough, what is your oppinion about the stricter interational control? Since they aim at putting reform pressure on your government.

  3. As long as the greeks think that others will save them they will continue sinking... These guys are only trying to save their own banks you are on your own. The quicker greeks can realise this and take charge of their own destiny the quicker salvation becomes a realty. Learn from past mistakes and clean up corruption, taz avoidance etc etc you will come good. Unfortunately youn are now a protectorate of the french and germans.

  4. greeks can never eat there cakes and still have it,what goes around,comes around,who is to blame if not them,greeks should stop living beyong there limits,just foget that u are in EU or euro zone u are still a baby to compare to others among u,how long should u stupid people will continue to blame and blaming,stop pointing fingers to other industrialize and hard working people,and just go back to work,stop been lazy,cheating,thieves,pay ur taxes,stop fraud,if not that u people manipulate and forge document to enter EU these could have not happen to u people,u now see that what goes around comes around,the problem is that u people are lazy and cheaters,how do u think that such nation will ever progress??????all greek offices is corruption,bribe,fraud,from government to citizens all contribute to this mess,all time u people are searching for excuse just to stop work,strike and striking,rioting,demostration all day and day,destroying the little one that u people have,stop blaming Germans and french,is how u made ur bed u will lye on it,these is 21 century,we are not here talking about accient history is over,all coutry now have tourism industry so if u people just keep relying on this just believe me that the worst is going to visit u people in little time to come not even far,the highest industry in greece is----caffe bar,redlight district,bars,night club,cabaret,etc,can u see that no hope???eating and enjoying from morning till night,only ur children will just keep suffering from these old mentality,also u people are complaing about forgners in ur country,when EU and UN are funding them through ur government still none goes to them.ur government ate the money that comes to refugees and still put them inside prison just for nothing,without even resident permit also denial,the whole countries now knows that Greeks are Thieves,and cheaters,with this life of behaviour believe me ur country will never see any light,when u cant even be happy seeing other progressing,shame to u people,u are a disgrace not only in EU also entire grobal,a word is for a wise,

  5. how long should this folks will stop asking for lone and lone?????????? all year borrowing and borrowing,greeks hust sell there right to EU and entire world,first civilized nation with democracy later be the last,shame anyway to u people ,i wish u people all the best,keep rioting and striking,monkey is working bamboo is eating,

  6. Greece is a failing state. Period. Constructive use of the small additional windfall produced by thsi agreement? Watch the members of the Big Fat Greek Publik Sektor take a sigh of relief as reform now comes to a halt....

  7. One can only get a rough sketch analyzing governmental figures. Just comparing the economic numbers published between OECD, Greek Ministry of Finance and Eurostat is enough to drive you insane.

    Questionable economic stats are not only a Greek problem, however. "GDP" is nothing more than an estimate, which counts many non-cash aspects and often widely variant just by changing a few assumptions. Therefore most newspaper articles quoting numbers in % of GDP is basically dealing with a % on a pie in the sky number.

    The basic things that count are assets vs liability , total tax revenue vs expenditure, total debt vs assets in Euros. If you cannot get an accurate assesment on those figures any projections based on rough estimates are unlikely to yield accurate results....Garbage in garbage out.

    Also unless the fix involves fundamental issues like the ones Tasos points out...whether Greece stays in or out of the Eurozone is a non-issue. It will eventually run itself into the same mess over and over again.

  8. Exit the Eurozone, together with Portugal and Spain, with some kind of economic agreement between the three countries. The debt gets denominated in dracma, escudo and peseta and if the curency is devaluated to 1/4 of its former value (has happened in Argentina), the debt will vanish overnight and exports will get a tremendous boost. Unemployment will go away, but imported goods will be hard to buy for a couple of years. But a less open economy will be a result of this process. It will be a tremendous blow to the global free market. And this is the (untold) fear no politician dares to confess to the people.

    Are the Greek people being sacrificed for the sake of a few more decades of life of the aging global market? It will die anyway, scarce oil and food will be hoarded by countries that control those resources, and climatic change will make it very expensive to use sea ports, canals and naval yards as a backbone for the import/export of low added value products.

  9. If you take the figures posted by Tasos on "Who owns Greek debt" out of a total Euro 337bn it breaks down as follows.

    Foreign Banks 16% or about 53.9B
    Troika 11% or about 37B
    Foreign Others 31& or 104B
    Domestic Financials 18% or 60.6B
    Domestic Others 24% or 80.9B

    I assume that these figures are debt exposure to the Greek government via direct lending or purchase of its bonds.

    Given those figures even if Greece did default on the entire amount of outstanding debt of 337B it doesnt look to me this will this will be something that will expose the world to financial armageddon.

    Also given the figures of tax revenues versus expenditures and given that already substantial part of expenditure go to debt service and the necessary military spending it seems very unlikely the country which has never had a substantial budget surplus will start coming up with year after year of positive balances to pay off the debt holders in full over the years.

    It seems that a more sensible deal would be to put the debt into moratorium and use the proposed funds establish a back stop to save depositors in institutions going bust and mark the bond and stock holders to zero. Then Greece might actually be able to come up with 10b euros a year to pay down debt principle of foreign holders and buy 5 to 10b in military hardware. If this can be achieved Greece might be able to pay off the 194.9B it owns to foreigners in 20 years.

    Greece should take it as a beginning to clean up its archaic legal system and public administration as a whole.

    Somehow, the world is not this simple.


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