Mist of half-truths hanging over Greece

A NUMBER of presumptions about the state of Greece's economy have been consistently touted as axiomatic truths since the general election on Jan 25. Far from being corroborated evidence, these points need to be delved into in closer detail. It is commonly asserted that the Greek government will never be able to pay back its debt. This affirmation calls for some clarification. A government or state is not the same as either a household or a business. It does not have an overriding urge to reduce its borrowings to zero.

Indeed, modern-day economies, especially when it comes to monetary policy, would not work without public debt. So, the challenge facing a government is not to pay off its debt, but simply to be able to roll over or renew its borrowings regularly. This means when a bond comes to term, the government must be able to issue a new bond on acceptable terms and conditions (similar coupon rate) so it can reimburse those investors who had owned the maturing bond. Herein lies the nub of the problem for Greece.

In view of the clouds of uncertainty over Greece's future seat round the eurozone table, investors are insisting on being rewarded with sizeable risk premiums (from 16 per cent on a 3-year bond to 9 per cent on a 10-year maturity). Faced with such demands, Greece cannot realistically secure financing on capital markets. As things stand, 75 per cent of Greece's public debt is in the hands of public agencies (European Financial Stability Facility and the European Central Bank) which can offer Greece advantageous terms for its borrowings. The debt has been rescheduled onto much longer-dated maturities. Coupons have been steeply reduced. Gains earned from these Greek bonds owned by public bodies are, moreover, handed over to Greece.