This isn't quite how they say it of course, they don't tell us all this truth in quite such stark terms. But that is indeed what this latest International Monetary Fund report on the Greek debt situation is really saying. That the accumulated losses of bailing out Greece will amount to some €300 billion over the years. A goodly part of this money is already lost and a significant portion of any further amount lent will similarly be lost. At which point perhaps the few adults left in the room would like to consider an alternative solution? Like, perhaps, what Greece should have done all along which is default, drachmatise and devalue. Yes, default would mean a crystalisation of the losses, something most European politicians are desperate to avoid, but it's entirely possibly that the total losses over time would be rather lower than they are with the current plan.
The IMF staff’s most recent DSA was published less than two weeks ago (attached here).
framework (debt of 124 percent of GDP by 2020 and “substantially below”
It noted that:
(i) About a year ago, if program policies had been implemented as agreed, no further
debt relief would have been needed to reach the targets under the November 2012
110 percent of GDP by 2022).
So, if everyone had done what they said they would do, and if everything worked as planned (these are two rather different things and the IMF does mean both of them), then a year ago the problem was solved.
(ii) But the significant shortfalls in program implementation during the last year led to a
only a few weeks ago. As a result, debt-to-GDP by 2022 was projected to increase
significant increase in the financing need—by more than Euro 60 billion—estimated
from an estimate less than a year ago of about 105 percent to a revised estimate of
142 percent, significantly above the target of 110 percent of GDP. This would under
the November 2012 agreement have implied significant additional measures to
reduce the face-value of debt.
But not everyone did do everything and not everything did work as planned (again, two different things, the IMF has recently admitted that its calculations of the effects of austerity were in error, as one example) and so further relief was indeed needed. It's not true, however, that this means that there should have been a haircut on the extant debt. The problem could still be solved by lengthening maturities and fiddling with interest rates.
(iii) However, as detailed in the published DSA—in view of the fact that most of the debt
was now owed to official European creditors on non-market terms—a case could be
made for changing from the stock-of-debt framework agreed in November 2012 to a
framework focused on the path of gross financing needs. This would support the
conclusion that haircuts could be avoided if instead there was a significant further
extension of the maturities of the entire stock of European debt (GLF, EFSF), in the
form of a doubling of grace and repayment periods, with similarly concessional terms
on new financing. At the core of this conclusion is the fundamental premise that
public debt cannot be assumed to migrate back onto the balance sheet of the private
sector at interest rates consistent with debt sustainability until debt is much lower.
Greece cannot return to markets anytime soon at interest rates that it can afford from
a medium-term perspective.
What this is saying is that we should really be recognising reality. Instead of making our targets x% or y% of GDP as a debt burden, we should recognise that the concessionary terms upon which almost all of the money is owed changes things. Thus we should be looking not at that debt to GDP ratio, but instead at how much of the economy Greece needs to divert to service that debt. Given that this number is actually rather low by current European standards (and certainly lower than the burdens faced by some of the countries that have lent it the money) this sounds rather sensible. So, all rather sensible to this point.
2. The events of the past two weeks—the closure of banks and imposition of capital
controls—are extracting a heavy toll on the banking system and the economy, leading to a
further significant deterioration in debt sustainability relative to what was projected in our
recently published DSA. A full and comprehensive revision of this debt sustainability analysis can
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only be done at a later stage, taking into account the deterioration in the economic situation as a
result of the closing of the banking system and the details of policies yet to be agreed. However,
it is already clear at this stage that there will be a significant increase in the financing need. The
preliminary (mutually agreed) assessment of the three institutions is that total financing need
through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was
projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated
need for a larger banking sector backstop for Euro 25 billion. Adjusting our recent DSA
mechanically for these changes, and taking into account the agreed weaker growth path for the
next two years, gives rise to the following main revisions:
a. Debt would peak at close to 200 percent of GDP in the next two years. This
contrasts with earlier projections that the peak in debt—at 177 percent of GDP in
2014—is already behind us.
b. By 2022, debt is now projected to be at 170 percent of GDP, compared to an
estimate of 142 percent of GDP projected in our published DSA.
c. Gross financing needs would rise to levels well above what they were at the last
review (and above the 15 percent of GDP threshold deemed safe) and continue
rising in the long term.
The real message here is that Syriza's faffing about has just cost everyone €25 billion. If a deal had been agreed earlier, the banks might have survived. But the dragging out of the negotiations meant that people lost confidence in the banks, the bank run happened, the ECB limited the ELA support for them and.....as and when they reopen that confidence is gone. There won't be a flood of money back into the banks as people sigh with relief, instead the remaining funds will flood out to be stored under mattresses across Hellas. Thus we've got to recapitalise the banks, no matter what else we do. So, thanks guys, that's been really helpful, you dragging out those negotiations.
Then there's this, which is nicely and discreetly put:
3. Moreover, these projections remain subject to considerable downside risk, suggesting
that there could be a need for additional further exceptional financing from Member States with
an attendant deterioration in the debt dynamics:
(i) Medium-term primary surplus target: Greece is expected to maintain primary
surpluses for the next several decades of 3.5 percent of GDP. Few countries have
managed to do so. The reversal of key public sector reforms already in place—
notably pension and civil service reforms—without yet any specification of alternative
reforms raises concerns about Greece’s ability to reach this target. Moreover, the
failure to resist political pressures to ease the target that became evident as soon as
the primary balance swung into surplus also raise doubts about the assumption that
such targets can be sustained for prolonged periods. The Government and its
European partners need to address these concerns in the coming months.
(ii) Growth: Greece is still assumed to go from the lowest to among the highest
productivity growth and labor force participation rates in the euro area, which will
require very ambitious and steadfast reforms. For this to happen, the Government—
which has put on hold key structural reforms—would need to specify strong and
credible alternatives in the context of the forthcoming program discussions.
(iii) Bank support: the proposed additional injection of large-scale support for the
banking system would be the third such publicly funded rescue in the last 5 years.
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Further capital injections could be needed in the future, absent a radical solution to
the governance issues that are at the root of the problems of the Greek banking
system. There are at this stage no concrete plans in this regard.
We don't believe a word about the assumptions that everyone is making. Greece just isn't going to run a budget surplus of the sort of size required, not for any length of time. Growth isn't going to reach the assumptions. In short, stop deluding yourselves folks, it just ain't gonna happen.
And finally, the bombshell:
4. The dramatic deterioration in debt sustainability points to the need for debt relief on a
scale that would need to go well beyond what has been under consideration to date—and what
has been proposed by the ESM. There are several options. If Europe prefers to again provide
debt relief through maturity extension, there would have to be a very dramatic extension with
grace periods of, say, 30 years on the entire stock of European debt, including new assistance.
This reflects the basic premise that debt cannot be assumed to migrate back onto the balance
sheet of the private sector at interest rates close to the current AAA rates before debt levels have
been brought to much lower levels; borrowing at anything but AAA rates in the near term will
bring about an unsustainable debt dynamic for the next several decades. Other options include
explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the
various options is for Greece and its European partners to decide.
That debt just isn't going to get repaid. No way no how. All anyone can do now is decide how they would like to lose their money. At which point the IMF outlines two methods.
Everyone can accept that they've lost some large part of what has already been lent to Greece and that means a haircut to the debt. This of course is entirely unacceptable politically. Because it means all those eurozone politicians having to go home to their own electorates and admitting that they've just managed to lose €100 billion, €150 billion of said taxpayers' money. This is not a career enhancing move for anyone thus it's not going to happen.
Or, everyone can accept that they've lost some large part of what has already been lent to Greece but agree, discreetly, not to tell their electorates about this uncomfortable fact. We can all do that by simply lying pretending. Lending someone money for 30 years without their having to pay interest on is for 30 years is exactly the same, in economic terms, as giving them some of that money for free. How much of that money is a gift depends upon the interest rate you're foregoing. If we assumed the interest rate that Greece would currently face in the marketplace (and that's the true economic cost) then absolutely 100% of that money is a gift. Simply because Greece wouldn't get the money on market terms. If we calculate it at the concessionary terms that they won't be asked to pay then it's some small percentage of the sum.
But that's not the way we should look at it: lending money to Greece means money that the other countries cannot use themselves for that 30 year period. So the number we should use is something like the "normal" (ie, before QE changed everything) yield on government debt in Europe. And 4% is a reasonable nominal (ie, including inflation) number to use there. So, if you lend money to someone, money you probably should be charging 4% on, and then you don't ask them to pay interest for 30 years, how much of that money is a gift?
Roughly, around and about, 70-75% of that money is a gift in such circumstances. The net present value of whatever the total nominal sum is will be about 25-30% of that total nominal sum.
Greece currently has €320 billion in debt: the current suggestions are that it will receive another €80 billion or so (and possibly, as the IMF says, much higher). Call it €400 billion just to have a round number. And what the IMF is really saying there is that around €300 billion or so of that is a gift to Greece from the taxpayers of the other eurozone countries. Simply because the only way that anyone can pretend that it will be paid back eventually is by not charging interest on it for 30 years.
Or, as no European politician is going to tell you, they've lost one large chunk of your money and they're about to go lose a whole lot more of it.
What should be done is, of course, what people like me have been shouting about for years now. Bring back the drachma, default and devalue. That would produce some months of very heavy economic pain. And then growth really would return: and rapid growth too. To the point that give it 18 months or so and Greece would happily sit down to discuss the terms upon which it will pay back that defaulted debt. Some decent haircut on it, denominated in drachma: but it's entirely possible, likely actually, that the recovery rate would be higher than the 25-30% implied by the 30 year grace period.
That is, Grexit would be better for everyone, both Greece and the creditors.
It's only politics and the delusions of the federasts about their precious European unity project that is stopping this beneficial solution from being carried out.
And just to add one final little delicious detail. The IMF is not allowed to lend money into unsustainable situations. Germany and other eurozone nations insist that the IMF must be a part of the Greek bailout. But here is the IMF insisting that the current situation and deal is unsustainable. Going to be interesting to see how anyone squares that circle.
