The Dictionary of Debt (VI): Odious Debt, Primary Deficit, PSI, Secondary Bond Markets


Odious Debt:

Under a UN proposal (of April 2010) a debt is considered odious not only if it is product of a suspicious exchange, but whenever its repayment involves the circumvention, violation or abolition of basic human rights. Whenever a country has to destroy jobs and cut people’s incomes, cut social and public spending, and sell off public wealth in order to repay creditors, then its debt is odious, and its repayment must be denied. This proposal was accepted by a majority at the General Assembly of the UN in 2010.

Primary Deficit:

The primary deficit, or surplus, is the net deficit which occurs when debt repayments (interest payments and debt servicing) are not included in the deficit calculation. If, for example we deduct the state’s expenditure (for wages, pensions of civil servants etc) from its revenue (from taxes etc) and the result is positive, then there is a primary surplus; but after deducting debt servicing too, the government may run an overall deficit.

One of the basic conditionalities imposed by the Troika on Greece was that the government should run a primary budget surplus by 2013, so that debt is repaid smoothly. In reality this means cutting pubic expenditure on wages, pensions and social services. The 2012 budget includes 17.9 billion euros for interest payments alone, much more than the cost of wages and pensions combined! Government claims that the PSI (‘haircut’) will reduce interest payments are rubbish!

PSI (private sector involvement) – the bond exchange programme of Greek debt:

The recognition that Greek public debt is unsustainable led to negotiations for a bond exchange. The PSI decision was part of the 26/7th October 2011 agreement, after the failed agreement in July for a 21% haircut. It involves the “voluntary” participation of private lenders, who accept swapping the titles they hold for new ones, of 50% lower nominal value (‘haircut’). From the total €325 bln of Greek debt, €92 bln is in the form of loans and €260 bln is in the form of bonds. Private bondholders, covered by the PSI, hold around €205 bln of the latter, with the ECB holding the remaining €55 bln.

The PSI reduction to the public debt will be small and unevenly distributed; for example, the debt held by the Troika and the bonds held by the ECB are exempted. An eventual ECB contribution to the PSI is key to the latest negotiations, whose results will be announced shortly. Direct victims of the haircut are the pension funds, that lose half their reserves (around €24 bln, invested under government orders in state bonds). The haircut puts the final nail in the coffin of the pension system.

The new guaranteed bonds, issued to replace the old ones, will not be governed by Greek law, but by English and Luxembourg law, further strengthening the creditors’ position, as these legal jurisdictions are renound for being creditor friendly. The rate of interest is a central element of the negotiations; the Eurogroup, refusing an interest rate of over 4%, threatens the entire deal, since the bondholders presently don’t accept anything less.

Because the PSI agreement is accompanied by €130 bln worth of new loans the expected reduction in debt will be much less than promised, and total public debt will even increase! Of these €130 bln, €50 bln will recapitalise the banks, which hold €50 bln of government bonds. On the other hand, Greek society will sink into poverty: new austerity measures, reductions in wages, layoffs and privatisations. Promises to reduce debt to 120% of GDP in 2020 are hardly credible. If this debt level were sustainable, then why is Italy, currently having this level of public debt, asked to lower it? And why was Greece, which had this level of debt in 2009, forced to enter the ‘stabilisation programme’?

Secondary Bond Markets:

The markets in which already existing debt contracts are bought and sold. These exchanges happen:

(1) Between investors, for bond exchanges of companies, publicly listed or not.
(2) Between banks and investors, in government bonds and treasury bills, without the mediation of the official regulatory authority, or the stock market.

The secondary bond market is tightly controlled by “large institutional investors”, who are in a position to coercively influence the prices of bonds.

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