The Bailout deal ends August 2018
Source: Greece's statistics service.
Greece is a member of the EU, and so, under the terms of the Maastricht Treaty, the country has to include all public debt in its national debt figures.
However, there are some categories of obligations that the government is not obliged to include in its debt figures. These include guarantees to the nation’s bank depositors, unpaid invoices, and pension system obligations.
The table below explains what is included in the national debt figure and what isn’t:
Greek Government Obligation Government Department Included in National Debt?
Government-issued bonds Public Debt Management Agency Yes
Short-term debt instruments Public Debt Management Agency Yes
Intergovernmental loans Public Debt Management Agency Yes
Civil Service pension obligations All No
National Pension obligations IKA No
ECB financing Public Debt Management Agency Yes
National bank guarantee scheme Ministry of Finance No
Accounts Payable (unpaid bills) All No
The national government is responsible for all public debt in Greece. The ministry that is specifically tasks with managing the national debt is the Ministry of Finance. The Ministry delegates the implementation of debt raising to the Public Debt Management Agency. This is an independent organization, but it is legally obliged to answer to direction from the Ministry of Finance. The Ministry appoints all of the agencies directors and also has the right to sack any of them.
The 2008 global financial crisis hit the Greek government hard. In order to remain within EU requirements on debt, the government hid some of its borrowing in special debt-holding corporations. The debts held by these government-owned companies was not recorded as part of the country’s public debt.
Secretive loans to off-balance companies cost more in interest payments that the government would have paid on bonds of the equivalent amount. So, in trying to source more money for government spending, this scheme actually consumed more of the national budget in debt servicing costs. Resulting in a widening budget deficit, which, in turn, required even more creative methods to finance.
The graph below shows the Greek government worsening budget deficit problem, which just exacerbated the national debt and made it impossible for the country to cover its obligations.
In 2009, the country came clean on its true debt levels. The recalculation of Greece’s national debt brought it up from €269.3 billion to €299.7 billion, which was an initial rise of 11%. The total debt and the interest that it obliged the government to pay was calculated to be unsustainable.
When a country isn’t able to service its debts, investors won’t buy its bonds and banks won’t lend it money. In those circumstances, governments have to turn to the IMF for a bail out. The IMF usually puts conditions on its loans. Those conditions reign in government spending and reduce budget deficits and they play a bigger role in resolving the debt crisis than the actual loan amount.
If a country is not able to balance its books and relies on ever-increasing debt to continue its government policies, there comes a point when no one will lend any more money because it becomes clear that the country can never pay it back. Adding IMF debt to an unpayable mountain does not resolve the problem.
The Greek government refused to accept IMF loan conditions and threatened to default on all of its existing debts — many countries have done this in the past. However, as Greece is part of the Eurozone, other European would have suffered a damaged credit rating if that had happened. When faced with a government that refuses to pay its debts, creditors are often prepared to negotiate a compromise. This is called a debt restructuring. Creditors may be prepared to lengthen the maturity terms of bonds, or reduce the loan amount in exchange for higher interest.
When bond holders propose a change in terms of debt it is called a “restructuring,” when the credit event is forced on creditors by the debtor, it is called a “haircut.” THe holders of Greek debt were forced to accept a 50% haircut in 2011. This measure reduced Greece’s national debt by €100 billion.
Owing to the Greek debt crisis, the funding sources of the national debt of Greek is complicated. A large proportion of the country’s debt is owed to supranational organizations, such as the IMF and a range of EU schemes. The chart below shows the sources of Greece’s national debt.
Among these sources are traditional methods that most governments use to raise finance:
The Treasury bill is a short-term debt instrument that has a maturity of less than a year. These do not pay any interest, but are sold at a discount and redeemed at full face value.
Benchmark bonds are long-term debt instruments that have maturity dates of more than a year. They pay an interest rate that is written on the bond certificate and the Greek government promises to repay the full amount of the loan on the maturity date of the bond.
Despite problems with debt, the Greek government still issues both bonds and Treasury bills. Both devices are tradeable and can be bought and sold on the open market.
Despite Greece getting €100 billion of its debts cancelled, the debt has continued to increase. The haircut removed the need for the Greek government to reduce its generous social security system, which was the major cause of its permanent budget deficit. Furthermore, the Greek constitution bans parliamentary scrutiny of the national defense budget, which means many expenses of the government can be hidden and run through the military. It turned out that the defense budget incurred massive unpaid debts, including a withheld payment to a German manufacturing syndicate for four submarines that didn’t work.
Once more hidden spending was revealed, the official national debt figure increased. The IMF and the ECB insisted on the government ceasing to offer subsidies to state-owned enterprises. The result of these measures was a collapse in infrastructure investment and an increase in charges for utilities.
These two factors both increased the figure of the national debt and reduced the country’s GDP. Economists are not so interested in the absolute value of a country’s debt, but examine debt as a proportion of the nation’s income, which is called Gross Domestic Product, or “GDP.”
Higher debt, combined with lower GDP greatly increased Greece’s debt-to-GDP ratio. The graph below shows how the Greek debt-to-GDP ratio has risen since the “bail out” began.
In 2007, before the crisis struck, the nation’s debt to GDP ratio was 103.7%. This could be considered high. However, after the creditor haircut, the IMF assistance, and the ECB loans, Greece’s debt to GDP ratio reached 178.6%, having reached 180.8% in 2016.
Now, the majority of Greece’s national debt is owed to the IMF, the ECB, and various EU schemes. One condition of these loan contracts was that the Greek government will not be allowed to demand a haircut from those creditors. The Greek bailout didn’t offer the country a way out of its debt, which, in terms of a percentage of GDP is now the second highest in the world after Japan.
What facts should you know about Greece’s national debt?