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Guest Post: Why extending maturities of Greek debt would not burden EZ countries & taxpayers

Opponents of Greek debt relief claim there will be an extra financial burden on Eurozone member states and their taxpayers. This is not true, says Eric Dor, Director of Economic Studies at IESEG School of Management in Lille, France.

Below Eric Dor’s position

Why a lengthening of the maturities of the Greek debt would not cost anything to the States of the euro area and their citizens

14 June 2017

There is a wrong but widespread idea in several countries, as for example in Germany, according to which a restructuring of the Greek debt, by lengthening the maturities, would be costly to the lender countries and their citizens. It is thus useful to explain why it is wrong.

Bilateral loans

The States of the euro area, like Germany or France, have borrowed the funds that they have lent to Greece. But Greece pays them higher interest rates than the interest rates at which these countries have borrowed. Extending the maturities of the loans, while keeping a small margin on the funding costs, would not cost anything to the States and their citizens.

Greece has been awarded the right to start paying interest states only in 2020. But this postponement of interest rates payments has been considered as additional loans to Greece. Thus Greece will later pay them with additional interest payments on them. It has not cost anything to the lenders. Postponing again the payment of interest rates, using this scheme, would not cost anything to the lending countries.

Loans of EFSF

With the guarantee of the States of the euro area, EFSF has borrowed on the markets the funds that it has lent to Greece. But Greece pays EFSF a slightly higher interest rate than the interest rate at which EFSF borrowed the funds. There is thus no cost to EFSF. The States of the euro area did not disburse anything. They are just exposed to the risk of being compelled to reimburse the creditors of EFSF if Greece defaults. But they receive fees paid by Greece for these guarantees.  Extending the duration of this scheme would not cost anything to the States and their citizens, as long as Greece pays a higher interest rate than the funding cost of EFSF, and pays fees for the guarantees.

Greece has been awarded the right to start paying interest states only in 2023. The same comments as those concerning the bilateral loans apply.

Loans of ESM

ESM borrows on the markets the funds needed to award loans to Greece. But Greece pays ESM slightly higher interest rates than those at which ESM borrows. States of the euro area had to borrow the funds needed to pay their shares of capital in the ESM. But ESM pays dividends on this capital which is invested. Anyway ESM is a permanent structure. The capital paid in by States has to remain there permanently, whatever the duration of the relationship between Greece and ESM. Extending the maturities of the loans of ESM to Greece would not cost anything to the States of the euro area and their citizens

by Eric Dor

Director of Economic Studies at IESEG School of Management

PS I saw this ext in French. Upon request Eric Dor was so kind to translate it in English and submitted it to KTG.  Much appreciated, Eric!

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7 comments

  1. Thanks for this which reinforces something I posted earlier (albeit not as succinctly put as Eric Don’s piece). Unfortunately, I don’t think it will make any difference no matter how cogent the argument might be. Schaüeble and company already know all this. But they have a political incentive to continue to peddle the sob story of how the lazy Greeks are literally stealing food from the mouth of starving kids and sick, old people in Slovakia, Estonia, Slovenia etc. in order to continue to fuel their lazy, degenerate way of life.

  2. You are once again right Tintin. What Germoney and “friends” do to Greece has nothing to do with economics but everything to do with domination and revenge. The Germans through bribe, corruption and deception have formed a wolves pack to raid the poor country through genocide and destruction. Among others, they also want to spread the message that resistance to the 4th Reich is futile and that resistance to the 3rd Reich will eventually be punished.
    The trouble is that the other members of the today’s pack (called “Europeans”) are still too stupid, and their leaders too corrupt, to realise that once Greece falls the appetite of the 4th Reich for their own blood will only become stronger.
    I can never be amazed by the extent of human stupidity!

  3. At the moment, some European member states have to pay less for loans than the interest rate Greece pays, that is the only thing that is true about that article. If Mr Dor claims he can look 40 years into the future and ensure that that fact will always be the case (as the interest rates Greece pays will be fixed while those of the member states fluctuate), i have a nice piece of swamp land i am willing to sell. Mr Dor also ignores the fact that certain EU members even currently pay higher rates for their loans than Greece, so those states like the Baltics and Slovenia already are in a situation of loosing money.
    What Mr. Dor also fails to take into account is inflation, the 20000 € that at the moment buy you a car in 40 years of 2 % inflation will have halfed in purchasing power. Please find better economists.

  4. Piedpiper, you did not understand what the article says. No state has paid any money to Greece. They all paid their share to the ESM, but they would have to do this irrespectively of Greece. The ESM raises money in the markets and loans this to Greece. The only thing other states do is supply guarantees for the loans of the ESM – no money!
    Your argument that some states borrow money to give to Greece does not hold.

  5. Iannis: Wrong. There are three diffenrent kinds of loans to Greece, as explained (quite well) in the article:
    The first trance, the bilateral loans, are loans that were directly taken by the other European countries and given to Greece, each country lending for whatever rate it could at the time. Also, those countries didn t lend the money for those credits for 40+ years, but for like 2-5 years, so those credits will need to be rolled over repeatedly. Whenever than happens and a country has to lend that money at a higher rate than the rate Greece has to pay for its loans, it looses money.
    For the second and third tranches, the money was borrowed by the ESM/EFSF, but those loans also will have to be rolled over repeatedly and when you extend maturities and given the low interest rate Greece is paying, there will come a time when those funds have to pay higher interest on their credits, also resulting in a loss.

  6. OK Piedpiper, I apologise for the mistake. The first set of loans were bilateral, and for the moment (at current rates) the states are set to make a profit out of those. For EFSM/ESM there is no such case.
    But let us consider the huge consequential damage to the Greek economy caused by the policies Germany and their allies forced on Greece as a condition for these loans and also their purpose: 90% of them went to repay private debt to the German, French, Dutch and Spanish banks. While Greece could have achieved a real restructuring of the loans directly with the private sector creditors, treacherous Greek politicians and the French/German governments forced the country into state loans to repay private loans, plus the insanity of austerity.
    This is economic strangulation, fiscal water boarding as Varoufakis calls it and is the real cause of the Greek problem: when you don’t let the economy recover and drain its liquidity via criminal austerity, then your loans can never be repaid! As simple as that. But beautiful free looting of all your assets is entirely possible and this is what is happening right now.

  7. You still haven t understood the loss issue but switch topic, nice.
    But ok, i am willing, so lets look at the situation in 2011 when Greece, after years of “Ponzi-Growth” (words from Varoufakis), that is incredible economic growth fuelled by increasingly huge deficits that allowed Greeces political parties to create tons of jobs for their cronies and voters finally came crashing down as the markets realized that no, Greece state bonds were not in the same security category as Frances or Britains and should for the whole time have had higher interest rates.
    At that time, a very limited amount of money was available from the other European nations to do something about the problem. Why was the amount limited? Well, three main reasons:
    1.) Nearly all European nations were forced to bail out major banks because of the subprime morgage crisis in the US, and the voters didn t want another bailout
    2.) The Maastrict treaty clearly states that there should be no bailouts for Euro countries getting into default trouble
    3.) There were no EU regulations how such a bailout should be handled and no experience with it.

    So, with the limited amount of money available, there were 2 scenarios on what to do:
    1.) The scenario which in the end was implemented, bailout of Greece (against the german opinion at least in the beginning which prefered scenario 2).
    2.) Greece declares a debt haircut of XX percent, the European states bail out their own banks affected by the Greece haircut, and pray that there would be no market contention about the viability of Portugese, Spanish or Italian debt. In this scenario, the only banks that would be not bailed out would be Greeces and of course Greeces pension funds, which held the majority of Greeces debt, so people with money in the bankrupt banks would have lost all their money as the Greek state who guarantees the first 100000€ of each person wouldn t be able to insure that when all major Greek banks go bust. At the same time, as after such a haircut noone lends to a country (naturally), so Greece would have to reduce its eyewatering deficit of 15% of GDP to 0 in a single year (while scenario 1 allowed Greece to slowly reduce it). In the end, Greece would ve been forced out of the Euro (cause only by printing Drachme like crazy would there be any chance to stabilize the economy), pensioners and savers in Greece banks would have lost all their savings and those people who had Euro-denominated money in other countries would have been able to swoop in and grab everything on the cheap, all this in a single year. Sorry, but i still think scenario 1 has a better outcome.

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