[Editor’s note - this article was initially published on September 19th 2013. While since then the cost of borrowing for Greece has fallen (with interest rates on the market below 6%) the basic argument still stands, according to the author, who has since reposted it on his blog. It was reprinted on the PressProject site. In a country that is imposing a host of stealth taxes on wage-earners, pensioners, small-holders and entrepreneurs, Costas Lapavitsas argues that it is unacceptable for Greek citizens to pay hundreds of millions of euros (which is what the interest on Greece’s imminent bond offering will amount to) for the sake of PR campaigns. But what, he asks, can be expected from those who implemented the economic policies which caused such destruction in Greece?\
Over the past three years Greek public debt has undergone a deep restructuring. A large part of it was written off at great cost - chiefly to its Greek holders, yet without rendering the debt sustainable. Almost the entirety of the remaining debt was transferred to international public organisations. The debt, finally, was also extended, with the average timeframe for maturity rising from 8 years in 2009 to over 16 years in 2013.
Additionally the cost of the debt was reduced to about 2.5% on average, whereas in 2009 it was over 4%. The primary reason for this reduction was the cheap interest rate of the Memorandum loans and chiefly because of the large loan provided by the European Financial Stability Fund. The real cost of the ‘assistance’ was of course the destruction of the Greek economy by the Memorandum conditions.
Due to the extension of the debt, the annual payments from 2016 until 2036 will range between 5 and 10 billion euros - an amount significantly less than before. The problem, howver, is the period 2014-15 because that is when over 40 billion euros worth of debt matures and must be repaid. The Greek government does not have at its disposal sufficient funds for this, creating the infamous ‘fiscal gap’.
The size of the gap cannot at this point be exactly determined. Of the 40 billion that must be repaid, the total deficit for 2014-15 must also be added, which arises chiefly due to interest on the debt and will possibly be less than 10 billion. Revenue from privatizations must also be subtracted - which are significantly lower than initially forecast. A reasonable estimate is that Greece will be short between 10 - 20 billion euros. Where will they come from?
If the pro-memorandum forces continue to govern the the most likely answer is a new loan from the troika. It will have a low interest rate but will come attached with harsh conditions, overseen by the troika. Given that Greece’s fiscal situation for 2015-16 has not yet been determined, the most likely scenario is that the troika will demand a continuation of strict austerity and ‘reforms’. An end to the financial impasse will be postponed, waiting for the European miracle which will bring growth. The debt will continue to grow beyond today’s 320 billion as will the debt to GDP ratio. The hope that some substantive lightening of the debt through its extension or a reduction in interest rates is not convincing given that debt repayments have already been extended and interest rates are already low.
In this context, Greece’s return to the markets appears groundbreaking, because it appears that Greece is standing on its own two feet. However it is nothing more than opportunist which only serves the interests of the troika.
Both Ireland and Portugal made a partial return to the markets in 2013 raising small amounts - about 5 billion euros - at a cost of 4-6%. In Greece’s case the amounts will be greater and the lack of confidence of the markets enormous. Investors are not likely to be impressed by the achievements of Finance Minister Yannis Stournaras over the primary surplus. Furthermors even if the issuance of bonds is not a failure, the interest rate will be high - at least 7%. At the same time the markets will demand the implementation of strict austerity and ‘reforms’ no different from the troika. The financial impasse will remain.
Who will benefit, therefore, if Greece succeeds in borrowing from the markets essentially under the same terms but at triple the interest rate? Only the troika because it will create the false impression that the crisis has ended, while Greece will bear the cost. It will amount to a firework display on the backs of Greek citizens.
Greece does not require a new loan, nor more amateurish experiments. Its debt is unsustainable and so what is required is a cessation of repayments and a deep write-off. There also must be a cessation of austerity as soon as possible, Above all the country needs a government that makes the needs of its people its top priority - not Berlin’s demands.
PressProject
Posts
