The redundant fictions of Greek debt



By Edward Hadas*

Greece has a lot of problems. No one would argue about some of them. GDP is too low, the unemployment rate is too high and the new Syriza government is untried. The question of whether the country has excessive sovereign debt is another matter. There is a heated debate, which is marred by the refusal to recognise four truths.

The first ignored fact is that net present value (NPV) is the only fair way to value bonds. The idea and the calculations are familiar to those who work in finance. For anyone else, it is enough to know that the lower the interest rate on a bond, the lower the true value.

When non-Greek politicians proclaim that they will never accept any reduction in the value of the Greek debt they hold, they aren’t telling the truth: they already have accepted a substantial write-off of the NPV, and they are mostly willing to accept more. Insistence on the sanctity of the principal amount may make domestic political sense in Germany or France – just as Greek voters loved the apparently now abandoned insistence on a reduction of that value. But both sides are promoting a false economics.

Of course, politics matter in these debt negotiations. The underlying questions are always about European solidarity. How much and what kinds of support does Greece deserve from the rest of the European Union? Perhaps the NPV fiction once helped find answers to these questions, but it is now a source of political instability. Creditors see the exaggerated sum of outstanding debt as a risk and a sign of Greek incompetence. Greeks see a threat of endless corrosive meddling.

The second fiction is that since the crisis, Greece’s creditors have provided the country with massive amounts of money. True, the raw numbers sound large. The Macropolis consultancy calculates that the total funding between 2010 and 2014 came to 254 billion euros, or about a quarter of the cumulative GDP over the five-year period.

But the vast majority of the loan money was given right back to the creditors as interest payments or loan repayments and some went to support Greek banks, keeping them from defaulting on their European obligations. Adjust for that, and the actual transfer is between 3 percent to 7 percent of Greek GDP over the period.

The lenders’ contribution is large enough to justify their influence on Greek policies. However, a more honest analysis also supports Greek complaints of lender overreach and indifference. Creditors have shown far more interest in keeping their own accounts whole than in funding and supervising the institutional revolution justly called for by Yanis Varoufakis, the new finance minister in Athens. The arguments about how much aid Greece has wasted and how much it deserves would be more fruitful if they were based on realistic estimates of the money actually received.

When Greece’s euro zone partners show an interest in helping Greeks deal with the pains of austerity, they draw a line. They say there is no way they can violate the EU ban on what are known as fiscal transfers. National governments can lend to each other, they declare, but the German government must not give direct support to Greek citizens or companies.

This shibboleth of no fiscal transfers is the third sham. The EU is a bloc with big governments and free movement of people, funds and goods. Money is always moving from one state to the citizens of another. There is a quasi-fiscal transfer to Greece when a German spends a state pension in a Greek retirement home or when European Central Bank programmes finance Greek banks at a low interest rate. There is a quasi-fiscal transfer away from Greece when a Greek-educated emigrant pays taxes in France.

The net Greek gain or loss from the euro zone quasi-transfers could be the matter of a fruitful debate, but clinging to the pretence of absolute fiscal sovereignty undermines the essence of the EU. The bloc is indeed a union, in which many gains and costs are shared. The strong and rich are supposed to support and nudge the weak and poor, with money as required. If the actual and potential implications of cross-border fiscal arrangements were included in the debt negotiations, the process would certainly be more honest. It might well also be more successful.

The final falsehood is moral. Reneging on the payment of debts is not necessarily a sin, as Greece’s creditors would have it. Nor is the demand that the Greek government fulfil its debt contracts an act of repression, as Varoufarkis sometimes seems to believe. In truth, too many mistakes have been made on both sides to allow any moral absolutism. The way forward is to forgive a bit, forget a bit and work together. Both Greece and Germany remain better off as partners in the European project than as self-righteous defenders of weak moral positions.

Each of the four types of dishonesty probably served a valuable political purpose at some time. What the poet Thomas Stearns Eliot said of humankind is certainly true of European voters and leaders – they cannot “bear very much reality.” However, even noble lies can eventually outlive their usefulness. Greece and the rest of Europe deserve a full, frank and fully honest debate.


*Edward Hadas writes about macroeconomics, markets and metals for Reuters Breakingviews. Before becoming a journalist, he worked for 20 years as an equity analyst in Europe and the US. His book, “Human Good, Economic Evils: A Moral Approach to the Dismal Science” is published by ISI Books in Wilmington, Delaware. He has also written a course-book about political philosophy for the Maryvale Institute in Birmingham. Edward has degrees from Columbia University, Wadham College, Oxford and the State University of New York at Binghamton. He has a website,



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