2015.01.29 Thoughts

More on Greece.

“Debt write – down is extremely unlikely and unnecessary as well.” claims Zsolt Darvas.

1. Extremely unlikely, because “Eurogroup, told the new Greek government not to expect any write down of the nominal or face value of the €316bn (£236bn) debt owed by Greece. At least 85pc of the Greek debt is owned by the EU, International Monetary Fund and European governments meaning that the cost of any write downs or cancellation would be predominantly borne by taxpayers in eurozone countries hostile to bailouts, such as Germany or Finland. Wolfgang Schäuble, the German finance minister, also ruled out any haircut as Berlin officials insisted that Germany’s opposition to debt forgiveness “remains unchanged”.

2. Unnecessary:
2.1 ” On the issue of repaying back its liabilities, it’s more a question of time, rather than money. Greece has already been the beneficiary of a number of debt extensions, and in 2012, underwent the biggest private sector debt restructuring in history. The average maturity on Greek government debt currently stands at 16.5 years. The sustainability, or otherwise, of the country’s burden relies more on the timetable for repayment rather than the overall stock of the debt, argue many economists.”

2.2 “Greece has managed to negotiate favourable terms on which it can service the cost of its loans and the interest paid by the country is far below that of Spain, Ireland, and Portugal (see chart below). Given that interest rates have fallen significantly from 2014, actual interest expenditures of Greece will be likely below 2pc of GDP in 2015, if Greece will meet the conditions of the bail-out programme.”

2.3 “Greece won’t recover without debt forgiveness. Wrong again. For all the fixation on the outstanding stock of Greek debt, kickstarting growth in the country is more likely to happen through a relaxation of budget rules rather than a debt cancellation. With the coffers looking sparse, the Syriza-led government is also asking for a renegotiation of the surplus rules imposed on the country. Greece is currently required to run a primary surplus of 4.5pc of its GDP. Before taking account of its debt interest payments, it is likely to achieve a primary budget surplus of around 3pc of its national output this year. This severely limits the new government’s room for fiscal manoeuvre. It also makes it almost impossible for Syriza to fulfil its pre-election promises to raise the minimum wage and create public sector jobs. According to calculations from Paul Krugman: “Dropping the requirement that Greece run a primary surplus of 4.5pc of GDP would allow spending to rise by 9pc of GDP, and that this would raise GDP by 12pc relative to what it would have been otherwise. Unemployment would fall by around 10pc relative to no relief”

And lastly. “The Greek media reports that capital flight last week reached €10bn as it became the clear that the amalgam of Maoists, ex-Leninists and radical socialists known as Syriza would win the election. Barclays estimates the outflow at €20bn since early December, roughly 12pc of GDP.
The European Central Bank is for now stepping into the breach. Liquidity support for Greek banks spiked to €54bn at the end of December, and is rising fast. If the ECB were to pull the plug, Greece would spiral into a systemic crisis immediately.”

Sources.

http://www.telegraph.co.uk/finance/economics/11372369/Three-myths-about-Greeces-enormous-debt-mountain.html

http://www.telegraph.co.uk/finance/economics/11370406/No-debt-forgiveness-for-Greece-say-eurozone-finance-bosses.html

http://www.telegraph.co.uk/finance/economics/11370960/Greek-coalition-braces-for-debt-showdown-as-Germany-rattles-sabre.html

“Greek Choices after the elections” by Zsolt Darvas.

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