Can’t pay or Won’t Pay?
February 20th, 2015 7:33 amInteresting article on Greece and the vagaries of sovereign bankruptcy via the WSJ:
By
Stephen Fidler
Updated Feb. 19, 2015 6:59 p.m. ET
The Greece crisis is reinforcing a cardinal rule of sovereign-debt crises: It isn’t whether a government can pay what it owes, it’s whether it wants to.
Analysis
The new left-wing government in Greece is seeking to reduce debts it says it can’t pay; its finance minister, Yanis Varoufakis, has called his own country bankrupt and insolvent. It has initiated negotiations—which continue in Brussels on Friday—with other eurozone governments to reduce the burden its debt represents.
Tensions were high ahead of the Brussels meeting. German and Greek officials traded barbs throughout the day Thursday after Berlin flatly dismissed Athens’s request to extend its bailout program.
Both capitals appeared to be staking out their positions ahead of the talks, underscoring how ties between the two have frayed since Greece’s left-wing Syriza party, led by Prime Minister Alexis Tsipras, swept to power last month on its promise to scrap the unpopular bailout.
Nobody is claiming—as they might of a bankrupt company—that Greece doesn’t have the wherewithal to pay back all its €320 billion-plus ($365 billion) of foreign debt in full: The assets of the country dwarf that figure.
What is in question is whether the Greek government can levy taxes or charges on its people—or can sell assets—sufficient to service its debts and still do all the other things Greeks expect it to do.
Sovereign bankruptcies are different animals from corporate bankruptcies, said Carmen Reinhart and Kenneth Rogoff in their 2009 book “This Time It’s Different.” Lenders simply don’t have the same enforceable rights to seize assets from governments as they do with companies and individuals.
However, “in most instances, with enough pain and suffering, a determined debtor country can usually repay foreign creditors,” they said.
The authors cite the example of Romanian dictator Nicolae Ceausescu, who forced Romanians to shiver through freezing winters with little or no heat and made factories close through want of electricity so he could repay the $9 billion his government owed to foreign banks.
Ultimately, that didn’t work out too well for the Romanian leader, who was executed by firing squad in 1989 after a show trial. For other leaders, the penalties may not be so savage. But political careers and sometimes a country’s political stability depend on the outcomes.
One reason that Germany—now Greece’s largest creditor—and other members of the eurozone are angry over Mr. Tsipras’s aggressive drive to secure more relief is that they believe Greece can repay its debts.
Athens argues that its debt-servicing schedule will force it to run a so-called primary surplus—a budget surplus before interest payments—equivalent to 4.5% of gross domestic product next year and for the indefinite future. That, it says, is just not politically sustainable.
Nonsense, say its creditors; such budget performances aren’t unusual.
In its June 2011 monthly bulletin, the European Central Bank cited four other eurozone countries that did just that or more in recent history: Belgium (1993-2004), Italy (1995-2000), Ireland (1988-2000) and Finland (1998-2003). Even Greece managed it from 1994 to 1999.
In just about all of these cases, countries were pushing debt down to prepare for their entrance into the European Monetary Union.
“If the country was willing to accept these surpluses when preparing for EMU, one should be able to assume that the same policy should be acceptable as the price of staying in the euro,” argues Daniel Gros, director of the Brussels-based Centre for European Policy Studies.
Also, creditors say that Greece’s debt-servicing burden isn’t excessive, thanks to the concessions its government creditors already made to lower interest rates and extend loan maturities.
According to data from the Greek government, interest payments fell from 7.3% in 2011 to about 4.2% of GDP last year. Thanks to an interest-rate holiday granted by the creditors until 2022, Greece has to find less in cash: A government estimate from last year suggested the expected interest bill in cash would fall to just 2.2% of GDP in 2020.
That isn’t high when compared with some other countries.
In 2013, the Portuguese government paid 5% of GDP in interest, Italy paid 4.8% and Ireland 4.4%.
This benign assessment, however, ignores some difficulties. Some years will be more problematic: In 2015 and 2019 the debt-repayment bill will be high, and in 2022 all the forgone interest from the previous 10 years comes due.
Furthermore, the budget surpluses of the 1990s were generated with what was then seen as the optimistic prospect of joining the euro, rather than the unappetizing prospect after a long and very deep recession of making sure foreign creditors are happy.
And that last factor is also relevant. A significant proportion of the debt of most European governments is held by their own citizens. If Italy or Belgium suspend payments on their debts, their own citizens will suffer. There is thus a domestic constituency arguing for government debt to be paid.
For Greece, that isn’t the case. The vast majority of its debts are held by foreign governments, which don’t get to vote in Greek elections.
Mr. Rogoff cites the following rule of thumb: It is politically difficult for any government to sustain over a long period debt-servicing payments to foreigners of more than about 2% of GDP.
As for almost all sovereign debtors, then, it’s about the Greek government’s willingness to pay the political price needed to service its debts in full.
In that respect, the signs for Greece’s creditors aren’t propitious.
The question becomes not really whether they will be repaid in full, but how they won’t be: whether it will be through negotiation, or whether this or a future government will take matters into its own hands.
Write to Stephen Fidler at stephen.fidler@wsj.com