In August 2015, the world witnessed something that leftist Greek politicians had been begging for, a substantial and forward-looking debt write-off. The catch, however, was that this debt restructuring deal was not for our sun-swathed Mediterranean partners in the EU, but for a country torn apart by a civil war ravaging over the majority of the past three years: Ukraine.
With the war in the east showing no end in sight, the world saw the economic prosperity of an over-resourced but under-utilised nation come to its knee’s. Since the beginning of 2013 to early 2015, the debt to GDP ratio in the Ukraine rose from 40% up to 100%. Foreign exchange reserves were becoming the predominant method of debt-repayment and had dwindled from the highs of $39.8 billion in 2011 to a low of $5.6 billion in February of this year. The IMF was already pledging a $40 billion support fund, but without a debt restructuring deal, the country would have defaulted on payments due in this second half of the year.
Greece, like Ukraine, faces a similar fate. The country has repeatedly been on the brink of default since the first European bailout of 2010. Greek bonds are at junk bond status. With massive austerity alongside the European bailout packages, the prospects of a safe and secure life for the people on the ground in Greece moves further and further into the future. The leftist movement, promising less austerity and greater power has effectively swallowed the country into a make or break situation, with politicians demanding more than ever that a debt restructuring is on the cards.
So why can’t we just do what we did with Ukraine? One must investigate the facts…
What is the Deal for Ukraine?
Effectively, Ukraine’s sovereign debt restructuring was only privately held debts of approximately $18bn. Making it easier for Lazard, their sovereign advisers, this debt was primarily held by four difference investment managers – BTG Pactual Europe, Franklin Templeton, T. Rowe Price and TCW Group. Commencing in August 2015, The Ukraine received a 20% haircut on the $18bn owed in government bonds. Alongside this cut, they received a 4-year maturity extension (freeze) on debt repayments. These two factors allow the Ukrainian governing officials to focus on the civil war for the foreseeable future. However, interest rates on the bonds affected will rise to 0.5% to 7.75%. Furthermore, the Ukrainian official pro-EU government agreed to offer all private investors securities in return that pay an undisclosed percentage of economic growth from the year 2021.
Spot the Difference
Greece seems to be in a similar situation as their debt to GDP ratio ballooned to 138% in 2009 from 103% in 2008 and is currently hovering at a massive 171%. So why can’t they receive such a positive deal?
Effectively, by agreeing to this deal, investors have acknowledged that the situation in Ukraine is salvageable within the next few years. There are a few fundamental reasons why this the case of Greece differs:
1. Prior to the Crash
From the naked eye, Ukraine and Greece look similar in their situations at this stage. However, once you look under the skin, there are stark contrasts between them both.
Greece and Ukraine were at very different stages of economic development when they plunged into recession. Greece joined the Euro in 2001 and immediately confidence grew, ballooning the economy to pre-crisis levels in 2008. The government, however, had a tax regime that allowed for people to pay taxes at will, (and usually that ‘will’ was short-lived.) Greek governments were borrowing large swathes of money to fund economic growth.
Furthermore, they relied on the tourism sector as their primary source of income. In 2008, tourism to Greece dropped dramatically. The debt to GDP ratio therefore skyrocketed and unemployment shortly followed.
Ukraine, however, has been rife with corruption over the past 20 years with resources being underused and GDP per capita lower than any other ex-USSR nation. With large swaths of underused natural resources, Ukraine was able to keep their GDP to debt ratio low throughout the twenty years leading up to the economic crash.
This difference in the size of their debt to GDP ratios before economic terror is key to deciding whether a deal, like the one Ukraine has signed, is on the horizon for Greece. Investors can blame the burgeoning debt in Ukraine on the war but in Greece, the debt levels were exceptionally high before the crisis.
2. The Structure of Greek Debt
The structure of Greece’s debt pile is key to this debate. Greece’s privately held debt has mostly been consolidated by fellow European nations. This leaves the countries political partners in Europe to control Greece’s future prosperity. It leaves Germany and other countries to hold the debt as leverage to enforce austerity on an anti-austerity government.
This creates a deadly combination for leftist’s who call for a deal like Ukraine’s. Governments are not necessarily aimed towards the most suitable mechanism to solve the economic crisis, as they should do. The political agenda of austerity is clouding what is best for this deal.
3. Future prospects
The final aspect to look at is the prospect for future growth in the economy. Ukraine and Greece are in essentially in completely different situations.
Greece has more issues than positives to demonstrate future prospects. The countries economic growth leading up to 2008 was built on the backbone of tourism, however, as southern Spain has demonstrated in the past 20 years, this is incredibly unstable and fluctuates on preferences. The stagnating European economy looks unlikely to help grow these preferences. The only positive at this stage is that the depreciation of the euro will encourage more people to travel to Greece.
However, in the long term, low human capital and low quantities natural resources give little hope for large economic development and expansion past this point. Therefore, private investors are less than happy to deliver on cuts to their small share of the great debt pile.
Ukraine is the opposite, private investors are expecting to see the country deliver sustainable economic growth after this war has ended. The country is sitting on depths of natural resources and underused and unproductive capital. They are also motivated by a Ukraine that can enter the EU and benefit from liberal economic stimuli. This left the country in a healthy situation for negotiations.
So can Greece do a ‘Ukraine’?
A simple answer to our question would, therefore, have to be no.
One could say that there are limited commonalities between the two nations and two fundamental differences that create serious problems for the Greek government’s hard-line leftist stance. Firstly, the structure of Greece’s debt as held by fellow EU governments allow them to force political pressure on the country and secondly, private investors are turned away by the lack of foreseeable future growth and fundamental issues stemming from before the crisis.
The prospects for Greece look rather dire…
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