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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 ]

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