By Tim Worstall , Forbes
As some of us pointed out about the Greek debt “deal” there wasn’t in fact a deal at all. There was just an agreement to carry on and muddle through until something really could be done about it all.
And that would be when everyone was thinking or talking about something else. For there has only ever been one possible solution to the amount of debt that Greece has: some of it must be written off. However, as a political solution that’s just not possible. The other taxpayers in Europe simply will not stand for the idea that their money swirls down the plughole of whatever it was that Greece spent all that money upon. And it will have to be taxpayers too. There’s almost no private Greek debt left other than that owned by the Greek banks themselves: and that can’t be haircut because then the Greek banks go bust meaning that the Greek government must bail them out with the money it hasn’t got.
The combination of the two red lines in the earlier “agreement” have led to this uncomfortable truth. Given that exit from the euro and subsequent devaluation could not be allowed to happen. Further, that the debts were transferred (through the EFSF and so on and on) from private creditors to official ones, there is only that one option left. The debt must be cut simply because it is unpayable. Thus it will have to be the taxpayers of other EU countries that bear the losses. But, as above, it’s not politically possible to actually say this and just cut the amount of debt to be repaid. And it also wouldn’t have been possible to kludge this when everyone was talking about the issue. Now, as we all concentrate on other things, that kludge is possible. And that’s exactly what isbeing done:
Greece’s finance minister suggested on Saturday that differences between EU partners and the IMF over the bailout program was undermining government efforts to help the Greek economy recover after years of recession.
The IMF has said that it stands ready to support Greece only if the country’s EU partners granted it “significant” debt relief. But Europe has made clear that it wants conclusion of the review before launching debt relief talks.
The IMF is insisting upon actual debt relief. As it should do of course. Various EU countries are insisting that the IMF must be involved in the solution: largely to make sure that no purely European Union political deals (the system is notorious for these) take place. And yet similarly it’s not possible, politically, for national governments to allow the gross amount to be repaid by Greece to be cut. Because that would be political suicide at home for anyone who was seen to allow this. That’s not an easy set of restrictions for everyone to navigate their way through. The solution though is what I have been saying would happen for some years:
They would initially allow lower interest rates and longer maturities on Greece’s 316-billion-euro ($352 billion) debt, the paper said. At a later stage, there would be talks on linking debt payments to economic growth provided Athens implemented measures to be agreed with creditors by 2022, it added.
In economic terms there’s no difference between cutting the gross amount of the debt and changing the terms of the debt to make repayment easier. There’s a vast difference in political terms of course. And thus the path to be taken is the economically equivalent but politically easier one. Reduce the amount that must be repaid by changing the terms of the debt instead of the amount of it. It still relieves the Greek problems and perhaps more importantly it is still the other taxpayers of Europe who lose their money.
The point is this: there’s a time value to money. That’s what an interest rate actually is: a reflection of the time value of money. £1 today is worth more than £1 in a years’ time. At current market interest rates that £1 in 365 days is worth some 97 pence today (roughly, around and about). So, If I say that that pound you owe me can instead be paid back in 365 days’ time then I’ve let you off 3% of your debt to me.
Now think about this politically. I have lent your money to someone else. And you’re going to get very angry if I tell you that I’ve lost 3% of it. Why, you might even vote against me and turf me out of my very comfortable job running Europe for you. Thus I say, no, no, they will still pay back £1, only in a year’s time! You haven’t lost anything at all you see! Smoke and mirrors of course, I’ve lost you 3% of your money, whether we think of it as being 97 pence now or £1 in a years’ time.
And thus what is happening to the Greek debt. It simply cannot be repaid. Thus the debt must be cut and the people who lent the money must lose however much that debt is cut by. But if we do it by lower interest rates and longer repayment terms then we are able to say that it will be repaid. Glossing over the fact that what will come back will be worth less than what was lent out.
What should have happened, what still should happen, is Greece leave the euro, the debt be redenominated in the new drachma and everyone acknowledge their losses as the devaluation takes place. Because the loss has already happened, the only question is how it is to be recognised. And if we’re honest about it it would be better to acknowledge that a couple of hundred billion has been lost on this European adventure and to recognise it right now. For that would provide the right incentives to guide people into the future about other European adventures. You know, don’t do things that plunge a European country and people into penury and losing a couple of hundred billions of the taxpayers’ money in the process?
