Athens, 19 July 2015
A public debt of truth*
A most brutal “anti-memorandum” mythology has been built, systematically and methodically, during the last five and especially during the last three years on the issue of public debt. In order to achieve this, three stereotypes have been formed:
The first stereotype is that the people are subjected to harsh sacrifices due to the large and unsustainable debt. Unfortunately, few have a clear understanding that the aim of the tough fiscal measures (which are now unfortunately extended until 2018) was to cover the huge primary deficit, which had reached 13,8% of the current GDP in 2009, i.e. 24,7 billion euros. A primary deficit, which since 2013, thanks to the sacrifices of the people, turned into a -however small- primary surplus and has sadly relapsed to a primary deficit, due to the five lost months of 2015, with the last nail being the referendum, the closure of banks, the capital controls. Unfortunately, only a few know that our country paid approximately 14 billion euro in interest (debt servicing costs) in 2010, while in 2015 -due to the 2012 restructuring- it pays only 5,5 billions, i.e. almost a third of that amount. Unfortunately, only a few know that the total financial needs for interest and repayments were -again due to the 2012 restructuring- at the internationally safe 10% of the GDP and have now -due to the referendum and the closure of banks- skyrocketed between 13,5% and 15%, depending on whether we use the analyses of the European Commission or the ones by the IMF; the latest ones, though, the ones that refer to the harmful effects of the last three weeks on the dynamics of the debt.
The second stereotype is that the 2012 intervention to the debt was supposedly catastrophic to Greek pension funds, which lost 25 billions from their reserves, and was overall considered from being non-consequential up to harmful to the country!
It is not pleasant seeing the PM lie before the Parliament; listening to him constantly talking about a supposed loss of 25 billions from the reserves of the pension funds, while knowing that with the PSI, for purely legal and accounting reasons, 14 (not 25) billion euros were transferred from the pension funds belonging to the general government, to the central government, to be legally safe from the haircut of Greek bonds held by foreign pension funds; while knowing that these 14 billions have been obtained by the Treasury, which can, at any time, start returning them to the pension funds, within the framework of a comprehensive social security policy. He knows that, in 2012 alone, the State’s budget subsidized the pension funds with 17 billion euros and with around 68 billions during 2012-15 the period. He knows that in 2012, due to the PSI, the pension funds received 4,5 billion euros in cash, i.e. an amount equivalent to six years’ return of the yields (about 700 mln. annually) from the 14 billions that were transferred to the Treasury, which is the main financier and guarantor of the pension funds. He know that, using the cash flow it received, IKA -the Social Security Institute- (which constitutes more than half of the overall security system) bought, at a low price, Greek bonds and restored its portfolio to 130%, while other pension funds refused to do the same, harming their insured.
However, this is just a scratch on the surface. The 2012 intervention to the debt includes a nominal haircut of 126 billion euros and further restructuring with a reduction to interest rates, a long grace period and a great extension of the repayment period (maturities), which is summarized in an overall debt reduction by 180 billion, i.e. 100% of the current GDP, in net present value. The ESM's Annual Report for 2014, released a few days ago, stresses that only due to the improvements in the terms of the loan that our country received from the EFSF in February 2012, did we benefit from a debt reduction equal to 49% of the Greek GDP of 2013, i.e. 100 billion euros in present value.
The main lack of the first program of May 2010, which did not include an intervention to the debt, finally led to a provision being made in the second program 2011-2012 for a nominal 53,5% haircut on the Greek debt held by private institutions (banks, funds, insurance companies and pension funds, and so on). The size of the haircut largely amended the negative impact of its delay. The intervention to the debt, however, had to be agreed with the partners, had to be supported by them through financial incentives that convince private parties to agree to the terms and ensure the legally voluntary nature of the whole operation so that Greece could not be submitted to legal disputes similar to those that took place in Argentina. How could the recapitalization of banks have occurred without a haircut to deposits, if the necessary funds had not been provided for in the second loan program? Funds that correspondingly limit the reduction of debt, but the public expects to win back a part of this amount when it distributes the shares of the banks it owns, correspondingly reducing the public debt. The preposterous argument is even being made, that the debt reduction achieved in 2012 has not been maintained intact, as if there were not deficits still to be covered.
The intervention made to the debt in 2012 was the largest of its kind in international financial history. The anti-memorandum propaganda, knowingly and using Goebbelsian propaganda, tried to distort or conceal this fact. Furthermore, the 2012 intervention was also accompanied by a commitment of the Eurogroup that a new intervention would take place as soon as primary surpluses would be achieved, to ensure long-term debt sustainability. These surpluses have been achieved since 2013. The country has returned to primary deficits, owing to the lost five months of 2015. Additionally, the need for a new recapitalization of banks has arisen.
You reap what you sow, though. Now, the Tsipras/Kammenos government sets as a fundamental objective the claim of the additional movements of the 2012 intervention to the debt. They have forgotten all about unilateral and heroic actions. Let us hope that they achieve the best results. The ones that the country needs and is entitled to. But even the best result would be but a small fraction of the result of 2012 in net present value terms. Using the same reasoning, let us hope that an additional nominal haircut will be achieved, which, however, is unfortunately explicitly excluded from the 07/12/2015 agreement. That too would be small compared to the 126 billion nominal haircut of 2012.
The same applies in regard to the recapitalization of banks. In 2012, the Hellenic Republic borrowed and spent (i.e. it assumed debt) 39 millions for the winding-up and recapitalization of banks due to the haircut, but also due to poor loan portfolios. At the same time, however, it attained a debt reduction of 180 billions in present value. Now, the Hellenic Republic assumes a debt of 25 billions for a new recapitalization of banks, which became necessary due to a leakage of bank deposits, an increase of non-serviceable loans, the referendum, the closure of banks and the imposition of capital controls. But there is still no visible benefit in terms of debt reduction. Let us hope that a further reduction will follow.
If we wanted to turn the agonizing history of the PSI, the haircut, the application of collective action clauses and the debt restructuring achieved in 2012 into a thriller or into a musical like “Evita”, as happened in the last five months, we would have won international viewership and sympathies within the country, but we would have exposed the country to huge financial risks. The result would have been that in 2012, the plans for a closure of banks and capital controls that we had made so as not to use them, would have been implemented, while today’s government have implemented them without having previously studied them, otherwise I hope they would have avoided these tragic developments.
The third stereotype was that SYRIZA, after coming to power, would undertake unilateral initiatives regarding the debt, would ask for an international conference on its haircut and restructuring and would not service, nor would repay the “odious” debt, about which the President of the Parliament has set up her own “truth commission”, with Mr. Tsipras’ blessings. However, an odious debt -according to the international bibliography- is one that has been concluded by dictatorial governments, for the dictators’ own benefit, to the knowledge of the lenders! I have observed that the President of the Parliament deliberately confounds an odious debt with a large debt and a large debt with a technically unsustainable debt. On these issues, however, no one is entitled to arbitrary notions or improvisations.
This third stereotype has been toned down in recent months, with the debt being appointed as a major aim of an agreement with the European partners that would not only contain a commitment for additional parametric changes, like the 2012 did, but something much more impressive and which would finally make the debt sustainable. In the 5/7 referendum (the result of which was reversed and subsequently vanished, within only a few days from its conduct), placed before the judgement of the citizens was not just Juncker’s proposal for fiscal and structural measures, but also a study on debt sustainability that reflected the technical data of those days. Before the closure of banks and the imposition of capital controls. This study was supposedly rejected by 61% of the electorate!
We have seen the results of the negotiation in the 12/7 agreement, which has been supported by the majority of the Parliament -including the votes of 110 SYRIZA MPs and of all the ANEL MPs- and published in the Official Gazette as an integral part of Law 4334/16.7.15. In the agreement concluded by Mr. Tsipras, it is expressly provided for that any nominal haircut debt is out of the question, that Greece is committed to honor all its obligations stemming from the public debt to all creditors, that a debt reduction in net present value will be sought after, through parametric changes such as the extension of the grace period and the repayment period, unfortunately without any explicit reference to a further reduction of the already very small interest rates of the European loan to Greece. The paragraph on the debt, in the 12/07/2015 agreement is not as good as the corresponding wording in the 2012 one, which does not, however, explicitly rule out a nominal haircut and leaves open the possibility of a further decrease in interest rates.
In the explanatory memorandum of the law that the government tabled in the Parliament, concerning the adoption and entry into force of the left-wing “Memorandum 3”, a main argument is the fact that the debt, due to the new large European loan, falls even more in the hands of our European partners and the ESM, i.e. the official sector, rather than the market. Of course, under English law and the jurisdiction of the court of Luxemburg. Thus collapses the obsessive criticism of all those who said in the previous years that the haircut of the debt held by individuals and the transfer of the remainder of the debt to the official sector (the Eurozone and the IMF) was a bad thing, because Greek law is no longer valid, i.e. the law of the debtor (excluding the law on forced implementation, which is that of the place of implementation). As if there is a lender that allows the borrower to define the legal framework.
The latest European Commission and IMF reports (after the referendum and the closure of banks) also give an answer to the rhetoric about the sustainability of the debt, as they reflect the negative impact of recent developments in the dynamics of the debt. I hope that even now, the government has understood that the legal condition for the disbursement of tranches from the IMF and for entering an ESM program is that the public debt of the interested country is technically characterized as sustainable; that a crucial matter is the “serviceability” of the debt, depending on the annual amount of interest and amortization and hence on financial needs, which have, sadly, deteriorated dramatically in the last six months and especially after the announcement of the referendum; that public debts are not repaid on the next day, but in the next forty, fifty, seventy years and are drastically reduced through growth rates and inflation, which matter more than primary surpluses. For this reason, the debt must be displayed not only nominally, but also in net present value.
Thus, if the, now, former anti-memorandum expressers try again to turn the debt into a political opportunity flag, they should know that apart from the public debt as a financial size, there is also the public debt of truth, as a political and historical size.
*Article by Evangelos Venizelos, published in “Kathimerini” on Sunday, July 19, 2015. A more extensive version of the article is published here, with the permission of the newspaper.