Why is Greece a crisis?

By: djharkavy
July 2nd, 2015
9:55 am

I was thinking about the whole thing with the Greek default on my way in to work today.

According to Forbes, Greek debt costs them about 20% in annual interest charges and is 175% of their GDP (and that works out to 475% of their annual government revenue.)
UK and Germany pay 5% or less on their debt for comparison.

As I understand it, the interest charged is based on the probability that the debtor will default and be unable to pay their debt, and Greece's high interest rate is based on the probability of it's defaulting.

In other words, the banks, if they were doing their job correctly, have already planned for the possibility of Greek default, and have either insured against the loss, or can absorb the loss based on the interest payments that they have already collected and similar interest payments from loans that have not defaulted.

As far as Greece is concerned, bankruptcy will mean that they pay an enormous fee on any borrowing, if they can get it at all.

But right now, they pay 20% interest on 475% of their annual government revenue. Quick calculations indicate that they are paying 95% of their revenue into debt service. Now the numbers are likely a bit lower, since not all their debt is at 20% or higher, but a significant amount of the government revenue goes towards debt service.

If they default, they won't be able to borrow money, but with (conservatively) more than 75% of their revenue tied up in debt service currently, if they default, they won't need to borrow money. They can run the same services that they do now, with money left over.

So defaulting should be better for Greece, and should be accounted for by the banks.

What am I missing that makes this a crisis?

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17 comments on "Why is Greece a crisis?"

  • bdubya
    July 2, 2015 at 10:36 am

    Off the cuff, I'd say that a)

    Originally Posted by
    the banks, if they were doing their job correctly, have already planned for the possibility
    is far from a safe assumption, taking the US mortgage debacle as an example. If the people profiting from making the loans don't bear any risk (or don't think they do), then the whole equation falls apart.

    Beyond that, you're right, it might not genuinely be a crisis, but the people holding the notes have every reason to pretend it is regardless.

  • william the wierd
    July 2, 2015 at 11:46 am

    Originally Posted by bdubya
    Off the cuff, I'd say that a)

    is far from a safe assumption, taking the US mortgage debacle as an example. If the people profiting from making the loans don't bear any risk (or don't think they do), then the whole equation falls apart.

    Beyond that, you're right, it might not genuinely be a crisis, but the people holding the notes have every reason to pretend it is regardless.
    I concur. German banks have purportedly written 100+ trillion in derivatives in order to sell Greek debts to investors including those in the US and China.

    Germany has defaulted more times than Greece since 1800 (Greater Prussia and its German allies/satellites are counted prior to 1870.) and given the bills they will have to pay in order to put Greece in default their own default is also highly likely.

    Given the way they have dragged the US into eastern Europe to restore the goal of Deutschland uber alles even Austria is trying get out of the EU before Germany implodes. (Their legislature was voting on an exit plebiscite last word I got.)

    At last count there is no veto power that is not at least somewhat irritated with them and Italy is about the only other top ten economy that wouldn't mind seeing Germany humbled.

  • PBTime
    July 2, 2015 at 1:18 pm

    Originally Posted by djharkavy
    I was thinking about the whole thing with the Greek default on my way in to work today.

    According to Forbes, Greek debt costs them about 20% in annual interest charges and is 175% of their GDP (and that works out to 475% of their annual government revenue.)
    UK and Germany pay 5% or less on their debt for comparison.

    As I understand it, the interest charged is based on the probability that the debtor will default and be unable to pay their debt, and Greece's high interest rate is based on the probability of it's defaulting.

    In other words, the banks, if they were doing their job correctly, have already planned for the possibility of Greek default, and have either insured against the loss, or can absorb the loss based on the interest payments that they have already collected and similar interest payments from loans that have not defaulted.

    As far as Greece is concerned, bankruptcy will mean that they pay an enormous fee on any borrowing, if they can get it at all.

    But right now, they pay 20% interest on 475% of their annual government revenue. Quick calculations indicate that they are paying 95% of their revenue into debt service. Now the numbers are likely a bit lower, since not all their debt is at 20% or higher, but a significant amount of the government revenue goes towards debt service.

    If they default, they won't be able to borrow money, but with (conservatively) more than 75% of their revenue tied up in debt service currently, if they default, they won't need to borrow money. They can run the same services that they do now, with money left over.

    So defaulting should be better for Greece, and should be accounted for by the banks.

    What am I missing that makes this a crisis?
    What you're missing is that one of the three primary lenders to Greece, the IMF, came out today and said that Greece needs to have a significant part of its debt relieved, that it's not reasonable to expect that it could ever pay it off. It also proposed that the debt payoff date be pushed back from 20 years to 40 years.

    In back of all of this is the irony that in 1953, Greece was one of the 20 nations that agreed to forgive half of the debt that Germany owed them. Now Germany is being stubborn and refusing even to consider forgiving ("relieving") any of Greece's debts.

  • william the wierd
    July 2, 2015 at 4:53 pm

    Originally Posted by PBTime
    What you're missing is that one of the three primary lenders to Greece, the IMF, came out today and said that Greece needs to have a significant part of its debt relieved, that it's not reasonable to expect that it could ever pay it off. It also proposed that the debt payoff date be pushed back from 20 years to 40 years.

    In back of all of this is the irony that in 1953, Greece was one of the 20 nations that agreed to forgive half of the debt that Germany owed them. Now Germany is being stubborn and refusing even to consider forgiving ("relieving") any of Greece's debts.
    I again concur.

  • Tom Servo
    July 4, 2015 at 12:06 am

    I want to know how Greece got itself in a position to be crippled by this much debt in the first place.

    Is it government overspending and few who pay taxes? Cuz if so, there's a lesson here that our politicians will happily ignore.

  • william the wierd
    July 4, 2015 at 11:09 am

    Originally Posted by Tom Servo
    I want to know how Greece got itself in a position to be crippled by this much debt in the first place.

    Is it government overspending and few who pay taxes? Cuz if so, there's a lesson here that our politicians will happily ignore.
    I would go to the Euro meltdown thread the list of causes are longer than any arm I have ever seen.

  • PBTime
    July 5, 2015 at 2:29 pm

    Originally Posted by Tom Servo
    I want to know how Greece got itself in a position to be crippled by this much debt in the first place.

    Is it government overspending and few who pay taxes? Cuz if so, there's a lesson here that our politicians will happily ignore.
    There are a number of factors leading to Greece's current situation, most of which I believe I've already delineated. But here they are again, maybe in a better format:

    1) Expiration in 1010 of EU tax breaks for various Greek island based corporations. These breaks accounted for a major boom in Greek investments. Their expiration has helped to cripple the Greek economy with extraordinarily bad timing, coming as it did on the heels of the global financial meltdown.

    2) Massive Greek government expenditures to support the 2004 Summer Olympics. Bear in mind these were made by a more conservative Greek administration at the time, but the boom times soon faded away.

    3) Traditional Greek mistrust of government and rampant tax evasion by many if not most Greeks who actually earn their living.

    4) A population that is increasingly elderly combined with early retirement age standards, leading to a larger burden on government pension funds.

    5) A long history, two centuries' worth, of Greece defaulting on loans. This made the EU wary of letting Greece in on the Euro, but Greece performed some bookkeeping tricks to make its fiscal situation look better than it was. Once in, Greece took advantage of as low as 2% credit interest it could get via the Euro, as opposed to the 10% or more interest it was having to pay outside the Euro, and started taking massive loans. But instead of using those cheaper loans to pay down its previously incurred debt, it used the funds to double public sector worker salaries and give generous pensions.

    6) Debt death spiral. In 2010, Greece's debt was 100% of its annual GDP. That was bad enough, but by 2015 that debt had soared to 170% of GDP. As Greece's credit rating has plummeted, its borrowing costs have soared, putting it into downward spiral where it can never borrow enough money at a payable interest rate to get out from under. Even the IMF agrees that Greece needs debt relief in order to have any hope of getting into the black.

    7) Austerity measures imposed on Greece as a result of its 2010 EU bailout have further depressed the economy, resulting in even lower tax receipts and a worsening of its financial picture. Another death spiral. The value of stimulation vs. austerity on a national economy have long been hotly debated, but I suspect a bit of both are needed for a nation to recover from the kind of fiscal black hole that is sucking Greece dry. The challenge seems to be how to decide who gets the stimulation and who gets the empty cup.

    8) A Greek cultural tradition where it's considered OK to say, "I didn't get paid, so I don't have to pay you". This might work between Greeks, where nobody pays and nobody gets paid, so somehow it all balances out, but it doesn't seem like the rest of the EU is too enthused about it.

  • djharkavy
    July 5, 2015 at 3:10 pm

    Why then, should they not default on the debt

    Sent from my SM-N900T using Tapatalk

  • william the wierd
    July 5, 2015 at 4:01 pm

    Greece is not the problem, the problem is that even Austria and the UK have an exit vote penciled on the calendar. They are talking about when, not if, to schedule it. Like the 10 years between the discovery of widespread incompetence and insolvency on Wall St. at the Long Term Capital Management bail out and the meltdown what's coming is known but when is not.

    Germany is going to blow up due to 20-40 GDPs of high profit and much higher risk derivatives that the big four German banks have written to profit from the austerity program and not just in Greece. When it will blow up because of the lack of an exit strategy is a totally different question.

  • PBTime
    July 5, 2015 at 5:50 pm

    Originally Posted by djharkavy
    Why then, should they not default on the debt

    Sent from my SM-N900T using Tapatalk
    Well, the pain is immediate if they default. They only have enough cash to pay their gubmint employees and pensioners for another week. Or so I've read. The banks are running out of euros, as well. If the EU doesn't step in and do another bail out, then I do see Greece dumping the Euro for the drachma again. And they have that right.

    However, the default won't relieve them of the obligation to pay the outstanding debts. But what can the creditors do? War over debt is sort of out of the question. Trade sanctions could work, and Greece is unfortunately highly dependent on imports for food and energy. Tourism is their main industry. I don't see that flagging, and in fact there are supposedly some great deals on Aegean cruises going on right now. I just wouldn't bring any valuables with me.



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