Debt Service Overload

Greece eventually made its payment to the IMF. It was an relatively small amount – given the big picture – of Euro 460, 395, 576 that goes back to the first bailout program of the IMF from 2010. Where exactly those funds were stemming from is rather byzantine but then again this only reflects the state of Greece’s public finance. It’s not clear how full or rather how empty Greece’s public coffers are. And yet, we will learn more soon as on April 16 when short-treasury bills (T-bills) in the amount of Euro 1.4 million and Euro 1 million are due. And on it goes. May 11 another Euro 767,309,994 for the IMF are due; followed by two more payments to Washington in the amount of overall Euro 650 000 on June 4, respectively June 11. June 15 and June 18 the IMF expects Euro 575 00 and Euro 345 000, followed by another Euro 460 000 on July 12. On July 19th the ECB expects Euro 2,095,880 for bonds held by the ECB which were exempted from the 2012 default; another Euro 1,360,500 for bonds held by national central banks which were also exempted from there 2102 default. Over the whole period until July Euro 10 billion are due on T-bills.

Greece was able to make its payment yesterday but it is already questionable whether it can deliver on the T-Bills during April. Things will get difficult latest in May and June when more IMF payments are due. The Greek government may prioritize IMF payments, if only to avoid negative repercussions. The IMF has some experience with delayed payments, mainly by problematic states like Sudan, Simbabwe or Somalia. A member of the Eurozone would be a first. Still, even if Greece would not pay buy today or miss the next upcoming payment the country has still another 30 days before it comes to an official confirmation of a missed payment, followed by an official complaint two months later. Without action, it needs another month until Greece’s access to IMF funds is getting limited.

Why bother then about the next days? The answer is that the Greek government needs to buy time, and if its only for a few more weeks, in order to survive, economically as well as politically. They still seem to hope that the EU is willing to compromise and to eventually accept the most recent reform plan with minor adjustments. I can’t see that but then again it may happen if some pragmatism wins over the Eurogroup. The next meeting is set for April 24 in Riga, and already on April 21 and 22 the Brussels Group will meet (for outsiders: The Brussels Group consists of representatives of the creditors European Commission, European Central Bank, IMF, European Stability Mechanism and Greece) to figure out potential zones of compromise. So far the eurogroup showed an enormous degree of unity against the stance of the Greek government; the ECB and the IMF, in turn, can’t make any further compromiser out of technical as well as political-economic reasons. So it is up to the Commission and more so to the eurogroup to decide the fate of Greece, to some degree at least. However, I am skeptical about the economic effects of a compromise.

Even if there is a compromise emerging and Greece put it reform plans into legislation, there are still problems. What I can’t see is that even a non-adjusted or only slightly adjusted version of the initial reform plan results in significant short-term fiscal income that would allow to deal with the upcoming debt service commitments. Given that most of the suggested reforms focus on the tax regime, any additional fiscal receipts depend strongly on compliance, and in particular on compliance of the wealthy Greeks. The question, though, is why they should follow the (old and new) rules of taxation (i) if there are so many legal possibilities to avoid taxation and (ii) the level of political and economic uncertainty is so high.

Some participants of the debate about Greece hinted to the fact that Greece actually got extremely favourable interest rates and also lent periods. “In fact, Greece’s official creditors have granted it long enough grace periods and low enough interest rates that the burden is bearable. Greece actually spends less on debt service than Italy or Ireland, both of which have much lower (gross) debt-to-GDP ratios. With payments on Greece’s official foreign debt amounting to only 1.5% of GDP, debt service is not the country’s problem.” I dare to differ.

Debt service ayments are coming up on a regular schedule, and given the paltry state of public finances they are difficult to make if at the same time the Greek government wants to held to some of its core campaign promises. In thymus sense debt service is actually a problem, more so, as Greece is expected to run persistently high primary budget surpluses. In 2014 the previous Greek government achieved a rather high primary budget surplus of 1.7% of GDP, after a initial primary budget surplus of .5% in 2013. This is impressive by itself and even more so if we take a comparative perspective. Between 2009 and 2014 Greece’s structural primary budget improved by 16 % of its GDP; the change in Ireland – the austerity fan’s poster child – was 7.2 % of GDP. However, those surpluses were only possible due to hefty cuts in the Greek public sector and reductions of wages as well as pensions. I assume there are social-political limits for further cuts of this calibre. The primary surplus must now come from other sources. Only on Wednesday the auction of short-term T-bills brought Euro 1.14 billion into the coffers of the Greek government; the yield was 2.97 %, and thus well above the eurozone crowd. Still, this auction showed that there is demand, even though the demand was low. It seems as this exercise is also coming to its limits. The best source obviously would be a upsurge of economic growth that would result in higher tax receipts. The Greek statistical office actually indicated some light: In February 2015 industrial production rose by 1.9% in comparison to February 2014. Whether this is a one-off needs to be seen. Economic circumstances still are dire, given that Greece’s inflation rate for March of this year was stuck at minus 1.9 % on an annual base – deflation is an ongoing problem that hinders even modest improvements in investments.

If the Greek government insists to stay in the Eurozone and if the EU wants Greece in the Eurozone and still sticks to its policy approach, then Greece will have to give in twofold: The government would have to apply for a third rescue program and it would have to accept the conditionalities of the Brussels Group of creditors. This is probably no recipe to survive politically. It sends a strong signal to Podemos and other political parties in Europe, though, who may have in mind to question the dominating economic policy discourse. In this sense Greece is the ultimate test case.