Here’s where another €2bn or so of freshly-issued Greek bonds would go. Chart via Citi:
And that’s after the largest sovereign debt restructuring in history. Bracing isn’t it?
And yet maybe Greece is better off paying up to issue a bond to private bondholders on Thursday. In the long run, it could well beat taking ‘free’ money from the Troika.
If Greece instead borrowed the €2bn from the official creditors who already own four-fifths of its debt, it wouldn’t actually be free money. But it would be much cheaper than the likely 5 per cent coupon yield on this bond. The difference in interest payments is money to build hospitals, schools, you name it.
As Citi also put it on Wednesday, in an overview of how the stock of Greece’s government debt (sounds terrifying: 180 per cent of GDP) differs from the cashflows required to service that debt:
Also, the cost of debt servicing has fallen to a new record-low of 2.6% in 2013, although based on the EU Commission and IMF projections it should move back to around 3% in the next couple of years. However, as a percentage of GDP interest spending remains a heavy burden, at 4.3% in 2013 and probably rising above 5% by 2016, especially considering that most of these resources are channeled to foreign creditors.
Now, on the other hand, thanks to both the restructured terms of its remaining private bonds and the rescheduling of official loans, the average maturity of Greece’s debt is around 16 years. This is a lot. Payments of principal — on IMF loans or bonds — also drop off markedly following 2015 (Citi’s chart):
In other words, insert joke here about zero-coupon perpetuals. But Citi is concerned that Greece has high debt, and low growth, two years after its restructuring (a period that’s usually a turning point for big restructurers).
So, should Greece have kept taking the blue pill (more official debt)?
We’d say no. Not because interest payments and high debt aren’t a problem — sure, they are. And not because there’s somewhat dubious political appeal to the Greek government of achieving a bond sale.
However, continued reliance on official money would have other, political, costs. Essentially it’s bad news for a sovereign to remain a ward of its public creditors. Again — the official sector looms large over Greece’s existing debt stock anyway, and any buyer of this private bond will have to bear that potential de facto subordination in mind.
But that official debt stock’s already liable to be written off, one way or the other, in future, turning into effective fiscal transfers to Greece. Not counting the IMF of course (it’s senior to all other creditors) — but let’s say the EU loans really do become zero-coupon perpetuals.
Adding further debt to that issue may increase political resistance in Germany (down the line). But more importantly it could increase resentment in Greece. The official money isn’t free: it comes with political strings attached in terms of required “adjustment” and surveillance. Greece is, two years on from its restructuring, just about in possession of current account and primary budget surpluses. Those should normally give Greece a stronger hand with its creditors, not going back cap in hand to them.
And last but not least — the IMF, institutionally embarrassed by its experience in Greece, is keen now on private bondholders taking their share of exposure to sovereigns of questionable credit. Less on existing bondholders getting to cash out with official money. The IMF was talking about the beginning of loan programmes. But it should, if it’s serious, also think about the exit from them too.
Well here’s a case in point. The red pill.
Of course for the other point of view… a last bit from Citi, with our emphasis:
We compute that the debt-to-GDP ratio would stabilise at 2013 levels if nominal GDP growth in coming years were to average at 2.9% YY, assuming an average cost of debt at 3% and a primary surplus of 0.5% of GDP. With the same assumptions, we estimate annual nominal GDP growth would have to be around 8.5% until 2020 to bring the public debt ratio down to 120% by the end of this decade (as per the IMF’s definition of debt sustainability). We judge such a high nominal growth to be unlikely. Hence, in our view, without a sizable haircut on official loans, the public debt ratio is highly unlikely to fall below the 120% any time over the next ten years…
By Joseph Cotterill and David Keohane
Related links:
Stavros Theodorakis’s ‘river’ party aims to get Greek politics flowing in the right direction – Guardian
Greek rebound is astonishing – Reuters
