In the mid-1980s and in the midst of a massive external payments crisis, Bernardo Grinspun was Economy Minister of Argentina for a brief period. Mr. Grinspun was a totally non-convential man who did not pay much attention to the established rites of international finance. As the representative of Argentina’s 8th largest private creditor, I had several meetings with him. He would always tell me (as he told all other bankers) the following:
“Make an escrow account and run all your lending/repayment transactions through it. If you want to disburse new loans to repay yourselves maturing loans, fine with me. If you want to disburse new loans to pay yourselves interest, fine with me. Just don’t bother me with it!”
Was Mr. Grinspun right? Well, he certainly was not completely wrong! If creditors want to continue to show their loans as performing by making new loans, that should be their privilege as long as – in Mr. Grinspun’s words – it doesn’t bother the country.
The reason why the proposed escrow account bothers, justifyably, Greece is that the creditors are not happy to only use the escrow account for their own purposes. Instead – to again use Mr. Grinspun’s words – they want to bother Greece. They want Greece to pay primary surpluses into the escrow account if and when such surpluses occur. That clearly falls into the category of ‘bothering’.
Proposal for a second escrow account
Much of Greece’s austerity has come at the expense of investments (‘expenses for goods and services’). Investments declined from 17 BEUR in 2009 to 10 BEUR in 2011. For Jan-Sep, 2012, they were only 1,1 BEUR.
The perfect way to accelerate recession is to reduce investments (as opposed to general spending). It escapes my imagination why Greece would have chosen that route. If the Troika imposed cutting investments, then the Troika should be made accountable.
One way to improve the situation would be to make a second escrow account for primary surpluses with the proviso that all funds from that escrow account must go into investments.
What about interest payments?
Greece paid 15 BEUR interest in 2011. Thanks to the haircut/restructuring earlier this year, interest for 2012 is likely to decline to around 12 BEUR.
Primary expenditures (excluding interest) will probably be close to 100 BEUR in 2012. Thus, interest for 2012 will represent approximately 12% of primary expenditures in 2012.
What would be so wrong in offering Greece that, during the restructuring phase, interest payable in cash will be limited to 6% of primary expenditures. Any interest exceeding that amount (i. e. the other 6% in the case of 2012) would be capitalized and payable at some future date.
Let’s do a little math
The primary deficit for 2012 is expected around 2,5 BEUR. If half of 2012′ interest had been capitalized, it would have provided a benefit of 6 BEUR and it would have turned a 2,5 BEUR primary deficit into a 3,5 BEUR primary surplus.
And that 3,5 BEUR primary surplus could have already in 2012 gone into the escrow account for investment!
Who would have suffered from all of this? As far as I can tell — NOBODY!