We know Greece owes about €320bn – that’s a debt-to-GDP ratio of 180%.
The UK’s equivalent debt-to-GDP ratio is ‘just’ 80%.
But how much is Greece’s debt worth?
We know it must be worth less than €320bn, given that there is, let’s say, considerable doubt over whether it can be repaid in full.
If you lend me £100, you could probably price that debt to anyone who knows me at somewhere in the region of £99. I’d promise to pay it back, but there’s always a small chance I’d die, forget or run out of cash. Invariably debts tend to be sold on for less than the original lender thought they were worth, particularly where the debtor is considered a bad risk.
Indeed, once upon a time Greece’s debts were held by private banks who decided it was worth selling them at a significant discount to the ECB and euro-area central banks. Eurozone nation states were content with the deal because it protected the banks from their exposure to such a risky debtor.
Greece also owes money to the IMF (the most senior lender), to private investors, and to the European Financial Stability Facility (a special fund established to address the EU sovereign debt crisis).
The general consensus seems to be that Greece’s creditors are unlikely to be repaid in full. Given the risk of default, no doubt they are keen to establish how much the debt is currently worth. But to strike a workable deal, the challenges are myriad:
- IMF rules prevent restructuring of debt.
- EU rules prevent the ECB granting a voluntary haircut on Greece’s existing obligations – it would close the tap on any further funding.
- Electorates across Europe would not tolerate a haircut in any case.
- Quite apart from the cost to taxpayers, it would also be politically untenable to sell the debt on to other creditors at a discount, unless Greece had left the Eurozone – by this stage Greece would most likely have defaulted and its remaining debt would be worth even less.
- If Greece is given special treatment, other PIGS nations (Portugal, Italy, Spain) would hope and argue for the same.
- Private investors will not be inclined to write off any of their own debts unless the transnational creditors agree to absorb some losses first.
But make no mistake… while Greece may own £320bn, the debt is not worth that to its creditors. It’s worth considerably more than I could afford to pay for it, and considerably less than Greece can afford to repay.
So far, a deal to reduce Greece’s debt obligations looks untenable, despite the fact few people – least of all in the Greek government – seem to think it can meet those obligations. But unless such a deal is found, then default and Grexit looks increasingly likely.
Greece’s populist government, led by Prime Minister Alexis Tsipras and his left-wing Syriza party, wants to stay in the eurozone. At the same time it wants to break free from some of the most onerous obligations imposed by its eurozone creditors. It seems unlikely it can do both. At some point it should clarify the options and put them to the people in a referendum.
In the birthplace of democracy, let the people decide how to proceed.