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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 ]

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