Sunday, February 05, 2012

Should the Official Sector Take a Hit on its Greek Debt?

The IMF believes that official creditors should take a hit on their holdings of Greek debt; Germany is opposed. Who is right? 

The IMF has a point. The private sector involvement (PSI) agreement aims to bring Greece’s debt to GDP ratio to 120% by 2020 – an improvement but hardly a game changer. Assuming that Greece receives a second bailout, the official sector will become a more important financier than the private sector; 60% of Greece’s public debt will be held by the official sector in 2013, according to the December 2011 IMF review of the Greek program (the number will depend, of course, on the final provisions of the PSI deal). Official sector debt is as problematic as private sector debt. 

But Germany too has a point. The Greek Ministry of Finance shows a wider deficit in 2011 than in 2010. In part this is because revenues continue to disappoint – although this reality has not deterred Greece from making similarly optimistic assumptions about 2012. More importantly, spending is barely down: 1.2% by one measure, but including other special items, it may even be up. Reforms are stalled, and we have yet to see any privatizations. This is hardly a government that is taking its program seriously. Instead, it is compensating for its inability to make any reforms by raising taxes and trying to squeeze every last penny from the public (but, curiously, not from individuals and companies that owe back taxes). 

The choice facing Greece’s creditors is simple: do you offer a break in hope that this will trigger reforms or do you demand real reforms in exchange for a break? My sense is the latter. It is clear that the new, post-Papandreou PASOK has no real reform momentum left in it. It inhabits a never-land of promising reforms but implement none. Rewarding it with yet another break will merely allow it to prevaricate, equivocate, hesitate and outright lie for longer. 

The official sector should eventually offer Greece debt relief. But this gesture should be an accelerant for  Greece’s positive debt momentum – it cannot be the ignition of reform. Greece has to stop pretending that everything hinges on decisions made in Brussels, Frankfurt, Berlin, or Washington. This program will be won or lost in Athens. Period. And until the government starts acting like it understands this, it deserves no more breaks.


  1. Exactly! I am from Germany and I defenitelly don't want my country to make profits with the ECB bond buying program at the expense of Greece. At the same time I don't trust these Greek politicians at all. From my point of view they are a bunch of criminals, worse than the mafia. The PSI will never be sufficient, everyone knows that. But a public sector involvement should happen AFTER the implementation of reforms, it should be a reward for real reform efforts, not for a lack of compliance. So it would be better if the ECB transfers the profits that it generates with the Greek bond buying program to Greece after something has really changed to the better. But I am not very optimistic ...

    1. Bravo!
      For those of us as concerned about the governance crisis here as we are about the economic one, the need to encourage/reward reforms is paramount. Seems the EU has finally noticed that bit.

    2. Instead of some of the silly taxation they imposed to confiscate funds (ie property tax via electricity bills), the officials etc should(should have) taken advantage of the current market rates and set up a "mutual" fund with full account of shareholders to buy up any greek debt trading at 30cents or less on the face value. This way they might even make a profit on something that would have gone to zero anyway (taxes hardly ever gets redistributed) and have any profits distributed back to shareholders. Incidentally as it stands any profits made by ESFB does not get redistributed back to the German other European tax payers who financed this and other structures. You only need several thousands Euros from 5million local Greeks and other European subscribers who can take the risk to come up with enough money to buy up 50 to a 100 billion of outstanding debts at current prices.

      Of course the above is almost an alice in wonderland proposition given that Banks like to carry even defaulted loan at face value...then the banks would have to realize a "market loss" on their portfolio if such a scheme was put in place. If this marking to market practice became a law most banks would need more capital...
      .....and there would be no prize to guessing who would be footing that bill.

  2. Nikos, I have a question and would be very grateful if you could tell me your opinion: If Greece defaults and decides to return to the Drachma, how big would the risk of contagion be due to such an event?

    Greece is so small, I read something around 2% of the EZ GDP. Both Portugal and Ireland are protected by the ESFS and on track with their reform programs. Italy and Spain are making fast progress as well and are absolutelly commited to the Euro. Bigger firewalls are in place and are said to get increased to around € 1.5 trillion very soon. This could protect more banks and countries. So why should people in other contries panic and run to their banks after a Greek default? Why should a few CDS trigger a new banking crisis when the total value of CDS for Greek bonds is not dramatic and well known? Isn't there a lot of fear-mongering by politicians and banks who would face bigger losses?

    I don't wish Greece to exit the EZ, I really hope Greece succeeds inside the Eurozone. But I think we have to face the fact that a Greek exit is not unrealistic at all ...

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  4. ↑Well,Portuguese spreads are soaring despite Portugal's performance,so a Greek exit would be unwise right now.

    I doubt Greece will leave the currency union in any case though...

    1. Willem Buiter, chief economist at Citigroup, reckons there is a 50% chance of a Greek exit ("Grexit") over the next 18 months. He argues that the costs of a "Grexit" to the rest of the euro area would be "moderate", as fear of contagion would be contained by policy action, if needed. "And with Greece currently struggling to secure reform pledges from its public sector and its wider population, willingness to help has diminished somewhat."

      European commissioner Neelie Kroes told the Dutch newspaper Volkskrant that the dangers of a Greek exit were being overplayed, saying "They always said if a country is let go or asks to get out, then the whole edifice will collapse. But that is simply not true."

    2. They've been tolerating our presence for over two years so far and I doubt they could afford to let us out even if we wanted to extricate ourselves.No-one's leaving.The dangers of a "Grexit" may be overplayed,but it's far too optimistic to make it sound like the remaining 16 will carry on from where the show was interrupted after Greece's untidy exit.

      The Eurozone needs to stay intact at all costs.

    3. "The Eurozone needs to stay intact at all costs."

      At all costs? In your dreams maybe!!! You might not have noticed that but polls show the the patience among the populations of creditor countries is running out very fast, we will not feed Greece forever!

      "I doubt they could afford to let us out..." That is your wishful thinking. "They" can obviously afford to let you out because there are no reasons why they couldn't.

      And it's going to happen unless Greek politicians get their act together and unless Greek people recognize that they need to fix Greece's competitiveness problem. The LAOS leader said two days ago Greece is less competitive than Uganda or Iran, so sharing a currency with Europe is not possible unless you fix that. I don't see how Greece could boost its productivity fast enough to avoid internal devaluation (incl. further wage decreases). You would have to find as much oil as Arabia has to avoid that...

    4. Wishful thinking?Do you realize that if Greece goes,she instantly takes Cyprus with her and she leaves Portugal,Spain,Ireland and Italy wide open to speculation?We are deeply,deeply sorry that patience with Greece amongst European contributors has reached its limits,but every Minister of Finance in Europe argues that Greece must remain in the currency union regardless for everyone's benefit.

      As for internal devaluation,I agree that it's unavoidable at this point for restoration of competitiveness is of paramount importance for Greece,but lowering salaries will only prolong recession and may as well destroy social and poitical cohesion in the country.But since Greece lacks competent governance and funds...

    5. Other countries being a victim of speculation in case of a "Grexit" depends on the firewalls in place and other measures. And they will soon (March) amount to € 1.5 Trillion (IMF + EFSF + ESM) which is enough to finance both Spain and Italy for three years.

      Competent governance and funds depend on each other. Why do these guys ( invest in Marocco and Tunisia but not in Greece? They have huge funds and are "non-profit". Maybe because of the business environment which Greek politicians could improve if they really wanted?

      And why aren't there more innovative ideas? Instead of cutting wages, why is nobody considering something similar like a temporary official 6-day-week for the public sector until the crisis is over to increase productivity while keeping labour costs stable? Still better than unemployment and less money, isn't it?

      I just cannot see why Greek politicians should change? What could force them to act differently?

    6. These(intelligent)points should be addressed to the troika,too.They're reluctant to allow the tranches released to Greece to be used for investment,training,reduction of bureaucracy and so on,evidently because these take time,another advantage Greece doesn't have.Maybe if the politicians had implemented everything promptly,they could have been treated with more tolerance.That,however,is still a moot point seeing that the ECB and the IMF demand both wage reductions *and* more tax burdens for the people.

  5. Why make it sound like Greece has no choice, it is up to Greece what to do and who to pay. Lenders need to take responsibility as well as borrowers. Greece has a choice; to default and start again or be in servitude to foreign creditors within the euro for the foreseeable future. Not an easy choice by any means.

    Without growth and job creation any reform program will fail though. Reform is needed, but the support of the people is critical or reform will go nowhere. This will not happen with unemployment shooting towards 20% and with no hope for the future.

    The potential output of the GIPS is being irreparably damaged by the current “reform programs” the most talented workers will emigrate and the countries affected will probably take generations to recover.

    1. From one point of view, in terms of facing future hardship, the Greeks do not have a choice... they must face it.

      However, as you say, there are choices as to how they go about dealing with this. If it were me, I'd rather face the hardship of my own choosing rather than put up with what someone had dumped on me. What's more, if the Greek people are not given a choice in this matter then the outcome can never be seen as legitimate.

      So will there be elections in February? That was the promise if I remember. When it is OK to forget about keeping your promise, then I guess it must be OK to forget about repaying your debts too.

  6. Nikos, what are you waiting to get out of the EURO? Don't you Greek have an ounce of honour? Being dictated by Frau Hitler Merkel, Van Bloody Rompuy how to run things...Are you a sovereign nation or a province of Berlin?

    1. The answer is simple: they want that the rest of Europe continues to pay for them.

  7. It's both Greece's luck and misfortune that the twin events compelling fiscal austerity and structural reform are occurring simultaneously. But the need for structural reform, which I fully support, would have never come up for discussion had it not been for a bankrupt treasury.

    Undeniably, the Greek economy and system of governance requires liberalization. The problems are many: Guilds, systemic corruption, unaccountable institutions, a poor business enabling environment, a lack of competitiveness, and a broken political system are only a start. Decades of free money transfers (that is, so-called cohesion funds and subsidies from the Common Agricultural Program) out of the EU budgets helped mask these defects, but no longer.

    A workable, agreeable compromise may -- just -- be within reach. But with political party jockeying already well underway for votes, a vicious cycle of anger, introspection, and delusions of some third way out of the crisis is growing. It's a pity that public anger and resentment over the fiscal problem is now becoming associated with the structural reforms.

    History repeats itself, and few countries can endure the kind of shock therapy that Greece is being asked to endure. As one American diplomat once described the results of shock therapy in Russia in the 1990s: "Too much shock, too little therapy."

    1. There is something extremely weird about the data and information we are getting about Greece.

      You claim that "spending is barely down: 1.2% by one measure, but including other special items, it may even be up", and that is also what I read elsewhere.

      But on the other hand there are articles about wage cuts (for teachers etc., i. e. for public employees!) and wages not having been paid for months - even by the government, people starving etc..

      So what do I make of that? The only logical answer would seem to be that even now there are quite a few fellows in the beaurocracy that sift off the money and pocket it for their private benefit.
      The situation looks to me somewhat like Russia during the transformation period: the workers didn't get paid, while a new capitalist class made their wealth by stealing the money that was actually there.

      I've never seen any newspaper-article on this aspect and I wonder, whether you might be able to shed some light upon these seemingly contradictory data?


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