The alert John Dizard of the Financial Times has taken notice of a development that has passed most commentators by, namely, that Greece is starting to restructure state debts. This hasn’t yet gotten the attention it merits because it’s bonds issued by particular government bodies (in this case, the Greek state hospital system) and the investors aren’t big Eurobanks but suppliers. Old outstanding coupon bonds are being replaced with zero coupon bonds. The relevant ministries contend this amounts to a 19% haircut; Dizard thinks the discount rate is too low (hence the proper discount is even greater) and an expert who deals in particularly exotic debt thinks this paper will trade down a lot further.
Oh, and the haircut assumed by the ECB on sovereign debt in its stress tests? A mere 3%. And you have to love this tidbit from the joint press release by Greece’s ministries of Ministry of Health and Social Welfare and the Ministry of Finance:
It is certain that the banks co-operating with the suppliers will show interest in prepaying these bonds, transforming the corporate risk undertaken on behalf of their customers – hospital suppliers – in credit risk against the Greek state, in the form of a bond which can be financed through ECB.
More from Dizard:
…here is the Greek state telling you their old paper isn’t worth what it was when they incurred the obligation.
Even before the new bonds are issued, some of the hospital debts are already said to be trading around Athens, supposedly at much lower prices than the release suggests would be appropriate.
And while the release says the debts “will be settled”, major suppliers have not yet agreed to the hospital debt bloodletting. According to a London dealer in edgier emerging market paper, some of the suppliers have already been around to get a bid. Unsuccessfully, sad to say, even though the suppliers’ banks have that promise of “ECB” repo availability. He sniffs: “You won’t get a bid at 50 [per cent of face]. My guessing is that it is more like 30. We were appalled at the very low quality of the documentation.”….
Since the hospital debts do not yet have the artificial support of ECB market operations, perhaps any indicated bid side for this paper should be considered as a useful data point. That is, the price people would pay for what will soon be Greek state bonds, if they were investing their own money.
Yves here. Funny, that estimate that the debt will be worth 30% to 50% of par is exactly what S&P said recoveries on a Greece default would be.
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–Yves here. Funny, that estimate that the debt will be worth 30% to 50% of par is exactly what S&P said recoveries on a Greece default would be.–
Yes, isn’t it sad that the end result of this assumed bondage is equivalent to the default/bankruptcy that should have occured. With the added benifit that the government and civil service keeps their place????
When we some six months ago looked at holiday options for this year, we concluded that Greece was overpriced by 30-50%.
My wife wanted to go but I told her to wait until next year.
Hi Swedish Lex,
may I ask you which options did you consider and how did they measure against each other?
Were you looking for sun and beach only, or some food/city/museum tourism too?
The interesting question becomes : what happens to FUTURE medical supplies ? Paid for with fresh money from the Eurozone ?
If it is the case, expect to see some drugs sold by Greek Hospitals with subsequent repurchases, nice money pump…
Nah! They will just recycle the bandages and syringes..:( If the nurses don’t mind waiting a few months to get paid.
Probably the next step after that will be to privatize the hospitals. Then only tourists will be able to afford them. Your ordinary Greek citizen will go to the vet if they can afford that.
That scale of discount on bonds signifies that the market has zero faith in collecting. A default would have been so much better.
Yes, you see that it is not necessary for Greece to run its own currency in order to be able to default.
Also that, even did it run its own currency, it would still default.
Also that, if you run out of money, at some point you stop spending. You can sell all your assets, you can borrow all you can, and at some point it stops. Whether you run your own currency or not.
As is happening in slow motion with Illinois and California. Whether they run their own currencies or not.
Um, Michel, you have the argument backwards.
This blog has LONG said Greece would default. Greece does not control its currency, the euro. And we have also said that countries that control their own currencies, unless they somehow wind up with a lot of debt in a FOREIGN currency (say like Iceland, backstopping a huge banking sector that had borrowed other currencies, or Argentina, which dollarized its economy and hence had a lot of foreign currency debt) are not at risk of default.
So in all honesty I don’t understand your point.
Yves, thanks for pointing to that Dizard Article.
Strangely, the FT likes to hide their best columnist. You always have to dig the site to find him. I wonder what that tells me about the FT.
Thanks for posting this, Yves. The comment about ECB repo-ability brought something home to me about this whole central bank QE–that the CB’s can pick winners and losers. Friends and cronies’ bonds are repoed (which makes them good as money) while outsiders’ bonds are not. I’m not saying it’s happening now, but the mechanism is there.
I suppose that’s why the Fed never used to deal in anything but Treasuries–I may be obtuse but I finally got it.
is that 30-50% on top of the official 19% haircut?
Adam Smith pointed out over two centuries ago that in the long term governments do not pay their debts. Governments default, collapse and default or inflate their currencies and default. How long will people continue to loan bankrupt states such a Greece, Argentina and perhaps the UK, USA money? Why will they continue to do so?
@Yves et all – I’m still trying to understand the whole MMT concept discussed on yesterday’s posting concerning SS and the Peterson (?) foundation. I apologize for going OT to get to you. Perhaps these comments are best served on an MMT blog, who knows…
1. I’m on board with the fallacy of household accounting in a fiat currency context. Interesting stuff. And that we are mixing metaphors by acting as if we are still on the gold standard (charging ourselves interest) but in effect issuing fiat currency.
2. I also get the idea that austerity would be counter-productive and that sovereigns can’t default. [As an aside, I do wish a couple of the MMT’s sites discussed inflation a bit more.]
3. I’ll call the above the “operational” aspect of MMT – it’s reality that money is created in a fiat regime.
Where I get off the rails with MMT is what I will call the “implementation” aspect.
1. Who determines the quantity of money to be created? I have a great distrust for governments and their ‘benevolence’. From the “billy blog” (don’t know if you like that one):
“The only sensible reason for accepting the authority of a national government and ceding currency control to such an entity is that it can work for all of us to advance public purpose. In this context, one of the most important elements of public purpose that the state has to maximise is employment. Once the private sector has made its spending (and saving decisions) based on its expectations of the future, the government has to render those private decisions consistent with the objective of full employment.”
I have a few problems with this statement. What is the appropriate level of employment to target (the author goes on to state a specific 2%)? “Render” those decisions? According to what standards? History has taught us over and over that politicians rarely act with long-term benevolence. Quite frankly, it sort of sounds like central planning. And we know how that works out.
2. The author goes on to prescribe a certain level of employment as being ideal – using the oft-mentioned Jobs Guarantee. Who determines what is the right level of employment? How do you determine what is the right level of effort needed to earn a unit of wage for unit of effort in the JG? For instance, I’m working at a JG, and I see someone working less hard then me, what incentive do I have to work harder than them? After all, the job is guaranteed.
3. Does inflation matter, or is it inflation EXPECTATIONS that matter? How does a citizen know how much money will be created next month, next year, or during the next administration?
4. Taxes are used to regulate inflation. Who decides what taxes?
5. How do you measure inflation? On an aggregate basis? What about the example of college inflation at 14% annually, but home equivalent rents going down, and therefore netting themselves on an aggregate level? What is the right unit of time to measure inflation?
6. Similar to #3, different businesses have different business cycles. A chip foundry works on a 10-20 (?) year life -cycle, while the hot dog stand works on a weekly/monthly basis. How do you manage inflation expectations for the respective parties?
7. How do you prevent the city/state governments from running up huge deficits and then asking for a bailout? There would seem to be huge political pressures for each party to do exactly that. But, the creation of money for the bailout would “surprise” the inflation expectations of citizens?
8. I read one poster that discussed free education, health care, and retirement. At what level of resource utilization? Is it infinite? Is there any rationalization of care? How does a society make these determinations in the context of the ability to create unlimited amounts of money (bounded only by inflation)?
9. Is there an inherent bias towards growth in the MMT Model? At what point does the model become unsustainable? And then what happens? And what is the right growth (who determines)? Is growth getting a 21″ TV instead of a 18″? If so, why? If not, why?
10. How do you manage a transfer from a household model of government spending to a MMT model? Debt destruction? Under what concept of the Rule of Law?
I totally agree that our current system isn’t working very well. I’m out looking for a new one. The trouble for me (so far) with the implementation aspect of MMT is that it seems to rely on the same government that got us into this mess (with the corporations, military complex, etc.). And requires them to have a fore-sightedness that is not founded in history.
Also, MMT seems to focus on the macro – aggregate demand and aggregate inflation. But how does it factor in the mis-allocation of resources over time? How are resources re-allocated and re-incentiviced? The senatorial candidate wants to offer $500/pp to each of the states as stimulus. Who determines how this money is spent? Do you ever get around to dealing with long-term structural inefficiencies in the economy (vis a vis your foreign competitors) or does MMT offer the [false] promise of washing over them?
Finally, MMT seems to lack acknowledgment of the impact of incentives on the individual level. Sure, might be too “invisible hand” for y’all (don’t know). But if my neighbor is working half as much as me but gets the same retirement, health care, etc. why do I want to work so hard? Would productivity on the aggregate decline? Oh, and MMT, if implemented with a completely free social safety net, wouldn’t that create a consumption-biased economy (since no one needed to save) – with moral hazard and all? Is that good?
My bias is that I am looking for an economic model that focuses on more than just the unit of exchange (happiness, free time, etc.) but still reflects my lingering belief that incentives matter. And that small groups of people governing large groups (that don’t really have the power to remove them) eventually become self-serving (micro>macro). That distance to/from the governed creates disconnect.
No need to reply to this. I appreciate you allowing me the opportunity to blather on – on your blog.
p.s. Yves – I was commenting last night on your response to Ishmael and not Dave. The former seemed to be trying a bit more to understand and discuss.
I am on vacation in Greece where nothing is quite like it first appears to be … especially to the often clueless reporters of the Financial Times. Regarding the settling of overdue accounts between the state and the suppliers to hospitals…
Yves, your story (John Dizard’s, of the Financial Times), I am afraid, is inaccurate but I cannot blame you since you are a rational person who could never fathom the levels of irrationality of the Greek state. Here is what happened. The majority of suppliers to state hospitals since circa 2004 overcharged by 400%, and sometimes much more, but they were paid with IOUs. Given their huge profit margins, they were willing to extend credit. Now, the current government, which despite all its faults is making some efforts to clean up the proverbial stables, made them an offer that amounts to a blanket settlement. For most suppliers, their protestations withstanding, this is a fantastic deal rather than a haircut! Of course, if there were an honest supplier, who charged the state hospitals the prices private hospitals pay, he would lose money on this deal but he would have the right to reject the settlement and sue for full payment. The majority of suppliers are (privately) overjoyed with the deal. Yeia sou!!!
Tortoise, sorry but you sound like a Greek govt official. You seem to ‘know’ way too much for just being on a vacation. If they overcharged, sue them.
Hah, your ID is very well chosen! This via e-mail from Dizard:
I’m open to the possibility—or virtual certainty—that Greek state institutions engaged in corrupt procurement practices. If so, then those responsible, both companies and individuals, should be investigated, the overcharges refunded or not paid, and the guilty punished. However, that is not what is being done, and the “19%” reduction in principal, which in real terms is much greater, is not only unjust to honest suppliers, but has very significant perverse effects on Greece’s future financial state. Mr. Tortoise is repeating the conventional PASOK talking points, it has to be said with great consistency.
First, by imposing a uniform haircut on the honest and dishonest suppliers alike, the Greek government is removing any incentive for suppliers to provide honest, market or cost based, price quotes. The hospital suppliers are not a monolithic block; Danish pharmas do not conduct themselves in the manner of local wholesalers who are nephews of Greek politicians. The Greek state was only prompted to act when the hospitals found that their suppliers were unwilling to ship critical supplies for which they were not being paid. Far from profiting from 400% overcharges, they were getting nothing for the value they provided. This is a familiar experience for Greek taxpayers hoping for honest services from their State, but not the basis for a workable commercial arrangement. Mr. Tortoise, by the way, provides no detail on the 400% “overcharges”. Not 325%, or 537%, but exactly 400%…. If there is a clue, to use Mr. Tortoise’s word, it is not provided in his comment.
In any event, many of the suppliers have not accepted the unilaterally imposed “settlement”. Apparently they believe that their accounts would stand up to an audit. In the meantime, Greece will pay extra for the needed supplies through intermediaries, names of which might be supplied by the usual connected people close to the government.
More seriously, the hospital debt cramdown is making a Greek recovery more difficult. Much trade is conducted on open account between companies or companies and government agencies such as the Greek hospitals. The lesson of the hospital suppliers is that exporters better get payment in advance, or just raise the charges to reflect the higher risk of doing business with the country. That increases the working capital requirement for the country as a whole, when its financial resources are ever more strained.
As is so often the case, self-righteous moralizing and insult conceals the self interest of political people and the intermediaries who cluster around them like remora fish.
Not impressed.
I believe Greece’s lenders bondholders and official creditors need to accept significant write downs, sooner rather than later, on the credit they extended to the country. Mr. Tortoise has picked one of the most expensive, ineffective, and conflicted ways in which to do that.
Guys i am greek and i must say that you don’t have the slightest idea of what is really going on here.
I read the newspapers, sites and blogs all the time and i am wondering if the make all those things out of their mind
and if what they really want after all is to force us to default.
Let me give you some REAL facts.
The bad:
1) the deficit is big.
2) the previous government was the most corrupted ever.
3) Nearly all (above 70%) politicians and the whole penal, health and tax system employees are corrupted.
Overall corruption is great in the PRIVATE AND PUBLIC sector with the government owned businesses like the electrical company and the railroad company in the lead.
TO PUT IT SIMPLY NOTHING WORKS.
4) This country was (is?) controlled by no more than 20 rich families that were stealing all the money.
6) No one except the true civil servants and the minimum wage (700 Euro) workers is paying his taxes.
The good:
1) IMF took over and that alone stopped the politicians from
stealing more money since they don’t have full control of spending. That took care of the 20 rich families i was talking about as they cannot bribe politicians and succeed in looting our money.
I believe that IMF is really a good thing for us.
There is a tremendous amount of money waiting to be collected if corruption is minimized.
When you start from the lowest position the improvement can be great.
2) Greek workers are not lazy like some idiots are saying.
They were idiots who believed what the politicians were saying. Have a look at the European statistics and you will see that they work the longest hours and get payed less than almost the whole Euro zone having at the same time the most expensive market. If you consider someone with a salary of 700 Euros per month a rich Greek then….
3) this Government at last started to chase the tax evaders hard, have in mind that before only the civil servants and the the minimum wage workers were actually paying taxes.
There is the potential for a at least 100% increase of income from taxation alone closer to 200% actually).
4) Since we don’t have an industrial country less money in our pockets means less spending and less debt as nearly all goods are imported.
The debt is owned by foreigners and it belongs to the government not the private sector.
The industry here cannot be hit because it is non existent in the first place, except for the tourist industry.
Less consumption means less German cars for us (not me
as i always lived a Spartan life because of my beliefs)
The tourists will always come here especially now that the cost is going down.
5) The banks here are among the strongest on the planet because they were stealing us also for over 30 years which means that they have enough money. Check the stress tests and you will see what i mean.
ALSO THEY WERE NOT EXPOSED to the mortgage bubble form the US.
6) People have changed since last year period.
They don’t forgive anyone now and this means that politicians are investigated thoroughly for their lifestyle
and wealth.
7) i see a move to privatize or get rid of the public health sector along with other problematic sectors which is a good thing for me as i was forced to pay dearly anyway for the two times i needed the “free” public health system
Conclusion:
I think that Greece will not default, it can only default if the IMF leaves and let this political mob with the stupid part of the population (was 80% but now is under 40% as even the idiots one day see the truth) that still supports the two big parties to have their way.
I hope i made some sense and provided some useful information.
Chris
Thanks for the update on Greece. There is also a good site for news in Greece called nea which offers realtime news about Greece. However it’s only in Greece but it’s good to use Google translate with it to get the latest news.