If Greece’s sovereign debt were held entirely domestically, there would hardly be any excitement today between Paris, Brussels, Frankfurt and Berlin!
The gross external debt represents the amount of other countries’ savings which would be lost if Greece were to fall into the Aegean. That is the number which Paris/Brussels/Frankfurt/Berlin are worried about.
Before the crisis began, at Q3/2009, Greece’s gross external debt amounted to 413 BN EUR. Please note that 229 BN EUR were with the Central Government (=sovereign debt) whereas another 184 BN EUR were in other sectors (mostly banks).
Of the 229 BN EUR of Central Government debt, 206 BN EUR were in the form of bonds. Total sovereign bonds of Greece were said to be around 350 BN EUR at the time. If this is correct, only 59% of sovereign bonds (206 BN EUR out of 350 BN EUR) was held offshore.
The official figures of the Bank of Greece would suggest that the gross external debt declined from 413 to 405 BN EUR in the 2 years following Q3/2009. That is incorrect! In the period after Q3/2009, Greece valued that portion of foreign debt denominated in tradeable securities (sovereign bonds) at “market”. Since Greek bond prices tanked due to the crisis, the valuation on the part of the Bank of Greece was reduced accordingly.
In the publication of the Bank of Greece, sovereign bonds held be foreign creditors would have declined from 206 BN EUR to 101 BN EUR between Q3/2009 and Q3/2011. In actual fact, that was simply a decline in market value.
The Bank of Greece does not reveal the nominal amount of sovereign bonds held offshore. In the table below, the column “2011 Q3 adj” assumes that these bonds remained at the same level as 2 years earlier (in actual fact they may have increased).
in BN EUR
What does all of this mean?
First, it means that – should Greece fall into the Aegean – savers of other countries would overnight be out of 510 BN EUR (indirectly via the banks where they hold their savings).
Secondly, it means that these 510 BN EUR are the “floor”. There is no point in performing intellectual acrobatics with rescue packages, Eurobonds, etc. Greece will not be able to reduce those 510 BN EUR for a long time to come (except for that amount which is being forgiven in the form of a haircut).
Instead, the 510 BN EUR will increase every year by at least 20 BN EUR. That is the minimum current account deficit of Greece.
Actually, the 510 BN EUR will increase by much more than the 20 BN EUR annually. To the extent that Greeks continue to withdraw deposits from banks, the foreign debt of the banking sector will increase because the deposit withdrawal is financed with new foreign debt (ECB).
The table above shows that – between Q3/2009 and Q3/2011 – gross external debt increased by almost 100 BN EUR. Without using a calculator, one can conclude that this represents an annual increase in foreign debt of about 50 BN EUR.
If Greece needs anywhere between 20-50 BN EUR annually in new funding from abroad for the next several years, the very valid question is: where is that going to come from?
It is not going to come from EU rescue packages. EU-politicians may be able to convince their voters for yet a third Greek rescue package but they won’t be able to convince them of an additional annual rescue package in the order of 20-50 BN EUR for years to come.
Banks are unlikely to make new loans to Greece voluntarily.
That reduces Greece’s options dramatically. The only viable options are new foreign investment and EU-grants. If Greece cannot cover the hole through these 2 instruments, the current account deficit will have to be eradicated forcefully which means a drastic curtailing of imports.
Today’s living standard of Greece is imported. If imports are curtailed drastically, the living standard will sink drastically.
Isn’t it about time to start thinking what measures Greece could take in order to maintain the living standard? At least more or less?
One doesn’t have to be an economic Einstein to recognize the first few priority steps: increase exports; curtail imports (and substitute them with new domestic production); focus on tourism revenues; attract foreign investment; focus on getting EU-grants into place.
And do that in a hurry! There ain’t much time left!