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Friday, October 14, 2011

Mr. Sallas on a bigger haircut for Greece

Mr. Sallas is right to object to a biggerhaircut. In fact, Greece should reject any form of a haircut altogether.

First of all, a haircut for a country of the First World (and as a EU and Eurozone member Greece is such a country!) after only 3 years of crisis would be an irresponsible precedent where no one could foresee its longer term implications. Clearly, that should be more of a concern to the EU-elites than to Greece. Greece, however, needs to consider the following: the stain of a haircut cannot be shed for decades, if ever. Lenin allegedly once said that one of the greatest mistakes of his revolution was to repudiate the debt of Tsarist Russia. Greece certainly does not want under any circumstances to be marked with such a stain. Actually, if Greece is formally offered a haircut, she should refuse to accept it!

To the foreign bankers who pride themselves for having generously agreed to a 21% haircut on July 21, Greece should say: “Sorry, you don’t seriously believe that we don’t know how to make NPV-calculations; that we don’t understand that your cited 21% haircut is at best a 10% haircut on nominal value while the rest of your exposure becomes EU-risk; or do you? You don’t really want us to believe that a 10% haircut on nominal is great generosity when that paper is presently worth in the market perhaps 50%; or do you?”

And, finally, Greece must bear in mind that she is far from being a basket case. The state has, according to the Troika, about 50 billion EUR in corporate assets which can be sold near-term (in the next 2-4 years). Longer-term, that potential is assessed in the triple-3 digit figures. Greeks have domestic deposits of roughly 200 billion EUR (not to mention their foreign deposits of several hundred billion EUR). Greeks probably have additional billions of EUR hidden under their mattresses. Open your eyes to see how much domestic real estate the wealthier Greeks own. Open GoogleEarth to see how many swimming pools are on roof tops of Athens. Or quite mundanely, just think of the yachts in your harbors and the luxury cars on your streets.

The premier Austrian newspaper published today a commentary with the headline: “Greeks deserve the Nobel Prize in Economics”. The underlying theme was that Greece – if given a haircut – has accomplished an outstanding job at cheating the savers of other countries out of a couple of hundred billion EUR.

Is this the reputation you want to live with for the next generations? I can’t imagine that it is. Particularly since the budget deficit is primarily a revenue problem and not an expenditure problem. Greece's government expenditures are definitely not out of control when comparing them to other countries. Greece's are 49% of GDP, Austria's are 53% and France's are 56%. Government revenues, on the other hand, are only 39% of GDP in Greece (compared with 48% in Austria and 53% in France).

Doe Greece really want to live with the blame that she had to be forgiven debt because she was incapable of collecting taxes?

So move forward and offer your creditors a rescheduling of your debt without a haircut. Reschedule half of it for at least 30 years with interest to be capitalized (that would be economically equivalent to a haircut for 30 years). Reschedule the rest for shorter periods. But under no circumstances to anything which will haunt not only the next but the next several generations of Greeks!

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