Wednesday 21 January 2015

Are Greece’s creditors really loan sharks?

I’ve lost count of the number of times I’ve heard Greece’s creditors referred to by local media and politicians as usurers or loan sharks (τοκογλύφους). According to Meriam Webster, a usurer is defined as a person who lends money and requires the borrower to pay a high amount of interest

The idea that Greece’s debt burden is too high is at the centrepiece of SYRIZA’s political promises (to implement a haircut of 50% of the total debt; to restructure the rest and link it to GDP growth).

But what does it mean for debt to be unmanageable? And who is responsible? There are no fixed definitions here, but let’s look at a few interesting points.

Greek Debt and Interest Rates

The current Greek debt level is listed by the Public Debt Management Agency at € 321.7 billion as of 30 September 2014. According to the provisional 2014 Budget Execution Bulletin by the Greek Ministry of Finance, Greece’s 2014 central government expenditure was € 54.967 billion, of which interest expenditure was € 5.569. Therefore, two key ratios* are:

·       Effective Interest Rate: 1.7%
·       Interest Share of Central Govnt Expenditure: 10.13%

United States Debt and Interest Rates

The United States Federal Debt was approximately $ 18 trillion at the end of December 2014. According to Wikipedia, US Federal Government expenditure was $ 3.77 trillion in FY2014. According to TreasuryDirect, the United States paid $ 430.8 billion in interest costs in FY2014. Therefore, two key ratios* are:

·       Effective Interest Rate: 2.4%
·       Interest Share of Central Govnt Expenditure: 11.6%

Comparing Greek and US Debt Costs

Just to make sure the full import of these calculations is understood:

·       Greece has a lower effective interest rate than the United States on its public sector debt.
·       Greece pays a lower share of its annual government budget to service the interest on that debt.

United States
Government Expenditure
€ 51 bln
$ 3.77 tln
Interest Costs
€ 5.57 bln
$ 430.8 bln
Effective Interest Rate
Interest Budget Share

So are Greece’s creditors loan sharks?

If we assume that Greece’s creditors are loan sharks, then we need to make the same assumption for all buyers of US Federal debt.

In a word, no, they are not. There is nothing usurious in an effective interest rate of 1.7%. Particularly not when Greek 10-year bonds are yielding 9.36% on 10-year GGB today.

Why can’t Greece Manage its Debt?

So the question remains: if Greek effective interest rates and debt service amounts are lower than in the United States, why can’t Greece manage its debt?

The first obvious reason is political instability. To put it mildly, the latest tactics and statements from both SYRIZA and New Democracy have caused investors to shun Greek debt as well as Greek equities since September 2014. And rightly so. The result of these tactics is a necessary and perfectly understandable aversion to lending more money to the Greek public sector.

The second reason is government incompetence in the area of tax collection. This is seen in at least three major examples:

a.     In April 2014, there were € 68 billion in private sector and household taxes owed to the government which could not be collected.

b.     In recorded instances of tax evasion, notably the Lagarde List or the list of Greeks who purchased property in London, successive governments have refused to do a systematic tax audit.

c.     The resignation of the Director for Revenue Collection Haris Theocharis in mid-2014, and the refusal of the government to appoint a new director, as well as recent distortions in the Greek tax code, indicate the true state of affairs. 

The third obvious reason is that Greece hasn’t reformed its public sector or implemented real structural reform. A good example of this is headcount reduction and restructuring in the public sector. What headcount has been achieved has mainly been done via early retirements, which simply shifts costs from the central government payroll to state pension funds. Of the 322 organisations that have been identified as useless, not a single one has been closed. The labour reserve has been a total failure.

The fourth reason is that what investments have occurred in Greece have been delayed. Three major privatisations, for instance—the Astir Hotel (€ 400 million), Hellenikon (€ 915 million), and the regional airports lease (€ 1.23 billion)—have taken place, but have not actually been completed. This means that investments of approximately € 10 billion are being held up due to public sector bureaucracy. There are many more examples of private sector investments which have been blocked by intractable public sector decision-making.


Today, the debate on Greek public debt remains convinced—in the total absence of facts and logic—that the Greek debt is unmanageable. The reality is far different. Greece’s debt is sustainable providing the public sector mobilises around real reforms: making the public sector more efficient; promoting investments; reducing needless red tape; promoting employment and entrepreneurship. Although almost every single political party claims allegiance to these objectives, not a single one appears to have a plan for them. The quality of public debate worsens with each week. Whether this is deliberate misinformation or simple ignorance, the result does not bode well for the future.  

(c) Philip Ammerman, 2015
This article was originally published on Navigator Consulting Group

* Note that the interest paid in 2014 reflects interest costs from 2013: the calculation of Greek and US debt ratios is done using the same [incorrect] temporal distribution. Greek budgets are done on a calendar-year basis (1 January – 31 December). US budgets are done on a fiscal year basis from 1 October – 30 September.

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