2 May 2017

Greece can never pay its debts. So why not admit it?


Peace, sweetness and light break out in the Balkans as we’re told that the EU, the eurogroup, the IMF, Greece, the ECB and Uncle Tom Cobley agree over a Greek debt deal.

Except, of course, that agreement hasn’t been reached, because the major point at issue is still being glossed over. That major point being that Greece simply isn’t going to repay all of that debt. So we still need to work out who is going to lose money, and when.

Debts which cannot be repaid will not be repaid. That’s why we have bankruptcy in the first place. Or, when it comes to sovereign nations, we have debt rescheduling and IMF programmes instead of bankruptcy.

When the Greek crisis first blew up, what should have happened was the standard IMF programme: a haircut on the debt, devalue the currency and a bit of a loan to tide things over until growth returned. This is similar to the approach taken by Iceland – which has already recovered while Greece languishes – and is what the IMF has been doing for decades in other places.

The one thing standing between Greece and this approach was the euro. In order to protect the integrity of the single currency, debts to the private sector banks were refinanced by public money from varying combinations of the EU itself, the ECB, the eurogroup (the group of eurozone finance ministers), the IMF and so on.

This is the crucial point. There are no private sector capitalists left. If there were, we could simply say “you lost your money, better luck next time”. Instead there are only official creditors, run by politicians, who have their voters wondering what has happened or will happen to their money.

For it is still true that Greece cannot repay those debts, and therefore Greece will not repay them. All that can change is who will lose money and when. Unsurprisingly, politicians are keen to delay the inevitable until they have retired and are collecting their pensions. That the Greeks have to see theirs cut in the interim is just bad luck.

This may sound terribly cynical but allow me explain the thinking. There are the true federalists happy to sacrifice a country on the altar of the euro and ever closer union, as long as the losses – losses of their own voters’ money – come to light later.

Then there are those who think this a little harsh and who would prefer to see an economically, if not entirely politically, acceptable solution. They insist that the IMF be a part of any final scheme because the IMF will only sign up if it is economically sound and not just a eurofudge to push default off into some other politician’s reign.

They’re right to think so too. For the IMF is insisting upon being economically rational in a manner that the eurogroup is not.

Which brings us to the little detail of the size of the primary surplus.

A budget surplus exists if the government is taking in more in tax revenue than it spends. (A simple enough concept, even if very few governments manage it.) A primary surplus exists if there is more coming in than going out before we factor in debt repayments and interest. That primary surplus is thus the amount that can be spent on repaying debts or the interest upon them.

Which brings us to the major unresolved question when it comes to Greece. The eurogroup thinks Greece should be running a primary surplus of 3.5 per cent of GDP for the long term. The IMF that this could, possibly even should, happen for a year or two but then it must fall to 1.5 per cent. The IMF’s thinking is simply that no one can run a 3.5 per cent primary surplus in the long run. Democratic politics simply will not allow 3.5 per cent of everything produced in the country to be sent off to foreigners to repay old debts.

So how has the eurogroup reached this figure?

The loans extended to Greece currently pay almost nothing (some are mere basis points above the ECB’s QE-influenced ultra-low rates) and the repayment periods are already out to 50 years on some of the debt.

Anyone who grasps the time value of money will realise that this means there are huge losses already baked into that lending of eurozone taxpayers’ money to Greece. But it is still possible to say that the whole capital sum will be repaid. And that is what matters politically. There will be no write-offs, just that invisible loss to time and inflation.

Even to manage this, it is necessary for Greece to run that 3.5 per cent primary surplus. That, after all, is how they reached the target: what will it take for us to get the capital sum back and thus keep the voters happy?

The IMF, on the other hand, is looking at how large a primary surplus Greece can afford in the long term. And that sum is very much less than the current capital sum. This creates a division between eurozone finance ministers over whether to follow their own numbers without the IMF, or to insist that the deal has to be economically sensible.

Behind the reports of pensions being cut, VAT being raised, ports being sold off, and so on is a fight between politics and reality.

The eurogroup has lent too much money to Greece. It will never be repaid simply because Greece cannot repay it without Ceascescu levels of financial repression of the populace. (Note that they machine-gunned Ceascescu for what he did.) What’s the point in impoverishing a nation while still losing the money?

Unfortunately the Greek crisis is now all about politics in the countries that lent the money. That money, or a goodly chunk of it at least, is already gone. The continued economic devastation of Greece isn’t about getting the money back; it’s about not having to admit that the money is gone. That isn’t the way to run a continent, is it?

Tim Worstall is senior fellow at the Adam Smith Institute