FLASH ECONOMICS

ECONOMIC RESEARCH

January 30, 2015 - No. 61

What part of the Greek public debt would

be the easiest to restructure?

The ascension of Alexis Tsipras new government in Greece has thrown the
question of a restructuring of the public debt back into the spotlight.
In the event such a scenario were to materialise, and even though this is not
the outcome we foresee at the moment, we examine how much could be
cancelled and what part of the debt this could concern.
We conclude that in order for a restructuring to have a significant impact on
the countrys debt level and to return it to a ratio of 120% of GDP in 2020 as
targeted initially in the Greek memorandum, approximately EUR 52 bn of
debt would need to be cancelled at present (i.e. 29% of GDP). Preferably,
such a cancellation would concern the bilateral loans granted by the Member
States to Greece under the first programme between 2010 and 2012.
For the time being, this scenario remains a mere working hypothesis. In
reality, the steadfast reluctance of the European institutions (European
Commission, ECB), the most exposed euro-zone countries (Germany,
France) and the IMF leaves little leeway for Greece to obtain a cancellation of
its debt.
It is undeniable that adjustments will have to be made to Greeces financing
programme, even if they do not consist in a pure and simple debt
cancellation. For example, the European partners could agree to take into
account measures taken by the government to boost growth and thus
improve the countrys solvency. Similarly, an investment drive financed by
the new Juncker plan with a view to improving potential growth could also
be put on the negotiating table. This type of compromise would have the
advantage of partially satisfying the demands of the various parties without
undermining the principle of debt repayment.

Author:
Jsus Castillo

FLASH

Who holds Greeces

public debt?

Since 2010, a large share of the Greek public debt has been transferred from
private investors to the official sector (Table 1):
IMF: EUR 32 bn
EFSF (European Financial Stability Facility): EUR 141.8 bn
Bilateral loans from Member States (Greek Loan Facility): EUR 53 bn
To continue to help Greece while the main tools to lighten the debt burden have
already been used (interest rate reduction, interest payment deferral, maturity
extension), the only way now is to proceed with a debt restructuring that truly eases
the level of the debt (Chart 1).

Table 1
Public debt at 30 September 2014
mln
% total
24.8%
Market securities
79,891
19.8%
Domestic bonds
63,791
0.8%
Foreign bonds
2,639
Other
137
0.0%
T-Bills
13,323
4.1%
75.2%
Loans
241,842
1.3%
Bank of Greece
4,266
0.0%
Other domestic loans
113
2.1%
Bilateral loans
6,794
68.4%
International loans (IMF, EU)
220,121
1.6%
Other external loans
5,036
1.7%
Repos
5,512
100.0%
Total
321,732

Chart 1
Public debt

% PIB
43.8%
35.0%

EUR bn - LH scale
As % of GDP - RH scale

400

174.2% GDP 180

1.4%
0.1%

350

160

7.3%
132.7%

314

300

140

2.3%
0.1%

250

120

200

100

3.7%
120.8%
2.8%
3.0%
176.6%

Sources: Greek ministry of finance, Natixis

150

80
Sources: Datastream, Natixis

100

60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

If a restructuring or a cancellation of part of the public debt is the only truly effective
way for Greece to become solvent again, two questions arise:
1. By how much does Greeces debt ratio need to be reduced to guarantee its
future solvency?
2. What part of the debt should be cancelled?
1- By how much
should the Greek
debt be reduced?

At the end of the third quarter of 2014, the Greek public debt had reached EUR 314
bn, or 174% of GDP. The question of whether or not a debt is sustainable depends
on three parameters:
- The outstanding amount in relation to GDP (Chart 1);
- The interest rate (Chart 2);
- The ability to generate incomes to pay it back, i.e. nominal GDP growth in the
case of sovereign debt (Chart 3).
Chart 3
GDP growth

Chart 2
Servicing of the public debt

Q/Q - RH scale

Interest paid (as % of GDP)

Apparent interest rate (as %)

7.5

4.0

Y/Y - LH scale

5.0
2.0
2.5

0.0

0.0

-2.5

-2.0

-7.5

-10.0

-5.0
-4.0

Sources: European Commission, Natixis

Sources: Datastream, Natixis

2
02

03

04

05

06

Flash 2015 61 - 2

07

08

09

10

11

12

13

14

-6.0
06

07

08

09

10

11

12

13

14

FLASH

With a debt at 174% of GDP, nominal growth that can reasonably be expected at
2% and an interest rate on the public debt of around 2.5%, the primary surplus
1
needed to stabilise the debt ratio is around 1%. Greece is basically at this level at
the moment (Chart 4).
Chart 4
Budget balances (as % of GDP)
Budget balance
Budget balance (excl. recapitalisation and equity capital transactions)

Primary balance (excl. equity capital transactions and investment)

-5

-5

-10

-10

-15

-15
Sources: European Commission, Natixis

-20

-20
02 03 04 05 06 07 08 09 10 11 12 13 14

To meet the debt ratio reduction target set by the Troika in 2012 when it drafted the
second programme, the Greek debt would have to reach a level of 120% of GDP in
2020. Starting from 174% in 2014, it would need to fall by 54 percentage points in
six years, i.e. 9 percentage points per year on average. Such a feat would require a
primary fiscal surplus of around 6 to 9 percentage points of GDP per year (Table 2)
depending on the assumptions used for GDP growth and interest rates. Neither
Greece nor any other euro-zone country has succeeded in maintaining such a
primary surplus for any length of time in the past 25 years (Charts 5A and B).
Table 2
Primary budget balance required to attain a debt ratio of 120% of
GDP in 2020 according to nominal growth rate and interest rates
Nominal GDP growth
0
1
2
3
4
5
6
7
0
7.9
6.4
4.9
3.4
1.9
0.4
-1.1
-2.6
1
9.4
7.9
6.4
4.9
3.4
1.9
0.4
-1.1
I
2 10.9
9.4
7.9
6.4
4.9
3.4
1.9
0.4
n
3 12.4 10.9
9.4
7.9
6.4
4.9
3.4
1.9
t r
4 14.0 12.4 10.9
9.4
7.9
6.4
4.9
3.4
e a
5 15.5 14.0 12.4 10.9
9.4
7.9
6.4
4.9
r t
6 17.1 15.5 14.0 12.4 10.9
9.4
7.9
6.4
e e
7 18.6 17.1 15.5 14.0 12.4 10.9
9.4
7.9
s
8 20.2 18.6 17.1 15.5 14.0 12.4 10.9
9.4
t
9 21.7 20.2 18.6 17.1 15.5 14.0 12.4 10.9
10 23.3 21.7 20.2 18.6 17.1 15.5 14.0 12.4
Underlying assumption: The total budget is balanced betw een 2015 and 2020. Grow th
and interest rates are average rates.
Source: Natixis

The primary balance that stabilises the debt is equal to the product of the debt ratio and the differential between the interest rate and
the nominal GDP growth rate, i.e. 175 x (2.5% - 2%) = 0.9%.
Flash 2015 61 - 3

FLASH

Chart 5B
Primary budget balance (as % of GDP)

Chart 5A
Primary budget balance (as % of GDP)
10

10

10

10

-5

-5
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain

-10
Austria
Belgium
Finland
France
Germany
Greece

-5

-10
Source: IMF

-5

-15
-20

-10

-25

-15
92

94

96

98

00

02

04

06

08

10

12

-15
-20
-25

Source: IMF

-30

-15
90

-10

-30
90

14

92

94

96

98

00

02

04

06

08

10

12

14

Greece has managed to post an average primary surplus of 3.2% in the past (from
1994 to 2001). Assuming it is able to once again attain this level (which would
require an additional effort of around 2 percentage points compared with the current
level), assuming that nominal growth returns to a rate of around 3.5% (which is low
compared with past performances, Chart 6), and at constant interest rates (around
2.5%), the debt ratio would have to be reduced by around 29% of GDP (i.e. EUR 52
bn) to reach a debt ratio of 120% of GDP by 2020.
Chart 6
Current GDP growth
Nominal GDP (Y/Y, as %)

15

2000-2008 average

15

10

10

-5

-5
Sources: Datastream, Natixis

-10

-10
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

2- What part of the

debt should be
restructured?

Above we saw that the public debt is held mainly by the IMF, the euro zones
Member States and the EFSF. If we exclude the IMF, which historically has never
cancelled any debt, then only the loans held by the Member States via bilateral
loans or the EFSF would be likely to be affected.
As for the private sector, it already contributed to a haircut in March 2012 in
connection with the PSI (private sector involvement). Moreover, as Greece wants to
regain access to the market, it is unlikely that it will seek a restructuring of its market
debt.
For both creditors (EFSF, Member State bilateral loans), Table 3 below
summarises the pros and cons that would result from a restructuring of their claims:

Flash 2015 61 - 4

FLASH

Table 3

Bilateral
loans from
Member
States
(Greek
Loan
Facility)

EFSF

Pros

Cons

- The funds have already been disbursed

- Requires a political decision from each

participant

- The impact on the debt ratio of each

creditor has already been factored in

- Negative impact (only in accounting

terms) on the fiscal deficit of each
participating country

- More expensive loans for Greece,

greater impact on its debt ratio

- Smaller outstanding debt

- No precedent with regard to other

countries under assistance (Portugal,
Ireland, Cyprus)

- Undermines the no-bailout clause

- The impact on the debt ratio of each

creditor has already been factored in

- Requires payment of guarantees that

would be called in equal to the losses

- The guarantees have already been

- Negative impact (due to the payment of
given by the Member States, no new
guarantees) on the fiscal deficit of each
decision to make (smaller political cost) participating country
- Larger outstanding debt, offering more
leeway to reduce the debt ratio

- Would create a precedent with regard

to the other countries receiving EFSF
financing
- Undermines the no-bailout clause

Source: Natixis

If a cancellation of the debt did take place in the end, it would be easier if it
concerned the bilateral loans from the Member States (Greek Loan Facility) in light
of:
No precedent with regard to the other countries that have received
assistance (Ireland, Portugal, Cyprus);
These loans are more expensive for Greece;
The outstanding debt is limited but sufficient to have a significant impact on
Greeces debt. Total cancellation would reduce the debt ratio by 29% of
GDP.
It would not require the participants to mobilise new funds as the
disbursements have already been made and included in their debt ratios;
The impact on fiscal deficits would only be in accounting terms (no
disbursements).

Flash 2015 61 - 5

FLASH

The ascension of Alexis Tsipras new government in Greece has thrown the
question of a restructuring of the public debt back into the spotlight.
In the event such a scenario were to materialise, and even though this is not the
outcome we foresee at the moment, we have looked at how much could be
cancelled and what part of the debt this could concern.
We conclude that in order for a restructuring to have a significant impact on the
countrys debt level and return it to a ratio of 120% of GDP in 2020, as targeted
initially in the Greek memorandum, approximately EUR 52 bn of debt would need to
be cancelled at present (i.e. 29% of GDP). Preferably, such a cancellation would
concern the bilateral loans granted by the Member States to Greece under the first
program between 2010 and 2012.
For the time being, this scenario remains a mere working hypothesis. In reality, the
steadfast reluctance of the European institutions (European Commission, ECB), the
most exposed euro-zone countries (Germany, France) and the IMF leaves little
leeway for Greece to obtain a cancellation of its debt.
It is undeniable that adjustments will have to be made to Greeces financing
programme, even if they do not consist in a pure and simple debt cancellation. For
example, the European partners could agree to take into account measures taken
by the government to boost growth and thus improve the countrys solvency.
Similarly, an investment drive financed by the new Juncker plan with a view to
improving potential growth could also be put on the negotiating table. This type of
compromise would have the advantage of partially satisfying the demands of the
various parties without undermining the principle of debt repayment.

Flash 2015 61 - 6

FLASH

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