“Debt servicing, combined with other economic ills, can push society to the breaking point” – correct, and that’s what happened in the Weimar Republic. Does it apply to Greece?



Greece’s nominal interest expense was 5,7 BEUR in 2014, or 3,9% of GDP (according to the OECD). In contrast, at the peak since joining the EU, in 1994, Greece’s interest expense was 12,6% of GDP! Few EZ countries spend such a small portion of GDP (or of tax revenues) on interest as Greece did in 2014. To put 2014 into perspective, in 2000, whan Greece’s debt was less than half of what it is now, the interest expense was over 10 BEUR!



There are two reasons why Greece’s interest expense was even as high as 5,7 BEUR in 2014: the very expensive IMF debt and bonds held by private investors (I believe both carry rates between 3-4%). Much of the EZ debt is zero and/or close to zero.



I believe that debt owed to private creditors is about 50 BEUR of the total but I may be off by a few billion. Assuming that the average rate on that is 4% (on the high side), that would translate into an interest expense of 2 BEUR annually. That should be considered as the floor because I doubt that this debt, short of default, could again be renegotiated.



If only the IMF, instead of reminding others to take a haircut, would bring its interest rates down closer to the EZ levels, Greece ought to be able to contain its annual interest expense at 3 BEUR or so.



Compare that to a haircut of Greece’s debt so that the remaining debt is 60% of GDP. With a GDP of 180 BEUR, that would translate into 108 BEUR of debt. At what rate would that debt be priced? I don’t know. But assume that it would be priced at 3%, it would translate into an annual interest expense of 3,3 BEUR, i. e. MORE than the above 3 BEUR which ought to be achievable. If it were priced at 5%, it would translate into 5,4 BEUR.



The debt service (the existing one or the possible lower one as described above) is definitely not the undue burden which everyone talks about. On the other hand, when a country which has lost access to the markets needs to refinance maturities all the time, that IS an undue burden. The traditional solution for that has always been a stretching of maturities. In the case of Greece, they would have to be stretched for a VERY long time, perhaps even including a portion of Evergreen Bonds or 99-year bonds (like Mexico).



The longer the maturities and the lower the rates, the more debt assumes the character of equity. Much of Greece’s debt already has the character of equity today. The objective would have to be to strengthen that character of equity by stretching maturities and lowering those rates which can be lowered without too much of a problem (IMF).



Debt, particularly excessive debt, is always the derivative whereas the underlying is the real economy. One can never improve the underlying by playing around with the derivative. For over 5 years now, there is been over-preoccupation with the derivative and, essentially, ignoration of the underlying, the real economy.



It pains to remember that it is already 4 years since McKinsey had come out with its proposal for “Greece 10 years ahead” and that 40% of that proposal could already be completed by now. The current government probably considers McKinsey’s proposal a creation of neoliberalism. That’s ok. But that does not free them of their responsibility to make their own such proposal (just like it does not excuse previous governments who had ignored the real economy).



In closing, and to stimulate discussion, I would propose a wager. If the current government took the McKinsey proposal to the world and said: “We are committed to implementing this plan and we guarantee that we will implement the legislative and administrative framework to make the plan possible!”, well, I think that investors would then line up in droves. Any bets against me?