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Monday, November 7, 2016

Gross Financing Needs Capped At 15% of GDP? - A Silly Idea!

There are reports that the Greek government has now decided what it expects (or rather: hopes for) by way of acceptable debt relief. The key term is "gross financing needs" by which is meant the sum of budget deficits and funds required to roll over or pay debt that matures during any given year. Apparently, the Eurogroup had proposed, last May, to cap gross financing needs at 15% of GDP until 2030 and no more than 20% thereafter. The Greek government would now consider this acceptable.

Frankly, I think this is silly!

Two different items are being mixed here and put into the same bag: (1) debt maturities are funded out of refinancings and (2) interest payments are funded out of the budget. The latter funding is controlled by Greece; the former is not.

There are hardly any industrialized countries these days which actually repay debt in nominal terms (i. e. out of the budget). To expect that, of all countries, Greece would be the one which could accomplish that is a farce. With the present debt load, Greece could not even cover all interest at market rates with 15% of GDP.

The best that creditors can hope for (and that already is a BIG hope!) is that Greece will not have to increase its debt in nominal terms. Assuming Greece can achieve this miracle, then it follows logically that one should base projections on the assumption that debt will remain unchanged in nominal terms (i. e. maturities always rolled over and/or put on very, very long tenors).

The only question which really matters is how much interest Greece could be (or should be) expected to pay out of its budget. And since expenses in the budget are funded with budget revenues, the most logical formula would be to cap interest expense at a certain % of government revenues.

According to ELSTAT, total government tax revenues were 45 BEUR in 2015. The US spends 13% of tax revenues on interest. The equivalent of that rate for Greece would be 5,8 BEUR (roughly the same amount which Greece paid on interest in 2015). 5,8 BEUR sounds higher than any primary surplus projection which I have seen. Thus, it does not seem achievable. To lower it would be the debt relief.

What if one said that Greece should pay interest at half the level as the US, i. e. at 6% of tax revenues? That would have been 2,7 BEUR in 2015. And guess what! That would have been about 15% of GDP!

In short: the critical decision is to determine how much of total tax revenues a suffering economy like that of Greece can be expected to allocate to interest expense. That percentage will lead to a nominal amount available for interest and then it's only a matter of negotiations among creditors to agree on an arithmetic which creditor gets how much and when of that nominal amount.


  1. I think a total annual debt service of 3 Billion for Greece at this stage would be o.k.

  2. Given the background, its size as a GDP% and that the Greek public debt is predominantly external (foreign held) and in a de facto foreign currency, even a consistent 1% of GDP or a consistent half of the tax revenues (like the US whose public debt is in its national currency and mostly domestic) or consistently whatever, is a insane phantasy.

    1. The only fantasy regarding the external ownership of Greek debt is that it would ever be repaid. There is not a chance of this in a trillion.

    2. I am afraid you overlooked the part where I explained that sovereign debt, be it domestic or external, hardly ever gets repaid in nominal terms. Servicing debt is the issue, not the repayment thereof!

    3. Kleingut:

      On this one we finally agree. Anonymous @ 9:10 completely missed that part.

  3. I'm afraid it is you who has overlooked the part that Greece is supposed to have a consistent budget surplus which is supposed to leave the country every year.
    I.e. even if we disregard the capital, interest payments are also predominantly foreign held (by definition since capital...)...
    Also your debt-never-gets-paid-anyway-assumption is ridiculous in such a context (a sad thing since you were one of the first analysts to explain the fact that the Greek debt crisis is of an external debt kind).
    Yes sovereign debt never gets paid normally , it gets rolled over normally.
    But therefrom it does not follow that therefore it doesn't matter whether Greek debt is domestic or external.
    Because of many things one of which is the NORMALLY part.
    Debt is used in whichever way a country wants once it gets loaned.
    But Greek debt does not get used in whichever way Greece wants; because it's foreign held and because Greece is actually insolvent (btw you're treating insolvency as illiquidity) it therefore -absent a Grexit- gets rolled over only if and when the foreign creditors want, it also gets used for things creditors want or agree to, therefore creditors demand/order internal cuts/default so that they get or would get the imaginary consistent, decades-long budget surplus to service the external debt, i.e. themselves. Etc., etc.
    Similarly Greece cannot inflate its way out of the debt because the debt is not in a currency it controls, Greece in fact does not have its own currency; in fact Greece consistently deflates itself -following the foreign dictates of the creditors' MoUs- therefore making the debt burden greater and greater.
    I.e. by saying sovereign-debt-does-not-matter-whether-domestic-or-external-because-it-gets-rolled-over-anyway-and-not-repaid you're presupposing an everlasting control of the Greek economy (and therefore of Greece itself) by the foreign creditors; something that even if it weren't itself a thing Greeks might have some...minor problems with, it is not even guaranteed to be true from the creditor side; i.e. the foreign creditors having almost total control, might decide at a time of the choosing (e.g. when the think that there are no more problems of spilling over to other EZ countries etc) to stop refinancing the external debt of Greece to themselves; a path Herr Schaeuble almost managed to lead to about a year and a half ago... ;-)

    1. You operate under a fallacy. Who is holding the Greek debt is not the issue. The size of the Greek debt (whether held or unheld) makes the Greek debt unpayable. The only way the lenders could see a return of their lending capital is if Greece returned to markets for its rollovers as they mature at interest rates below 1%. The current market rate for 10 yr Greek bonds is between 7-8% which means no one in their right mind would ever swap existing debt at below 1% with future debt at 7-8% interest rate. Simply put there isn't enough revenue for Greece to do so and even if there was additional revenue (which at the moment does not exist) the Greek government has better plans for spending it rather than rewarding a bunch of european dumb lenders who pretend for purely political purposes that the 320 BEUR greek debt would ever get repaid. IT WILL NOT GET REPAID, EVER! Do you understand?

    2. Please note the difference between "normally" and "nominally". I meant the latter. Nominally means that a debt of 100 Euros is reduced to 90 Euros. My point was that, in nominal terms, sovereign debt hardly ever gets reduced or even paid back. I think Switzerland is the only country which is reducing debt in nominal terms these days (in small amounts).

      "Debt is used in whichever way a country wants once it gets loaned" - well, unwittingly you put your finger on the core issue. Greece decided to spend long-term debt on short-term consumption. The enjoyment of the consumption is now part of the past but the debt is still there. Had Greece spent a greater portion of the debt on meaningful investments, Greece would be in good shape today.

      Any country which is borrowing in a currency which it cannot print is exposing itself to the potential whims of creditors.

      Luckily for Greece, most of its creditors are now official bodies who behave more or less well. Argentina had private foreign creditors and some of them behaved terribly, as I am sure you remember.

      I take it you have not followed my blog when I made my own proposals regarding Greece's debt structure. The principle is: recognize reality and adjust the debt structure accordingly. If reality says that at least half of Greece's debt will definitely not be reduced within a century, I would put that half on 99-year tenors. Another 1/3 perhaps on 30-50 year tenors and only a small portion on tenors up to 10 years. That would take care of any short-term roll-over requirements.

      And the interest rate I would structure as proposed in my article (i. e. a % of government tax revenues).

    3. @Anonymous at 10:08
      It's always a good self-check to check if one is living under a fallacy oneself before accusing others thereof.

      Your fallacy is your belief that debt is there to be repaid. Yes, individual loans have loan agreements which call for debt repayment and those agreements are kept. But you will hardly find a balance sheet of a growing company (or a country) where total debt does not increase in nominal terms from year to year to finance growth. Growth can hardly ever be financed entirely out of retained earnings and/or equity.

    4. 1.I used normally to emphasize normal conditions only under which the sovereign debt gets rolled over not repaid is valid.
      I didn't confuse 'normally' with 'nominally'.

      2.It's irrelevant if in the past you've talked about Greek debt restructuring or reprofiling; (which btw I haven't missed; sure e.g. 100-year maturities would be great but they are so imporbable that they become misleading, to say the least).
      Cause in the present article what you essentially argue for is not to restructure or move to the future Greek sovereign debt capital/maturities (cause supposedly per you false argument, sovereign debt is never really repaid, only rolled over) but to only set a top limit to interest payments.

    5. I wonder whence you derive the sense of intellectual supremacy which you demonstrate. As for myself, I derive my statements about finance from 40 years practical experience in finance. Just remember the following:

      The longer the tenors of debt and the lower the interest rate, the more the character changes from debt to equity. If Greece's debt is restructured into very, very long maturities and at extremely low rates, most of the Greek debt will assume the character of equity.

      If I no longer reply to your comments, it is not due to arrogance but, instead, because I have already said everything there is to say.

    6. The thing is that there is ALMOST ZERO PROBABILITY/chances that the troika will restructure Greek public debt to very very long maturities. (The IMF is for it but only on the non IMF part of the loans; the Europeans are adamantly against it.)
      It took the troika many destructive years of muddling through to do a minor (by relative size and effectiveness) haircut.
      Most of the Troika (i.e. the Europeans), even though they had promised it would come once a primary surplus had been achieved, strongly opposes and keeps pushing minor reprofiling of the Greek public debt to the future for years. A restructuring to the next century would be equivalent to a huge write off; how probable would then that be?
      GOT IT?

      I.e. exactly because very very long maturities are the second best alternative for a debtor to a very very large (almost total) nominal haircut in the present, the Troika won't do it.
      GOT IT?

      PS I would be happy to be proven wrong.

  4. In summary:
    *Even if sovereign debt capital never gets repaid, if interest payments are to be taken out of the Greek economy -in order to pay the foreign creditors- is VERY BAD and improbable to be consistent in the long term.
    *It really does matter whether the debt -capital and interest- is domestic or external (also currency thereof); large external debts do not usually get rolled over, they instead usually lead to major crises, defaults and/or foreign domination; whence:
    Foreign domination is not a good thing however much you try to conceal it under the carpet or claim that it is good for the natives.

    1. I would agree with you that it is not helpful for the Greek economy if capital is taken out of it for whatever purpose. Interest payments would be one such purpose, capital flight to Switzerland & Co. would be another. Since the Euro, the latter has exceeded the former by far. And, of course, unnecessary imports represent another outflow of capital.

      The Greek economy needs foreign capital for its growth. If Greece does not want to pay interest to foreigners, the following forms of capital inflows would be alternatives: more EU subsidies, foreign investment, remittances of Greeks working abroad, and a few others.

      If Greece brings in the needed foreign capital as debt, then interest will have to be paid to foreigners. Foreign creditors may agree temporarily to defer interest (like the EU is presently doing it for a very large portion of its debt) but over time Greece will not find any lender who makes interest-free loans.

      Domestic vs. foreign debt used to be much more important during local currency times (when local currency debt was debt in a currency which the country can print on its own; see the USA). The Euro is a foreign currency not only for Greece but for ALL other EZ-countries. None of them can print Euros. Today, all EZ countries have their debt in a currency which is similar to what a foreign currency used to be.

      BTW, my understanding is that, prior to the Euro, Greece owed much if not most of its debt domestically. Today it's the other way around. A cynic could say: ah, clever Greeks! They transferred their own money into safety and had foreigners replenish it...

    2. Kleignut:

      It's not that some extreme minority of Greeks tranferred their own money to safety and had the foreigners replenish the Greek public debt.

      What happened here speaks more about the stupidity/rigidity of Schauble whom some of you hold in high esteem whereas he is not a very smart man judged according to his actions. Greek banks and Greek social security funds owned most of the Greek public (sovereign) debt which Schauble in order to show a stern approach to the problem ordered a massive haircut. The result was that the GReek banks ceased to exist (today they are a feeble shadow of there former selves), the social security system suffered major depletion and the austerity ordered on the greeks made both of these and other cumulative problems even worse.

      The net result (thanks to Schauble's lack of genius) is that today almost all of Greek debt is owned by foreigners with the added net effect that such debt is hardly repayable.

      If Schauble executes his long term plan which calls for elongation of Greek debt and lower interest rates the net present value effect would be that the debt has been extinguished.

      Now, if you know an effective way of going after Swiss bank accounts of a few Greeks (who if they were the least smart should have moved their balances to the US or overseas) then by all means. Show us how you do it. But the net effect of such action would be more of political satisfaction and of very little real/practical value.

      So I am not sure what your action plan is right now.

      Obviously if you manage the greek economy to get going then you might see a small fraction of such funds returning to the lenders. But I don't think is worth talking about it because even at optimum conditions such amounts would be miniscule.

    3. "Greek banks and Greek social security funds owned most of the Greek public (sovereign) debt" - you have to check your numbers. Before the crisis broke out (4Q09), 75-80 BEUR out of a total debt of about 300 BEUR were held domestically. Clearly more than 2/3 of the debt was held abroad. The haircut involved 100 BEUR, of which 40 BEUR were held domestically.

      If anyone should get mad about the EU's decision to assume all the Greek debt, it's the EU tax payers because they are footing the bill. If you want to blame the EU for hurting its own tax payers, go ahead.

      No, there is no perfect way to go after foreign money but there are some ways which produce at least some results. The German state of Northrhine Westfalia was the trendsetter in this: for a few million investment, they collected hundreds of millions. They offered Greece their help but I have not heard what, if anything, came out of it. A couple of years ago I made some proposals which could be pursued. The link is below.

    4. Kleingut:

      The haircut was much higher. The second bailout programme was ratified in February 2012. A total of €240 billion was to be transferred in regular tranches through December 2014. The recession worsened and the government continued to dither over bailout program implementation. In December 2012 the Troika provided Greece with more debt relief, while the IMF extended an extra €8.2bn of loans to be transferred from January 2015 to March 2016.

  5. And where does this lead us to in the future? Obviously debt levels have risen as long as the EU exists and such have the percentage of interest paid by countries. Will this gon on forever without consequences?

    There is obviously a fundamental conflict of interest between the people and the creditors. What are taxes for? With every % more of taxes paid for interest, the state looses a part of his legitimacy.

    We have a social contract to use taxes to pay for public purposes. Whith every euro taken away from this common contract, the reason for having a society or a state is eroded.

    With the raising percentage of GDP and tax income that goes to the unearned incomes (Vermögenseinkommen) people are distancing themselves more and more from politics, the state and democracy. They see that not schools, but banker bonuses, not hospitals, but billionaires profits, are prioritized by they state they live in.

    Where will this lead us? Will creditors force more and more countries to make whole economies pay for interst to further the accumulation of wealth in the hands of the few?

    This is neither capitalism nor democracy but a new form of totalitarian postcapitalist system I call "bankism".

    Today America votes. Trump, AFD and brexit are what you get if we do not stop this trend.

    I do think that capitalism will see its end in my lifetime and it could take down democracy with it. Will it by a new tyranny of postcapitalist profiteers that keep societies and people in dept peonage by a militarized police state and disfunctional corrupt politics? Or will we get rid of the moneyed elite and enter the era of some new form of socialism, I dont know.

    Economists that legitimize the raising debt levels and interst payments are guilty of this trend and see their role in this development in leading the way into a new totalitarianism.

    But, again, they do so by just ignoring the consequences that economic and financial policies have on society and wash their hands in innocence.

  6. Another calamitous blow for germany. After Brexit here comes Trump and with him the end of global trade as we know it.

  7. It is now 6:30 am in germany and Trump has probably won. Of course the neoliberal mainstream will not reflect on the role it has played in this desaster. Neoliberals should not fool themselves. There is a close cause and effect relation between the financial politics of the younger history (as argued for in the article above) and this development.

    Mainstream cconomics had aligned itself closely with the elites against the people and held on by corrupting politics. This political and economic mainstream has lost today just as it has lost in greece. It was not Trump that led into the postfactual age, but neoliberalism.

    The demographics are very clear. 70% of Trump voters wanted "change" an change means "anything but neoliberalism".

    The american dream has been a myth for the disenfranchised for some time. The neoliberal centre is losing ground all over the world.

    This "radical centre" (Tariq Ali), that had promotetd the TINA of neoliberalism, has lost its ideological power.

    Trump will of course not fulfill any of the hopes that the disenfranchised project on him. He will continue the war against the lower classes in USA.

    We are another step closer to the totalitarian postdemocratic dystopia I have spoken of.

    1. @alien observer
      You get a blog of your own, right? So could you please stop to pirate Klaus Kastners blog and do your commenting on issues you have no idea of at your own place? Thanks.

    2. Why? Because the position commenting on issues you have no ideas of is already occupied by You?

    3. Listen, I am not "highjacking" anything. I might have gotten carried away a bit. I come here sometimes and add a different perspective. You might not like my perspective, but I do know a lot about sociology, economic-anthropology and politics. I grant you your epertise in economics, but the economic perspective hides political and social effects behind numbers. It may well be that you do not like to be reminded of the real world effects of economis, but I am willing to have a civil discussion. Are You?

      Why have a blog when not being willing to discuss different opinions in public? What good is a having blog if only readers of the same opinion read or comment it.

    4. The problem is that both with the Brexit and Trump case the establishment press has proven it can not be trusted.

      If anything the media and press have become contrary indicators. Whatever they say expect the opposite to occur. In such new behavior they are very reliable.

    5. @alien observer
      Quote: "Why have a blog when not being willing to discuss different opinions in public? What good is a having blog if only readers of the same opinion read or comment it."

      I have no issues with discussing different opinions than mine or answer to posts that "add a different perspective" but your comment is completely unrelatd to Mr. Kastners blogpost on Greece debt servicing capacity. Agreed, my reaction was a bit over the top, sorry for that, but I maintain that if you want to comment on the US elections there are many comment sections that are better suited than this one.

    6. Actually I do not think that the Topic of Trumps election and the percentage of public debt service are unrelated.

      If we study history, political upheavals have a very strong relation to debt service and I do see Trumps election as a politicaal upheaval.

      If you take the time of the French and American revolution, UK and France had to spend up to 75% of their public budget on debt services because of costly wars. Doesn't this sound familiar?

      Historians see that as one of the major reasons for the revolutionary age.

      I dare say that this should be something to be pondered by creditors when thinking about what percentage of public spending can go into interest rates, don't you think so?

    7. I can name professors of economics backing up my point.

      See i.e. Michael Hudson:

    8. Yes, there is probably always some correlation between level of debt service and revolutionary spirits. I recall that Greece in the mid-19th century had to allocate about 50% of budget to debt service. Still, you have to bear in mind that Greece presently spends very little on debt service in comparison with peers, 'only' in the area of 10-12% of budget.

    9. As Prof Hudson points out, if you add the private debt things look quite different. I currently do not know the numbers, but Hudson says i.e. that the american working class actually pays 75% in debt service and taxes from their income.

      Also, if simultaneously all income is reduced drastically, public services get more expensive due to privatization (that is enforced due to public debt) everything adds up.

    10. @alien observer:
      Quote: "Actually I do not think that the Topic of Trumps election and the percentage of public debt service are unrelated."

      Well, they are. In fact one could argue that Trumps electoral amnifesto contradicts the relationship you try to establish because he plans to lower taxes and raise public expenditure. Guess what! This would raise the debt level not lower it.

    11. Now this is embarrassing, reading your post makes me think that you might believe Trumps election had something to do wit a "program". Are you for real?

  8. A Greek friend of mine tested my diplomatic skills this morning. He asked me how I thought a new president Trump would support Greece.

    1. Geopolitically it works like this.

      Clinton supported Turkey and opposed Israel. Trump will oppose Turkey and will support Israel.

      And since Israel and Greece are now strategic allies, whatever is good for Israel(or whatever Israel supports) it is also good for Greece.

  9. Trump's advisors are preparing his "to do" list, until now they have listed the first 1600 points, Greece does not appear on the list yet.

    1. Why would Greece be any responsibility of Trump?

      Trump is doing his job by creating maximum discomfort for germany. That's all we need Trump to do.

  10. You say "What if one said that Greece should pay interest at half the level as the US, i. e. at 6% of tax revenues? That would have been 2,7 BEUR in 2015. And guess what! That would have been about 15% of GDP!"
    2,7 is 15% of 18!

    1. Well, thank you for pointing that out! I was surprised that there would be such a match of percentages and you have now shown that I should have questioned my surprise. I meant, of course, 2,7 BEUR out of 180 BEUR. Coming to think of it, 15% of 180 BEUR, which is being proposed here for debt service, would be 27 BEUR. A ridiculously high figure. Just proof that the entire proposal is silly.

  11. The central banker of Greece seems to disagree with you:

  12. Stournaras made it clear that unless a serious discussion starts on debt, Greece will not be included in the ECB's sovereign bond-buying program. Inclusion could give the recovery a major boost.

    "QE depends on debt being sustainable. The ECB needs to have something concrete on debt measures before it performs its own debt sustainability analysis," Stournaras said.

  13. Here the gist of the 2040 geopolitical forecast which begs the question: What the hell Greece is doing following a declining power like germany?

    "In this glimpse into the next quarter century, we forecast several significant changes and disruptions in the global structure, which will be summarized here. However, one fact that will not change is the United States’ position as the sole global power. Over the next 25 years, it will adopt a new strategy to maintain power at the lowest possible cost. This strategy will resemble isolationism, in that the U.S. will not be drawn into regional military conflicts in any significant capacity. The U.S. will support its allies with supplies, training and some air power, however, it will contain regional problems in Europe, the Middle East and Asia, rather than directly and forcibly engaging. This will prove to be a prudent strategy and help the U.S. sustain its global dominance.
    In Europe, the European Union as an institution will collapse or redefine itself as a more modest trade zone encompassing a smaller part of the continent. The current free trade structure is unsustainable because its members, particularly Germany, have grown overly dependent on exports. This dependency makes these economies extremely vulnerable to fluctuations in demand outside of their own borders. Germany is the most vulnerable country and will experience economic decline due to inevitable fluctuations in the export market. Consequently, by 2040, Germany will be a second-tier power in Europe. Other countries in Western Europe will be affected by its decline, leading Central Europe, and Poland in particular, to emerge as a major, active power."

  14. @ Anonymous 5:57 AM.
    Save us the re-heated geopolitical quotes from Stratfor and George Friedman. Go and play with Blazing Panos, or play a, not too difficult, war video game.

    1. Only if you stop your german reformation nonsense pretending that you are somebody we should listen to. Why don't you take care of your own decline and cut out the Sunday church school lessons?