The general consensus in some quarters is that official creditors need to forgive a large portion of their loans if Greece is ever going to become financially viable.
Such a major haircut would clearly reduce Greece’s indebtedness as percentage of GDP. However, since much of that debt is currently at interest rates of zero outright (interest moratorium) or at rates close to zero, the benefit to Greece’s budget would be very limited.
Put differently, such a haircut would be the least attractive option of all because (a) the damage to creditors would be immediate and substantial and (b) the benefit to Greece’s budget would be minimal.
Alternatively, Greece could assume the following position: “We are indifferent as regards a haircut if (a) we don’t have to repay those loans for a very, very long time; if (b) those loans carry an interest rate of zero or close to it; and if (c) we are not limited as regards future borrowings to finance investments.”
Here is an extreme (and hypothetical) example to illustrate the point: If Greece’s debt to official creditors (allegedly 280 billion euros out of the total debt of 320 billion) were rescheduled out to a 50-year bullet maturity at an interest rate of zero, this debt would be cost-free to Greece during this period and upon maturity in 2065, the value of the 280 billion would be eroded by inflation. The indebtedness as a percentage of GDP would be reduced dramatically due to Greece’s growth during those 50 years.
The benefit to Greece’s official creditors would be most significant when comparing it with the alternative of a major haircut. In the case of a haircut, the losses have to be realized immediately and it is highly unlikely that even the most creative public accountants could find ways to avoid that tax payers feel those losses. To take Germany as an example: Germany is said to hold about 80 billion euros of Greece’s debt. If Germany agreed to a 50 percent haircut, the country would immediately be out of 40 billion and that loss will land on tax payers’ shoulders.
If, in contrast, Germany agreed to rescheduling its 80 billion euros for 50 years and to reduce the interest rate to zero, Germany’s annual cost of this measure would be equal to the cost of funding the 80 BEUR when those 80 billion don’t generate a return. Assuming that Germany can currently fund itself at 1 percent, the annual funding cost would be 800 million euros.
Those 800 million would annually flow through Germany’s budget but there wouldn’t be a line item titled “cost of Greek credit losses”. Instead, those 800 million would be buried in Germany’s total interest expenses and there would be no way to trace them separately. True, Germany’s budget balance would be burdened by 800 million euros annually but that is an amount which German tax payers would not feel in the slightest (compare that with roughly 100 billion euros in Germany’s annual West-East transfers!).
The above example is hypothetical. Germany might (or rather: is quite likely to) agree to a 50-year rescheduling but neither Germany nor any other creditor will commit to zero interest for 50 years. There are, however, creative ways to pretend that interest is payable whereas in actual fact interest will never get paid. One could, for example, set an adequately low interest rate but offer Greece the option of freeing itself from the obligation to pay annual interest if and when certain targets are reached. In the world of financial engineering, there are many ways to skin a cat.
To sum up the above concept: Greece would not have to repay official debt for 50 years; it would not have any interest expense on this debt; and it could borrow during those 50 years because lenders would know that Greece is free of major debt obligations until 2065.
And the beauty of this: by 2065, the value of Greece’s official debt will have been eroded by inflation and its indebtedness will have fallen to a very low percentage of GDP (assuming that Greece will have growth during these 50 years).
The Greek Godfather would say to the official creditors something like this: “I’ll make you an offer which you cannot refuse. I will do you the favor of repaying your loans down to the last Eurocent. Not today, but in 50 years from now. All I ask you in exchange is that I don’t have to pay interest during those 50 years. That will make a world of difference to me and you will hardly feel it.”