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Greece's bail-out only delays the inevitable | FT.com / Columnists / Wolfgang Munchau

The European Union finally agrees a bail-out, and the much-predicted rally of Greek bonds turns into a rout. A week later, spreads on Greek bonds had reached their highest levels since the outbreak of the crisis. The financial markets have recognised that, bail-out or no bail-out, Greece is in effect broke.

The bail-out prevents a default this year, but makes no difference whatsoever to the likelihood of a subsequent default. Just do the maths: Greece has a debt-to-gross domestic product ratio of 125 per cent. Greece needs to raise around €50bn ($68bn, £44bn) in finance for each of the next five years to roll over existing debt and pay interest. That adds up to approximately €250bn, or about 100 per cent of Greek annual GDP.

<...>

On my calculations, we have already gone beyond the point of no return, and should no longer focus on whether we can avoid default but on how best to manage it. Will it be an orderly process, or are we looking at default of the messy Argentinian kind? ...



The point is not to be right, but to get to right.
by marco on Mon Apr 19th, 2010 at 02:01:03 AM EST
[ Parent ]
Greece needs to raise around €50bn ($68bn, £44bn) in finance for each of the next five years to roll over existing debt and pay interest. That adds up to approximately €250bn, or about 100 per cent of Greek annual GDP.

That means Greece has to raise 20% of GDP.

Hey, if you add up enough years every country owes 1000% of GDP.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon Apr 19th, 2010 at 02:04:30 AM EST
[ Parent ]
Does every country need to raise 19% in finance for each of the next five years to roll over existing debt and pay interest?  What is the situation for the UK, and for the US?

The point is not to be right, but to get to right.
by marco on Mon Apr 19th, 2010 at 02:24:59 AM EST
[ Parent ]
That should have been:

Does every country need to raise 19% of GDP in finance for each of the next five years to roll over existing debt and pay interest?

The point is not to be right, but to get to right.

by marco on Mon Apr 19th, 2010 at 02:36:29 AM EST
[ Parent ]
Apparently the accepted way to run the public finances is to continuously roll over debt. This is what Minsky called speculative finance (borrowing to pay principal, paying interest out of revenue).

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon Apr 19th, 2010 at 02:39:00 AM EST
[ Parent ]
Migeru: Apparently the accepted way to run the public finances is to continuously roll over debt. This is what Minsky called speculative finance (borrowing to pay principal, paying interest out of revenue).

As you pointed out here, too.

Re: Upstate NY's response to your comment --

     Why not just extend the repayment terms?

     Surely, for the creditors, that's a better outcome than restructuring.

Münchau writes:

But even if the Greek government were to present a credible long-term stability plan, the risk of default would remain high. This means that some form of debt restructuring is unavoidable. Restructuring is a form of default, except that it is by agreement. It could imply a haircut - an agreed reduction in the value of the outstanding cashflows for bond holders. The Brady bonds of the late 1980s, named after Nicholas Brady, a former US Treasury secretary, worked on a similar principle. An alternative to restructuring would be a debt rescheduling, whereby short and medium-term debt is converted into long-term debt. This would push the significant debt rollover costs to well beyond the adjustment period.

One way to force the debate would be to attach super-senior status to the EU loan to Greece. I understand this is still an unresolved issue. Super-senior means this loan would be repaid before existing debt. Should Greece ever get into a liquidity squeeze, bondholders would be put in a back seat. In such a situation, they might prefer rescheduling.




The point is not to be right, but to get to right.
by marco on Mon Apr 19th, 2010 at 02:58:46 AM EST
[ Parent ]
My mistake in conflating these two:

marco:

Migeru: Apparently the accepted way to run the public finances is to continuously roll over debt. This is what Minsky called speculative finance (borrowing to pay principal, paying interest out of revenue).

As you pointed out here, too.

These are not the same.

As explained in Wikipedia.

The point is not to be right, but to get to right.

by marco on Mon Apr 19th, 2010 at 03:04:57 AM EST
[ Parent ]
Which one applies to the current Greek situation?

  • for hedge finance, income flows are expected to meet financial obligations in every period, including both the principal and the interest on loans.
  • for speculative finance, a firm must roll over debt because income flows are expected to only cover interest costs. None of the principal is paid off.
  • for Ponzi finance, expected income flows will not even cover interest cost, so the firm must borrow more or sell off assets simply to service its debt. The hope is that either the market value of assets or income will rise enough to pay off interest and principal.

Financial crisis - Wikipedia, the free encyclopedia



The point is not to be right, but to get to right.
by marco on Mon Apr 19th, 2010 at 03:07:48 AM EST
[ Parent ]
Take Greece's 125% Debt-to-GDP. At 5% annual interest, that's under 7% of GDP in interest payments. That can be paid out of government revenue so we can assume Greece is not engaging in Ponzi finance. Not all of Greece's debt pays that interest since some of it was issued before 2007 when the yield the market demanded for its bonds was lower.

As for paying the principal, we get Munchau's 20% of GDP for debt service is we assume about 10% of Greece's bonds mature each year (13% GDP for principal plus 7% GDP for interest).

"Rolling your debt" means issuing a new batch of bonds to pay the principal on maturing bonds. That's speculative finance. It means Greece would issue maybe 15% of GDP each year in order to pay the bonds maturing that year.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon Apr 19th, 2010 at 04:40:04 AM EST
[ Parent ]
Debt which cannot be paid will not be paid. You can call it default, you can call it restructuring, you can call it rescheduling. In the end what it means is creditors get a smaller cash flow out of the debtor, possibly for a longer time, possibly preserving the "net present value" of the cash flows.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon Apr 19th, 2010 at 04:50:00 AM EST
[ Parent ]
If you compare 20% to Greece's 125% debt-to-GDP ratio, you get an average duration of roughly (very roughly) 6 years.

So take other countries' Debt-to-GDP ratio and multiply by 15% (or divide by 6).

For instance (2008 figures):

EU average: 62% => 10% a year in debt service
Eurozone average: 69% => 11% a year in debt service
Italy: 105% => 18% a year in debt service
Belgium: 90% => 15% a year in debt service

And this is 2 years ago.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon Apr 19th, 2010 at 02:36:38 AM EST
[ Parent ]
Where does Münchau get the €50bn ($68bn, £44bn) figure from?  Can we look up the corresponding figure for other countries?

The point is not to be right, but to get to right.
by marco on Mon Apr 19th, 2010 at 02:50:47 AM EST
[ Parent ]
FT.com: Investors flock to Greek bond issue (January 25 2010)
Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the government had reckoned on. However, in a sign that Greece is being made to pay for years of fiscal profligacy, the bond carried a record high interest rate spread relative to the rate for German bonds, the eurozone's benchmark.

Greece is under heavy pressure from its 15 eurozone partners to restore discipline to its public finances after it disclosed last year that it had massively understated its budget deficits, partly because of political interference with the national statistical service.

Greece needs about €53bn to fund its debt requirements this year, a task that may prove harder than raising last year's sum of more than €60bn if, as some investors suspect, global financing conditions tighten in the course of 2010.

These figures are in each country's national budgets - they should be no secret though I am not sure where we could readily find the numbers...

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon Apr 19th, 2010 at 04:47:39 AM EST
[ Parent ]
By the way, Munchau makes it sound like Greece is doing Ponzi finance:
Greece needs to raise around €50bn ($68bn, £44bn) in finance for each of the next five years to roll over existing debt and pay interest.
since the implication is that Greece is paying its interest out of issuing debt...

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon Apr 19th, 2010 at 05:00:13 AM EST
[ Parent ]
Migeru: By the way, Munchau makes it sound like Greece is doing Ponzi finance...

Well, so do Peter Boone and Simon Johnson, right?

The point is not to be right, but to get to right.

by marco on Mon Apr 19th, 2010 at 05:48:56 AM EST
[ Parent ]
Well, any crisis has the potential to push a speculatively-financing unit into nonfraudulent Ponzi finance, or a Ponzi-financing unit into default.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 20th, 2010 at 01:43:11 AM EST
[ Parent ]
Greek Problems Will Drive Integration - WSJ.com
... whatever happens the process is built on an important new principle that will define the euro zone: each nation is indeed its brothers' fiscal keeper.

No matter that troubled Ireland, Portugal and Spain are expected to contribute to the bail out, or that Angela Merkel has yet to explain to her disapproving electorate why every German should cough up €100 each to enable Greeks to retire earlier than any German can hope to. A long step has been taken to move the integration project forward.

No taxation without representation is another American notion that will now come into play. European citizens will now be in effect taxed to support the Greek government, which they did not elect and in which they are not represented. <...>

Olli Rehn, EU commissioner for economic and monetary affairs will begin using his long-dormant monitoring powers, supplementing IMF oversight, and allowing Mr. Sarkozy to claim Europe is following Voltaire's advice and cultivating its own garden. We are about to learn just how much additional sovereignty each euro-zone nation is willing to surrender as Europe takes another step--a giant step--down the road to more complete economic integration.



The point is not to be right, but to get to right.
by marco on Mon Apr 19th, 2010 at 03:46:07 AM EST
[ Parent ]
These people are seriously obessed with taxes.

They'd rather "freely" pay larger amounts to lawyers, private insurance companies, oil companies or mercenaries than to the government... it's sick.

Of course, what's really at stake is not so much the taxes but the fact that if all basic services were provided by the private sector, plenty would be excluded and the rich would feel even more exclusive and special...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Mon Apr 19th, 2010 at 08:37:59 AM EST
[ Parent ]
And the rich would be more stressed and less healthy. Isn't the world just great?
by Colman (colman at eurotrib.com) on Mon Apr 19th, 2010 at 08:45:31 AM EST
[ Parent ]
yeah - I keep on saying that we have a simple argument: "how do you know that you pay the bodyguards of your kids enough money that they won't kidnap them?"

Wind power
by Jerome a Paris (etg@eurotrib.com) on Mon Apr 19th, 2010 at 10:19:45 AM EST
[ Parent ]
Jerome a Paris: They'd rather "freely" pay larger amounts to lawyers, private insurance companies, oil companies or mercenaries than to the government.

No.  In this specific case, they simply would rather not pay extra taxes in order to save another country from the incompetence and/or corruption of its own government.  Has nothing to do with lawyers, private insurance companies, oil companies or mercenaries.

The point is not to be right, but to get to right.

by marco on Mon Apr 19th, 2010 at 11:37:13 AM EST
[ Parent ]
Well, the Germans didn't mind the Greek debt when they sold them several state-of-the art submarines...

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Mon Apr 19th, 2010 at 12:41:07 PM EST
[ Parent ]
We're talking 3 year loans in this case, with a yield of 5.33%.

Munchau says this is a net transfer of wealth from Athens to Germany, a kind of loan payout dynamic that is quite familiar historically.

by Upstate NY on Mon Apr 19th, 2010 at 12:50:17 PM EST
[ Parent ]
That's ridiculous. Germany could extract 4% in seigniorage out of Greece. If the German government is unable to fund that without raising taxes...

Not to speak of the fact that they probably think they cannot do it without raising taxes partly because they wrote into the ECB regulations that the German government cannot borrow from the ECB. But of course, if Greece could borrow from the ECB we wouldn't be having this conversation.

Ultimately, this is all the fault of the Bundesbank's ideologues.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 20th, 2010 at 01:41:51 AM EST
[ Parent ]
Like this one.

Bundesbank attacks Greek rescue as a threat to stability - Telegraph

The Bundesbank, headed by ultra-hawk Axel Weber, said the decision to bring in the IMF makes matters worse, arguing that the EU would impose tougher budgetary discipline.

The report mocked the IMF as the "Inflation Maximising Fund", saying the body had gone soft under Dominique Strauss-Kahn, a French socialist and Keynesian. It has shifted focus from fiscal cleansing to "growth-oriented" financial policies. "Currency reserves from the Bundesbank cannot plausibly be made available for such purposes," it said.

by generic on Tue Apr 20th, 2010 at 06:59:25 AM EST
[ Parent ]
Alex Weber is the front-runner to replace Trichet next year.

Or was. I cannot imagine that the rest of the Eurozone will take kindly to him spouting this kind of nonsense.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 20th, 2010 at 07:06:48 AM EST
[ Parent ]
It's unfortunately hard to see Germany accepting anyone else...
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Apr 20th, 2010 at 07:30:37 AM EST
[ Parent ]
Then there will be an impasse.

As with other high-profile European appointments, if there is disagreement an outsider gets the job.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 20th, 2010 at 07:34:26 AM EST
[ Parent ]
That is the only way out.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Apr 20th, 2010 at 07:37:03 AM EST
[ Parent ]
Axel Weber has a reputation as an inflation fighter. If Germany can't collectively muster enough neurons to realise Europe's problem right now is deflation...

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 20th, 2010 at 07:44:23 AM EST
[ Parent ]
Sorry, not Alex but Axel.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 20th, 2010 at 08:10:16 AM EST
[ Parent ]
sorry, I was writing about the WSJ writer who spouted that article and wrote about "no taxation without representation" and other similar inanities.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Tue Apr 20th, 2010 at 11:29:57 AM EST
[ Parent ]
Correct me if I'm wrong, but...

...Germany's 67 retirement age is unmatched in any other country. Germany is also the biggest net contributor to EU funds. In other words, Germans already work longer than other Europeans AND they contribute more to EU funds.

Greece raised its retirement age to 65 (although women, for some reason,--bizarrely--can retire earlier--don't ask me), and that number seems largely in keeping with other European countries, no?

by Upstate NY on Mon Apr 19th, 2010 at 12:48:49 PM EST
[ Parent ]
the actual retirement age in Germany is 61.5 (official: 67)
the  actual retirement age in France is 61.5 (official: 60)

So, again: bah.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Apr 20th, 2010 at 11:30:50 AM EST
[ Parent ]
Greek Yield Spread Widens to Record as Talks With ECB, IMF Delayed by Ash  - Bloomberg.com
The yield on the Greek two-year note climbed 59 basis points to 7.49 percent at 10:57 a.m. in London. The 4.3 percent security due March 2012 slid 0.97, or 9.75 euros per 1,000 euros face amount, to 94.50. The 10-year bond rose 29 basis points to 7.74 percent, driving the difference in yield, or spread, between the security and bunds 30 basis points wider to 460 basis points, the most since October 1998. The Portuguese-German yield spread jumped 8 basis points to 147 basis points and the Irish-German spread rose 6 basis points to 153 basis points.

Credit-default swaps tied to Greece's government bonds rose 17 basis points to a record 455, according to CMA DataVision prices.



"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Mon Apr 19th, 2010 at 08:52:01 AM EST
[ Parent ]

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