Economic Plans and Political Sentiments

It seems fair to state that Greece’s public debt ratio of today is not sustainable. This is not so much due to the its staggering value of 178% but due to the circumstances that Greece is cut off from private credit markets, experiences a slow but steady drain of bank deposits and seems close to lose the support of its main official creditors. One way to deal with the situation is to go for a high primary budget surplus that allows to finance the debt service and to simultaneously organize drastic reform of the economic and political regimes in place. This is more or less the policy demanded by the Institutions and favoured by governments across the Eurozone. A primary budget surplus implies strict cuts of government expenditures as well as the increase of government receipts. From experience we know that former is easier to achieve then latter. Going for more austerity in a situation where the economy started to shrink again (after a reduction of GDP over the years of about 25%), official unemployment is about 25%, and poverty numbers are increasing is a political gamble, not least for a left government that came to power with the promise to overcome those sebere problems.

Alternatively, a policy of debt restructuring could be put in place that would combine actual debt cuts with debt service extensions. This Is the Syriza option, offered to its credtors in a document labeled as Ending the Greek Crisis. At this moment, the four public creditors have this structure of out standing credits (in Euro) that need repayment and service:

ECB	IMF	Eurozone Members	EFSF
Bonds for 27bn	Bailout loans for 20bn	Bilateral loans for 53bn	Bailout loans for 144 bn

The plan of the Greek goverment foresees solutions for all four creditors. Following previous suggestions the Greek government proposers to get a new loan of 27n from the ESM in order to pay off the ECB. Credits from the ESM have the advantage to come with relatively longer maturities and also lower interest rates then EBC credits; moreover, paying off the ECB would reduce the probability for an official default declaration the ECB would have to come up with in case that Greece would come into debt service problems. This component is close to a Ponzi scheme, though, as it pays off one credit line by entering a new credit line. Still, it has also the mark of debt restructuring as one credit line woukld be substituted by a more advantageous credit line.

A similar political logic holds for the plan to repay IMF credits as early as possible. Not only did the IMF take a harsh position in regards to the required primary budget surplus, it also insists on clear-defined reform requirements that need to be fulfilled before funds can flow. So getting rid of the IMF is a reasonable strategy for Syria. However, the way to this goal seems not so realistic. The plan foresees that the Eurozone members are actually ready to enter the previous agreement to give up their respective profit shares in Greek bonds that were purchased by the ECB and to pass the whole amount to Greece. We are talking about an amount of 9bn. The plan suggests to send this whole amount immediately to the IMF and to deal with the residual 11 bn over time, according to a debt service schedule.

At the very beginning of the Greek crisis assistance was organized by bilateral credits to Greece. Those credits are already very generously structured abnd restructured and come with long maturities and low interest rates. The idea is now to even further extend the debt service. The Syriza plan suggests annual interedst rate payments in the range of 2-2.5% with no principal payments. This is nothing else then saying that those credits will be served but never repaid. Alternatively or in combination the plan proposes to introduce bonds that are indexed to GDP-growth, an idea that
has been suggested since quite a while by academic circles.

The bulk of credits is with the forerunner oif the ESM, the EFSF. The plan proposes to split the debt obligations ionto two parts. Half of the 144 bn would be turned into a interest bearing instrument that would come with a 5% annual coupon (comoared to the current interest rate of 2.5%). The second part of the credit  would be turned into  a ‘series of non-interest bearing instruments (zero coupon bonds)’. Latter would probably become a write-off over time.

The document of the Greek government is accompanied by a debt sustainability analysis that shows that in case those steps are put in place the public debt ratio  and real GDP growth recovers to levels around 3% would shrink to 93% in 2020 and even further to 60% in 2030.

I have no doubt that this plan will not fly at all with the creditors, even though it can claim some economic rationality. Greece needs a substantial debt cut in order to revive its economy. Creditors, on the other side, have plenty of reasons not to accept those ideas and rather to insist of austerity and the continuation of the ‘extend-and-pretend’-approach. Until this moment, and in contrast to a lot of spin, creditors have not suffered losses in relation with the credit programs. On the contrary, as long as Greece (and others) successfully deals with its debt service, creditors actually make profits. The Syriza plan would bring change, at least in the sense that eventually creditors would have to recognize that critical parts of the overall credits will not get paid back, at least not in full. Those credit lines will be stuff for future generations, and eventually be written off. Such a solution would be seen as special treatment by other governments, in particular by countries that have been in the same program then Greece without getting such a goodie. In this sense the Syriza plan is not realistic at all as it does not address those realities.

One way to address the realities is to come up with a far-reaching economic and political modernization plan that even risks to confront some of Syriza’s supportive organizations. As a matter of fact the Greek government presented  a draft for a staff level agreement that contains economic policies for the period 07/2015 to 31/3 2016. This document is more detailed then previous ones (at least the ones that have been leaked) and in many respects can best be summarized as policies towards ‘normalcy’. If those policies would be put in place, Greece would move closer to the Eurozone average in terms of its tax system, its privatization schemes, its legal system as well as its social system, including the pension rules. I don’t talk about levels here but about principles. Still, modernization of both the economic as well as the political regime is a long way, and outcomes are sketchy. In this regard the underlying real GDP growth rates in the simulation exercise seem to be rather optimistic. And yet, it is a plan that tries to avoid the austerity trap of the past. However, it also builds on the political willingness of creditors to again trust into reform efforts of a Greek government, and this time one that so far could not bring a lot on the table. No case for optimism then.