Wednesday, February 4, 2015

The redundant fictions of Greek debt

by Edward Hadas


February 4, 2015

Greece has a lot of problems. No one would argue about some of them. GDP is too low, the unemployment rate is too high and the new Syriza government is untried. The question of whether the country has excessive sovereign debt is another matter. There is a heated debate, which is marred by the refusal to recognise four truths.

The first ignored fact is that net present value (NPV) is the only fair way to value bonds. The idea and the calculations are familiar to those who work in finance. For anyone else, it is enough to know that the lower the interest rate on a bond, the lower the true value.

When non-Greek politicians proclaim that they will never accept any reduction in the value of the Greek debt they hold, they aren’t telling the truth: they already have accepted a substantial write-off of the NPV, and they are mostly willing to accept more. Insistence on the sanctity of the principal amount may make domestic political sense in Germany or France – just as Greek voters loved the apparently now abandoned insistence on a reduction of that value. But both sides are promoting a false economics.


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