Payback of Greek Debt
Greece has something like €315 billion of public debt. Well forget about
that.
Instead focus on liabilities as presented in Revised Greek Default Scenario: Liabilities Shifted to German
and French Taxpayers; Bluff of the Day Revisited.
The above total is a "modest" €256 billion.
- Assume 0% interest
- Assume Current Account Surplus of 3% of GDP
- Assume Greek Debt-to-GDP is 176%
- Assume Greek Debt €312 billion
- Assume Greek GDP is €178 billion
Point 5 is derived from points 3 and 4. All of the numbers seem to vary a bit
depending on the source, but the above numbers should be close enough for
this exercise.
Payback Math at 0% Interest
Let's assume that Greece can run a 3% current account surplus for as long as
it takes to pay back €256 billion.
3% of €178 billion is €5.35 billion. To pay back €256 billion it would take
about 48 years. That assumes 0% interest and a 3% current account surplus
every year for 48 years!
Those calculations ignore rising GDP. But they also ignore a huge burden on
Greek citizens for 48 years.
Let's be honest: Greece is not going to run current account surpluses in
perpetuity.
Unrealistic or Not?
Syriza says Greece Debt Repayment in Full is 'Unrealistic'.
The above math says Syriza is correct. But that math assumes debt is as
stated above.
What is Greek Debt-to-GDP?
Financial Times writer Ferdinando Giugliano asks Is Greek government debt really 177% of GDP?
Economists tend to disagree over how sustainable this
burden really is: some point to the sheer size of the liabilities, saying
Athens will never be able to pay them back. Others emphasise the favourable
conditions which the Greek government has secured on official sector loans in
two rounds of restructuring: these include heavily subsidised interest rates
and a lengthening of the average maturity of the debt, which now stands at
16.5 years, double Italy’s or Germany’s.
One figure on which everyone tends to agree, however, is that Greece’s
public debt is 177 per cent of gross domestic product, the highest level in
the eurozone. Well, everyone but a private equity group and a number of
accountants, who think the relevant figure could be as low as 68 per cent.
The calculation is part of a large bet which private equity group Japonica
Partners has made on Greek debt through the years. A year and a half ago,
Japonica, led by former Goldman Sachs banker Paul Kazarian, offered to buy as
much as €2.9bn of Greek government debt. The group has launched a campaign to
prove that Greece’s liabilities are significantly more sustainable than the
headline debt-to-GDP ratio suggest.
This could be easily dismissed as a private equity group talking its books.
Except that it raises some interesting issues over how governments calculate
their debts. The question is at the heart of a debate among the accounting
community, with some thinking that the way states calculate their liabilities
is out-dated and should be revamped to resemble more private sector
practices.
Eurozone governments estimate their debt according to the so-called
Maastricht definition”. The debt is taken at face value, meaning that a €100
liability is worth the same whether it needs to be repaid tomorrow or in 30
years time and regardless of the interest rate. Since the time-value-of-money
and interest rates are ignored, Maastricht forces governments to book even a
zero coupon bond at the principal amount due at maturity.
Why is this relevant to Greece? The reason is pretty simple. Eurozone
governments have repeatedly agreed to lower the interest rate charged on
their loans to Greece, as well as to extend their maturity. Conversely, they
have insisted that the face value of the loans stayed the same. While these
changes have undoubtedly made life easier for the Greek government, they do
not show up in the Maastricht definition of Athens’ debt, which only
considers face value.
Japonica’s estimates are based on a different system of accounting. This is
the so-called International Public Sector Accounting Standards (IPSAS), the
equivalent for governments of the International Finance Reporting Standards
(IFRS) used by companies across the world. There are many ways in which IPSAS
differs from the book-keeping rules used by governments across the EU: but
for our purposes, it is worth noting that the calculation of debt moves
beyond the simple face value of the liabilities, discounting it over time
using market interest rates.
Wishful Thinking
I suggest it is pretty clear Greece cannot possibly pay back €256 billion
even at 0% interest.
I admit I ignored potentially rising GDP. Yet, no matter how you slice
it, Greece will not run current account surpluses for as long as it takes.
Moreover, government spending (debt) adds to GDP. How much is GDP supposed to
rise in the absence of more government spending and more debt? For how long?
Japonica’s calculations appear to be a combination of wishful thinking and
talking one's book.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
