Greek Debt Deal, 2012.11.27 Will Cost €25K Per Greek Taxpayer Over 9 Years.

Christine Lagarde of the IMF has been quoted as saying the Greek government can expect its debt to be well below 110% of GDP by 2022 but is that realistic?

Key Figures Over The Next 9 Years

1 – 16% of Greek GDP will go to government debt servicing

2 – Over 50% of government tax revenue will go to debt servicing

Lets look at the figures as of today.

The Greek government has a debt load of 417 billion Euros as of June 2012.

Greek GDP is around 238 billion Euros in 2012.

Looking at forecasts carried out by Eurobank Greece can expect its GDP to be 354.62 billion Euros in 2022 (assuming 4.5% annual economic growth).

Table 1.1 – Greece: debt sustainability analysis (revised “baseline” scenario)
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Nominal GDP growth (%) -6.1 -6.5 -5.4 0.2 3.2 4.9 4.9 5 4.9 4.7 4.4 4.1
Primary balance (% GDP) 2.3 1.5 0 1.5 3 4.5 4.5 4.5 4.5 4.5 4.5 4.5
Avrg interest rate on debt (%) 4.5 3 2.8 3.1 3.7 3.7 3.7 3.7 3.7 3.7 3.8 3.8
Stock flow adjustment (% GDP) 3.6 12.6 2.7 3.2 3.4 2.6 1.6 1.6 1.6 1.7 0.6 0.1
Gross public debt (% of GDP) 170.6 176.8 189.4 190.1 184.7 175.7 167.5 159.4 151.6 144 138 133
Projections Source: EC,ECB, IMF, Eurobank Research

A debt to GDP ratio of 110% would mean a Greek government debt load of 390 billion Euros in 2022.

According to Eurobank the Greek government can expect its debt load to increase by around 14% in 2013.

So for 2013 we have a debt load of 475 billion Euros.

With a 110% Debt to GDP ratio the Greek taxpayer will have to pay back 85 billion Euros over 9 years at an interest rate of   3.7%, again using Eurobank figures.

Given the time period, the interest rate and the amount to be paid back the calculation works out at a total debt repayment of

918,630,225.75 Euros per month

Made up of interest payments of 14,212,064,381.00 Euros

And a total debt repayment of 99,212,064,381.00 Euros

This works out as every working Greek paying 16,000 Euros over the next 9 years solely to bring the debt down to less than 110% of GDP.

So how realistic is it to expect the Greek taxpayer to pay 918.6 million Euros a month in debt servicing only?

Greece has a population of around 11 million people.

At the time of writing 25% of the working population is out of work and let’s imagine that unemployment will decrease until 2022 and average out over this 9 year period at 15% of the population unemployed.

14% of the Greek population is under 15 years of age.

20% of the Greek population are over 65 years old.

So taking all these figures together (34% of the population not of working age and 15% of the population of working age out of work) leaves  a working population 0f 6.17 million people.

A debt repayment of 918 million Euros a month works out at a debt load per person in Greece of 148 Euros per month.

GDP per capita in Greece is around 10,000 Euros per year or 833 Euros per month.

Given that 56.1% of the Greek population is in work this works out at an average GDP per working person in Greece as 1484 Euros per month.

This works out at the average working Greek paying 10% of their income solely to reduce the debt to 110% of GDP and excludes all other debt servicing and other government costs.

Currently the Greek population pay around 30% of their personal GDP in taxes.

So the personal cost for the average working Greek will see 30% off all the tax they pay going to pay down government’s debt leaving 20% of the average Greeks GDP being used for all other government expenses.

6% of government tax revenue is used to service the national debt in the UK and in reality this figure is smaller but if we assume the debt servicing costs on the remaining government debt is 6% it leaves 14% of the personal GDP to be used to pay for all other government services in Greece.

Is it a realistic proposition for 16% of the personal income of every working Greek to be used to service debt. Does this enable economic growth? Does it allow Greece to build a solid foundation for the future? Does it makes Greeks better off than if the government defaulted on its debt?

Are the Eurobank/EU/ECB figures realistic?

Are Lagarde’s predictions/forecast for Greece in any way realistic. Eurogroup. Image Source: http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_27/11/2012_471717

With regards to the Eurobank figures. It has hard to imagine Greek interest rates being so low until 2022. It is also hard to be so optimistic about the growth of the Greek economy given it is still shrinking at an accelerated rate and this is before the new tax increases and benefit and welfare cuts.

In summary, even if it is possible to suppress the interest rates on Greek debt for 9 years and even if it is possible for the Greek government to pass all the measures it promises it only takes us back to the figures I have just outlined and these are the best case scenario as far as the Eurogroup is concerned.

Any further contraction of the Greek economy, any increase in number unemployed, any reduction in tax revenues will blow this agreement out of the water.

And these figures do not even take into consideration the Greek trade deficit which conservatively will take 1 billion Euros a month out of the Greek economy or in other words, with no money printing the trade deficit on its own is enough to shrink the Greek economy by 5% every year.

Is It A Good Deal For Greeks?

Going back to the figure I highlighted earlier.

The cost to the average working Greek will be around 16,000 Euros over the next 9 years. Would the average Greek be better off if the government defaulted on its debt and allowing working Greeks to keep this 16,000 Euros?

And in reality the potential savings for the Greek taxpayer is more than 16,000 Euros. It is hard to imagine that the Greek government would not want to right down the majority of its debt meaning that not only would Greek taxpayers save 16,000 Euro over the next 9 years they will also save on the debt servicing costs on the remaining government debt which is easily half as much again, lets call it 24,000 Euro total.

Summary

In summary it is highly debatable whether a Greek taxpayer will be better off paying 24,000 Euros over the next 9 years as opposed to spending that money themselves inside Greece.

The fact that even this 24,000 Euro cost prediction is extremely optimistic and will fall apart under the slightest pressure of increasing interest rates of slow GDP growth makes the whole situation seem all the more absurd. The fact that nothing is being mentioned about the trade deficit which in itself can contract the Greek economy by 5% per year is the cherry on a very silly cake.

I do not believe this deal is going to withstand even a year of economic reality let alone 9 years.

The interest rate on government debt in Europe is at 300 year lows (YouTube forward to 9.00 minutes), interest rates have only one way to go from here and that is up. The slightest increase in interest rates is not only going to send the Greek government’s debt plan back to the drawing board it is going to put many of the biggest economies in Europe in severe trouble and I am including Spain, Italy, France and the UK.

I believe Greek taxpayers would be better off supporting a Greek government default. If the Greek government continues to be propped up as it is by outside money it is going to lead to countless Greeks losing their assets due to the default on taxes to the states and debts to creditors in general.

Putting the Greek government on life support is paving the way for the wholesale assets stripping of the Greek private sector and it is doing immeasurable damage to the Greek private sector.

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