The Greek Debt ‘Confidence Trick’

by George Pappas | 23 Feb 2015

As William Shakespeare said in Much Ado About Nothing, “Let every eye negotiate for itself And trust no agent.” As so it seems appropriate to cast our ‘eye’ upon the discourses that have defined the current Greek financial crisis from both the left and the right. These discourses have failed to draw the curtain back enough to reveal the true nature of the ‘Oz’ like problem Greece faces today.

As Costas Douzinas so aptly stated in his recent article on CLT, Syriza:The Greek Spring:

There is no blueprint or textbook and the new government will be tested every step along the way. It is a tall order for a small country and party. But if the Greek spring succeeds — it is a big if — it will mark the beginning of a new type of democratic socialism for the 21^st century”.

Douzinas sounds a wistful “a big if” as if to measure the size of the challenge facing the new Syriza Government of Greece. The challenge appears even more daunting when Douzinas prefaces his hopeful call with the important qualifier: “It is a tall order for a small country and party.” A small country and party! Clearly, Syriza is neither small nor just a party. European wide rallies from London to Paris, for example, now support this so called ‘small county’; thus, extending its influence beyond the borders of Greece. It is also no longer just a small party, but the largest party in Greece. Size no longer matters, but a larger obstacle must be overcome by Syriza and its larger following – sleep walking!

But before the awakening can occur, let us cast our focus on yet another discursive illusion defining the Greek financial crisis, the crisis of debt. Germany’s Chancellor, Angela Merkel, recently reiterated on the eve of last week’s talks with Greek representatives in Brussels that “there has already been voluntary debt forgiveness by private creditors, banks have already slashed billions from Greece’s debt.” Merkel told the Hamburger Abendblatt newspaper, “I do not envisage fresh debt cancellation.”¹ Merkel continues to base her statements on “forgiveness” as if the Greeks did something immoral coupled with Germany’s focus on so-called “Greek Debt.”

In a recent Slate article, Seth Stevenson wrote:

For Greece, the BATNA appears to be a total economic meltdown. If there’s no deal, there’s no more money coming from the troika. And without any further loans, Greece will run out of cash. It will be unable to meet its internal pension obligations. It will suffer bank runs. It might have to exit the Eurozone and return to the drachma, which would quickly devalue, leading to a collapse of savings. There would be rampant chaos.²

Note Stevenson’s emphasis on “…without any further loans.” From this discourse, unless Greece cuts a deal for more “loans” it might have to exit the Euro. Surely, then, Greece has no choice but to cut to the chase, agree to some face saving reductions in austerity measures to pacify their Greek supporters and acquiesce to yet another deal with all the trappings of German compromise: ‘rebooting’, patience and extended maturities, subsidized interest payments, forgiveness, and dare we say, even a ‘bridge loan’ to the Greeks. Wonderful, we can all now return to our countries and live happily ever after in the EU.

We’ve heard cries of neo-colonial breaches of Greek sovereignty by the troika and from the Greek side we have heard ‘enough’ we are human not statistics.³ Alexis Tsipras, newly elected Prime Minister of Greece, declared at an open-air rally outside the city’s university building “The people have handed us a clear mandate. The people’s verdict brings to an end the vicious circle of austerity. It cancels the memorandums of austerity and destruction and makes the troika a thing of the past,”⁴

There is obvious truth to much of this, but there is a little dirty secret that that has been obscured by the financial and political rhetoric — ‘accounting’.

Greek Finance Minister Yannis Varoufakis has been quoted in the press describing the fantasy that Greece can’t pay back it’s 318 billion Euro loans:

Finance Minister Yannis Varoufakis dismissed the 240 billion euro ($270 billion) bailout packages crafted by Greece’s lenders as a “toxic fantasy” that had always been doomed to fail. The time has come to say what officials admit when the microphones are turned off and say out in the open. … At some point someone has to say ‘No’ and that role has fallen to us, little Greece,” he told parliament.⁵

Imputed in this statement is that if Greece can’t pay back the loans, why push Greece to the brink by asking it to cut government expenditure even more. But what Vourafakis’ statement also represesents is a hand-grenade in terms of the Keynesian ‘confidence trick’ that is necessary to maintain the fiction that the loans on the books by the French and German banks are still ‘performing.’ According to a Wall Street Journal Report, “European Central Bank President Mario Draghi warned Mr. Varoufakis that such statements threatened to accelerate the flight of deposits from Greek banks, officials present at the meetings said. Draghi was urging him to be careful,” said one official who was present Monday. “Careless communication is not good for the banks.”[1. Dalton, Matthew, Wall Street Journal, February 18, 2015] More in line with this ‘confidence trick’ is Nobel Economist and New York Times Columnist Paul Krugman’s description of this Alice in Wonderland pretense by the troika in relation to their austerity push “How did they get it so wrong? In the spring of 2010 both the European Central Bank and the European Commission bought fully into expansionary austerity; slashing spending wasn’t’ going to hurt the Greek economy, because the confidence fairy would come to the rescue.”⁶

Let’s examine how the ‘confidence trick’ is threatened. For example, how would the political discourse appear today if one stated that Greece’s debt to GDP ratio is not 175% but 18%?⁷ How would the political discourse sound if it were revealed that Greece’s cash debt payments were lower than most EU nations?⁸ How would the financial community react if Greece has one of the lowest debt to government ratios in the EU? If the above were true, according to FreeGreece.info, Greece would pay much less interest on its government debt, its stock market would rebound and best of all, hundreds of thousands of Greek jobs would materialize within a year once confidence and new investment poured in.⁹ Fantasy?

Germany has experienced a huge export boom since the Greek crisis started to shake the Euro in 2008 that resulted in the depressed Euro relative to the dollar. It seems Germans are doing quite well, especially when you factor in that exports accounted for 45.6% of the German GDP in 2014.¹⁰ Couple this with the moralizing of Greek debt by Chancellor Merkel and you begin to see why any loans to the Greeks must be followed by a quid pro quo of austerity measures to punish the Greeks for the immoral spending and corruption. Paul Krugman righty asserts,

Unfortunately, German politicians have never explained the math to their constituents. Instead, they’ve taken the lazy path: moralizing about the irresponsibility of borrowers, declaring that debts must and will be paid in full, playing into stereotypes about shiftless southern Europeans. And now that the Greek electorate has finally declared that it can take no more, German officials just keep repeating the same old lines.¹¹

What if the Germans woke up one day and realized that their Government and private bank loans to Greece are de facto non-performing loans, but in fact, loans whose principle will never be paid? You can imagine the German reaction — outrage — ‘how can we give money away to a country that has misspent so unwisely after we saved and suffered when we had to absorb the former East Germany’. Worse still, the house of cards known as the European Monetary system would start to unravel; in other words, the ‘confidence’ trick’ would be undone, and French and German banks would experience yet another Lehman event. Krugman states “After all, the great bulk of the debt is now officially held, the interest rate bears little relationship to market prices, and the interest payments come in part out of funds lent by the creditors. In a sense the debt is an accounting fiction; it’s whatever the governments trying to dictate terms to Greece decide to say it is.¹² Translation, a European wide liquidity crisis ala 2008. This explains why European Central Bank President Mario Draghi tried to muzzle Voufakis’comments about the fantasy of Greeks paying back their loans.

The liquidity crisis would play out as follows: If you have a Grexit in 3–5 years there will be great suffering upon the Greeks (i.e., there would be capital controls, a massive devaluation of the Greek Drachma, saving would evaporate, but at least the Greeks would control their own destiny via currency devaluation to boost exports, mitigate the financial losses through tax evasion and institute strategic controls in key industries to focus on long-term investments and growth);¹³ however, all of the Greek loans currently on the French and German bank books would not only have to be written off, but given the stress test parameters for bank solvency by the ECB, banks would have to sell their financial assets 2 to 1 up to 3 to 1 in many cases to shore up their depleted capitalization ratio’s. In other words, you would have yet another Lehman event because most European banks would be scrambling to sell their other assets at the same time thus driving the price of these assets down by the minute. You would have yet another liquidity crisis: methinks the Greeks still have the options to defend their fiscal/austerity integrity.

On the Greek side, surely there is a play for time under the new government, but not for a bridge loan, but perhaps for something more dramatic. If the Greek government can convert 318 billion Euros in so-called debt into 68 billion, you can imagine the financial boom that would benefit the Greeks. Unlike many nations, the Germans and Greeks have distorted their debt calculations to such an extent that neither transparency nor real accounting has occurred. We have a Greek debt crisis built on a mirage of numbers, numbers that have enslaved Greeks and enriched Germany.

Judicial Precedent favors Greece

There is also judicial precedent that Greece has not leveraged to date. In Belgium v. Greece (1939), the International Court of Justice held with respect to a Greek government’s default on a Belgium construction company loan and the arbitration resulting pursuant to that loan agreement, that any financial debt settlement between Greece and Belgium at the time had to incorporate the ‘capacity’ of Greece to repay the loan. Here the International Court of Justice held:

If, after the legal situation had been determined, the Belgian Government should have to deal with the question of payments, it would have regard to the legitimate interests of the Company, to the ability of Greece to pay and to the traditional friendship between the two countries…. It enables the Court to declare that the two Governments are, in principle, agreed in contemplating the possibility of negotiations with a view to a friendly settlement, in which regard would be had, amongst other things, to Greece’s capacity to pay. Such a settlement is highly desirable. (FASCICULE No 78 SOCIÉTE COMMERCIALE DE BELGIQUE, pg. 22)

In other words, as the Greek economy grew, so would their capacity to pay. In fact, Finance Minister Varoufakis has offered to swap Greek ‘growth linked bonds’ in exchange for short-term debt due to the EU.¹⁴ Varoufakis, however, seemingly failed to highlight the judicial precedent that provides a legal basis to use such growth — linked bonds as part of national debt settlements. There is still time for Varoufakis to plead this point to the EU over the coming weeks.

The real numbers reveal a different tale – behold!

Under International Public Sector Accounting Standards (IPSAS) at year-end 2013 Greece’s net debt was 18% of GDP.¹⁵ In terms of cash interest expense, year-end 2013, Greece was one-third of other EU countries. Compare the above figures with the EU/German accounting standard used under Maastricht where Greek debt to GDP is 175%. The key differential can be explained by the 275 billion Euros of Greece’s 318 billion debt (86%) which comprises zero cash interest for 10 years; subsidized interest rates significantly below market; generous extended maturities up to 40 years; debt with interest and principle rebates and you begin to realize that what Germany and the ECB classify as ‘loans’ to Greece is de facto nothing more than an illusion of financial assets. Seen in this light, Greece does not have a debt problem but an accounting illusion by a distorted Maastricht accounting standard. The Maastricht standard completely ignores the time value of money and instead calculates so-called loans at full value instead of the discounted present value; hence, the debt measured based on the Maastricht Treaty (face value) is a political decision in direct conflict with the debt valuation principles of international accounting statistics.¹⁶

Under Maastricht accounting standards, it is clear that as long as Germany and the EU can classify its loans through the troika as debt that is still owed, it will not be reflected as losses to German and French banks. This helps to pacify German voters and allows the focus on debt crisis to be obscured by ‘forgiveness’ of the ‘irresponsible Greeks.’ Interestingly, IMF Director Christine Lagarde in 2012 tried to convince the Germans to pay the price via forgiveness to keep Greece in the EU. “For Greece to recover, she insisted, creditor countries would have to forgive the government in Athens a large share of its debt. “Nothing else will work,” Lagarde said.”¹⁷

Couple this with the turmoil in the EU over a possible Grexit, and you witness the devaluation of the Euro resulting in an export boon to Germany. For the period of 2010–14, for example, the value of German exports increased from 228.7 to 263.9 expressed in U.S. dollars compared to the base year of 100 for 2000. Over the same period, German exports increased from 42% to 46% as a percentage of German GDP.¹⁸

Maintaining the illusion of the debit crisis has also given leverage to the troika and Germany to concentrate on politically expedient austerity measures to buttress their moral message to the profligate Greeks. Germans cry ‘follow the rules and we will loan you money’. ‘Play by the rules’ ergo be honest and you will be rewarded. “Europe is always geared to compromise… and Germany is ready for that,” Merkel told reporters as she arrived in Brussels from Minsk, where she helped negotiate a peace deal for the conflict in Ukraine during talks overnight…Nevertheless one has to say that Europe’s creditability is based on sticking to the rules and that we are reliable,” Merkel said in relation to debt negotiations with Greece.¹⁹

Greece may no longer be ‘sleep walking’ and if much of the analysis above is proven correct, expect some type of ‘face saving’ deal to be reached this week between the EU ‘institutions’ and Greece to buy more time; however, Greece’s best long term economic and budgetary policy lies in adopting the IPSAS accounting standard to kick start Greek job growth and rebuild its economic infrastructure.²⁰ The chains of the Maastricht accounting standards created the illusion of a Greek debt crisis, helped to foster German exports and unjustifiably adopted a financial and fiscal policy rationale to impose inhuman austerity upon the Greeks. Lastly, Greece should not squander the legal precedent held in Belgium v Greece by the International Court of Justice — a precedent which provides a legal basis to swapping Greek growth linked bonds for EU held debt.

George Pappas is Executive Director of the International Center for Legal Studies in Asheville, North Carolina.

1
Angela Merkel rules out cancelling any more Greek debt, Jan 31, 2015, The Guardian
2
Seth Stevenson, Slate, Are the Greeks Sound Negotiators?, Feb. 11, 2015
3
Austerity proponents in Germany justify their demands for government expediters reductions in Greece to improve the investment confidence of the bond market, but the price that Greece has had to pay to cater to the International Bond market not only misjudged the downward spiral on aggregate demand but also the human cost. A 2012 UNICEF report highlights that devastating impact on Greek children. The report found that the 2012 median Greek household incomes for families with children sank to 1998 levels — the equivalent of a loss of 14 years of income progress. In real terms, that meant that the since 2008, the percentage of households with children unable to afford a meal with meat, chicken, fish (or a vegetable equivalent) every second day increased by 18% Greece in 2012. Source: Mac Con Uladh Damian, Greece suffers ‘great leap backwards’ in child poverty, EnetEnglish, Oct. 24, 2014
4
Irish Times, Jan. 26, 2015.
5
Gatopoulos, Derek, As Greece Rejects ‘Toxic Fantasy’ Of Rescue Package, Greenspan Predicts ‘Grexit’, Huff Post Canada, Jan. 9 2015
6
Krugman, Paul, Ending Greece’s Nightmare, New York Times, Jan. 26, 2015
7
Mourdoukautas, Panos, Greece’s Net Debt Is 18% of GDP, Not 175%. What’s Germany’s?, Forbes Magazine, January 22, 2015. This figure is even lower if you take into account the net debt calculations asserted Paul B. Kazarian, one of the largest holders of Greek government bonds, was recently trying to persuade a room full of investors that Greece’s debt load of 318 billion euros was actually a tenth that size. Thomas, Landon, Greek Debt Vastly Overstated, Investor Tells the World, New York Times, Feb. 20, 2015.
8
Reguly, Eric, Eric Reguly, In Europe’s showdown over Greece, debt matters less than you think, The Globe and Mail, Feb 16, 2015. Greece’s payments on its debt in 2014, as a per cent of GDP, were only 2.6 per cent, according to Bruegel, the German think tank. The interest payments of Portugal, another country that had to be bailed out during the height of the crisis, consumed 5 per cent of GDP. Italy shoveled out 4.7 per cent of GDP on debt payments.
9
FreeGreece.info is a site dedicated to jump starting 200,000 to 400,000 new sustainable jobs within the next 24 months in Greece through the effective implementation of International Public Sector Accounting Standards (IPSAS). A cornerstone of successful job creation is to get educated on why Greece net debt is 18% of GDP and not 175%. Japonica Partners is the lead organizer of FreeGreece.info
10
World Bank Exports of goods and services (% of GDP)
11
Krugman, Paul, A Game of Chicken, The New York Times, Feb. 6, 2015. Also “This objective fall from grace of German prestige is the result of Merkel’s persistent punitive attitude, with no room left to breathe. European Unity and the fate of people and nations are being sacrificed in the name of fiscal rigidity. Merkel’s moralizing is hypocritical — German banks are massively exposed to Greek debt — and most importantly it is uncalled for.” — See more at: http://www.albertoforchielli.com/2012/05/20/the-grim-view-from-germanys-ivory-tower/#sthash.4ma7oNlE.dpuf
12
Krugman, Paul, Greece: Think Flows, Not Stocks, New York Times, Jan. 26, 2015.
13
There would be capital controls, a massive devaluation of the Greek Drachma, but at least the Greeks would control their own destiny via currency devaluation to boost exports, mitigate the financial losses through tax evasion and institute strategic controls on key industries to focus on long-term investments and growth.
14
James, William, Greece outlines debt ‘menu’ in bid to win over skeptical euro zone, Reuters, Feb. 2, 2015.
15
Supra note 7.
16
Elias Spirtounias, Executive Director, Jump Start Investments and New Jobs in Greece with Good Government Accounting, American-Hellenic Chamber of Commerce, Dec. 1, 2014
17
Spiegel Online International, Denying Reality: Germany’s Ongoing Refusal to Forgive Greek Debt, Nov 26, 2012.
18
The World Bank Exports of goods and services (% of GDP)
19
Angela Merkel, Alexis Tsipras See Greek Bailout Compromise, NDTV World Press, Feb. 13, 2015
20
Tzanninis, Dimitri, The ECB Collateral for Greece Must be Lowered to 5 percent, Business Partners Special Supplement, accessed on Feb. 22, 2015.