During Varoufakis’ European tour, there was much discussion of a proposed swap of Greek sovereign debt for a new contract that would link payments to the performance of the Greek economy. For lay readers, this kind of contract is a bit like UK student loans, which don’t have to be paid back at all unless graduates clear an earnings threshold.
This sounds exciting, ingenious, rational; even fair. But we should remember that the Greek sovereign debt is not really debt any more anyway. The large face value [174% of GDP, before a new contraction set in] translates into an interest burden [2% ish of that same hazy GDP number] lower than Spain or Italy, because of the already very generous terms, recognising that, in essence, the debt is partially forgiven already.
How much it’s forgiven is unstated, but would surely depend on how well the Greek economy was doing. And because there has been one renegotiation of terms already, any equity-like feature of the new debt would of course be just as hazy, really, since those terms could be renegotiated down the line.
So what is really being proposed is an exchange of one renegotiable contract whose eventual repayments are variable and related to Greek economic performance, for another.
It has the symbolism of communicating that Greece is being let off something again. But really such a swap would be repackaging. It’s also a rather academic kind of symbolism to invest in for political reasons. And carries political risks for both sides.
Consider a hypothetical German punter/ tabloid editor: ‘eh? now they can tank their own economy to get out of the debt!’. And the Greek equivalent: ‘Syriza have been taken over by investment bankers! Just as Greece is doing well the Troika are swooping in to steal more!’
The idea of linking sovereign debt-repayments to growth is one contained in Robert Shiller’s urgings. He described a beautiful utopia in which governments worked to lay off all idiosyncratic country risk in their bond issues. This would allow countries to focus on their comparative advantages – and not labour over statist industrial policies that tried to diversify their economies – and provide beneficial insurance.
Whether a Greek debt-for-equity swap gets us closer to this utopia is moot. This would be after renegotiations of the debt, and where future renegotiations are threatened. Shiller was thinking of a world where governments start out issuing such contracts, and honour them.
It’s also moot whether such a swap is ‘fair’. On the one hand, bondholders signed a bond contract, not a something else contract. Yet on the other, given a long history of sovereign debt restructuring, bondholders bear some responsibility for recognising that contractual promises are not and cannot always be kept.