17/07/17: Debt Relief v Payments Relief: A Lesson Ireland Should Have Learned

An interesting study looked into two sets of debt relief measures:

1. Immediate payment reductions to target short-run liquidity constraints and 
2. Delayed debt write-downs to target long-run debt constraints.

It is worth noting that the first measure was roughly similar to the majority of 'sustainable debt resolution' measures introduced in Ireland (e.g. temporary relief on payments, split mortgages, etc) that temporarily delay repayments at the full rate. Even worse, in Irish case, policy instruments that delay repayments are generally associated with roll up of unpaid debt and in some cases, with interest on the unpaid debt, thus increasing life-cycle level of indebtedness. 

The second set of measures used in the NBER study are broadly consistent with debt forgiveness measures, where actual debt reduction took place at both the principal and interest levels.

So what did NBER study find?

"We find that the debt write-downs significantly improved both financial and labor market outcomes despite not taking effect for three to five years. In sharp contrast, there were no positive effects of the more immediate payment reductions. These results run counter to the widespread view that financial distress is largely the result of short-run constraints."

In other words, it appears that empirical evidence supports debt relief, as opposed to temporary payments reductions. Irish banks and authorities, in continuing to insist on preferences for temporary relief measures are simply driven by pure self interest - protecting banks' balancesheets - not by a desire to deliver a common good, such as speedier recovery of the heavily indebted households. 

Study link here: http://www.nber.org/papers/w23545.

Specifically, for debt relief: "For the highest-debt borrowers, the median debt write-down in the treatment group increased the probability of finishing a repayment program by 1.62 percentage points (11.89 percent) and decreased the probability of filing for bankruptcy by 1.33 percentage points (9.36 percent). The probability of having collections debt also decreased by 1.25 percentage points (3.19 percent) for these high-debt borrowers, while the probability of being employed increased by 1.66 percentage points (2.12 percent). The estimated effects of the debt write-downs for credit scores, earnings, and 401k contributions are smaller and not statistically significant. Taken together, however, our results indicate that there are significant benefits of debt relief targeting long-run debt overhang in our setting".

For repayment relief: "we find no positive effects of the minimum payment reductions targeting short-run liquidity constraints. There was no discernible effect of the payment reductions on completing the repayment program... The median payment reduction in the treatment group also increased the probability of filing for bankruptcy in this sample by a statistically insignificant 0.70 percentage points (6.76 percent) and increased the probability of having collections debt by a statistically significant 1.40 percentage points (3.56 percent). There are also no detectable positive effects of the payment reductions on credit scores, employment, earnings, or 401k contributions. In sum, there is no evidence that borrowers in our sample benefited from the minimum payment reductions, and even some evidence that borrowers seem to have been hurt by these reductions."

Why did payment relief not work? "The payments reductions increased the length of the repayment program in the treatment group by an average of four months and, as a result, increased the number of months where a treated borrower could be hit by an adverse shock that causes default (e.g., job loss)."

Now, imagine the Irish authorities arguing that no such shocks can impact over-indebted households over 10-20 years the repayment relief schemes, such as split mortgages or temporarily reduced repayments, are designed to operate. 

14/8/15: IMF on Two Unfinished Bits of Greek Bailout 3.0

IMF's Ms. Christine Lagarde statement on Greece:

Key points are:

1) Per Lagarde, “of critical importance for Greece’s ability to return to a sustainable fiscal and growth path", "the specification of remaining parametric fiscal measures, not least a sizeable package of pension reforms, needed to underpin the program’s still-ambitious medium-term primary surplus target and additional measures to decisively improve confidence in the banking sector—the government needs some more time to develop its program in more detail." In other words, the path to Eurogroup's 3.5% long term primary surplus target on which everything (repeat - everything) as far as fiscal targets go, hinges is not yet specified in full. The Holy Grail is not in sight, yet...

2) "…I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own. Thus, it is equally critical …that Greece’s European partners make concrete commitments in the context of the first review of the ESM program to provide significant debt relief, well beyond what has been considered so far." In simple terms, for all the lingo pouring out of the Eurogroup tonight, Greece has not been fixed, its debt remains unsustainable for now and the IMF - which ESM Regling said tonight will be expected to chip into the Bailout 3.0 later this autumn - is still unsatisfied with the programme.

"Significant debt relief" - off the table so far per Eurogroup - is still IMF's default setting.

5/1/2015: IMF on Debt Relief for Greece: Repeating the Repeats

Much of talk nowadays from the European leaders on Greek debt situation and the link to political crisis in the country. Some conversations are about lack of potential contagion from Grexit, other conversations are about the right of the Greeks to decide on their next Government, whilst all conversations contain references to the new Government having to abide by the previous commitments. Which is fine. Except, what about the European partners commitments? Specifically one commitment - relating to further debt relief for the country?

Here is 2013 IMF assessment of the Greek situation (emphasis in italics is mine):

"47. The program continues to satisfy the substantive criteria for exceptional access but with little to no margin. Delays in the implementation of structural reforms raise concerns about the capacity of the authorities to implement the program in a difficult political environment. …The continued commitment of euro area member states to support Greece, including by providing additional official financing to fill future financing gaps and through further debt relief as necessary, is an essential part of meeting the criteria."

And then:

"48. …The program is fully financed through July 2014, but a projected financing gap will open up in August 2014. Thus, under staff’s current projections, additional financing will need to be identified by the time of the fifth review, to keep the program fully financed on a 12-month forward basis. The Eurogroup has initiated discussions on how to eliminate the projected financing gaps. In this regard, the Eurogroup’s commitment in February and November 2012 to provide adequate support to Greece during the life of the program and beyond, provided that Greece fully complies with the program, is particularly important."

For some more on debt relief:

"55. As noted in the third review staff report, debt sustainability concerns continue to remain a risk. …The commitment of Greece’s European partners to provide debt relief as needed to keep debt on the programmed path remains, therefore, a critical part of the program. But the programmed path entails still very high debt well into the next decade, leaving Greece accident prone for an extended period. Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed."

And

"56. …The program remains subject to numerous risks, mainly from the worsening of the macro outlook combined with a further deterioration in banking sector assets (feeding back to the real economy), difficulties with the implementation of ambitious fiscal policy and administrative changes, and—above all—failure once again to ensure a reinvigoration of structural reforms in the face of strong resistance from vested interests. Absent a critical mass of structural reforms that would transform the investment climate, the growth outlook—and, therefore, crucially the assumptions regarding financing needs for the rest of the program period and the debt path—would not materialize. Externally, closing financing gaps and delivering on the commitment to reduce debt will be a test of European support."

And in Box 4, Criterion 2:
" …In light of the commitments from euro area member states to provide additional debt relief as necessary, the baseline debt trajectory is sustainable in the medium-term but subject to significant risks."

Link to the above: http://www.imf.org/external/pubs/ft/scr/2013/cr13241.pdf


But there are more statements from the IMF on the issue of debt relief for Greece.

Take for example Transcript of a Press Briefing by William Murray, Deputy Spokesman, International Monetary Fund, from September 11, 2014 (http://www.imf.org/external/np/tr/2014/tr091114.htm):

"QUESTIONER: You told us many times from this podium that the issue of the Greek debt will be discussed at the sixth review. As I understand this, it's going to begin at the end of the month. The Euro Group said on Monday that the debate will begin after the sixth review. What we want to hear is that are the discussions about the financing of the Greek program and about the debt, still proceeding on an orderly way as you told us before many times? And what is your plan or your strategy for the Greek debt? Is there an option of those talks between you and the Europeans? Are the Europeans onboard to discuss this big problem for Greece?

MR. MURRAY: ...I do want to remind you and others what we have said all along. There is an agreed framework in place for ensuring debt sustainability with Greece's European partners agreeing to provide any additional debt relief as needed to help bring Greece's debt down to 124 percent of GDP by 2020. And to substantially below 110 percent of GDP by 2022 as long as Greece continues to deliver on its program commitments."

Now, IMF estimates debt/GDP ratio for Greece to be at 170% of GDP. Which means that over the next 5 years, the programme will have to deliver debt.GDP ratio reduction of a massive 50 percentage points. How on earth can this be achieved without debt relief is anyone's guess.

And more: Interview by Greece’s newspaper Ethnos with IMF Mission Chief for Greece, Poul Thomsen, published in Ethnos, June 15, 2014 (http://www.imf.org/external/np/vc/2014/061514.htm):

"QUESTION: You talk constantly about the commitment of Europeans regarding the financing needs of Greece and Greek debt relief. If Europeans do not show the determination needed or the courage to take bold decisions, like last time, what is the IMF planning to do?

ANSWER: We are confident that the European partners will deliver on their commitments. Do you believe that Greece's debt is now sustainable or do you believe that the situation needs new and drastic interventions? Are European commitments to contribute to debt relief enough for the IMF? What could the potential tools for debt relief be? The agreed framework is credible, provided that Greece and its European partners deliver on their promises. For Greece, this means continuing to advance reforms and achieving and maintaining a fiscal primary surplus of 4.5 percent of GDP. For the European partners, this means providing additional debt relief, if required, to keep debt on the programmed path. Thus, if adhered to, the framework will make the debt sustainable."

So 4.5% primary surplus over 5 years - even if achieved, will deliver somewhere in the neighbourhood of 1/2 of the required debt adjustment. The rest, presumably, will have to be achieved via economic growth, which will have to be running, on average, at 4% per annum to provide for the adjustment planned. And, thus, do tell me if the above any realistic, let alone probabilistically plausible.

In its 5th (most recent) assessment of the Greek situation, IMF reiterated (paragraph 49) that "The continued commitment of euro area member states to support Greece, including by providing additional official financing to fill future financing and through further debt relief as necessary, is an essential part of meeting the criteria" for debt sustainability. (see http://www.imf.org/external/pubs/ft/scr/2014/cr14151.pdf)

And it also carries Greek authorities expectation of the European funders agreement to further debt relief: "The program is fully financed through the next twelve months. Firm commitments are also in place thereafter from our euro area partners to provide adequate support during the program period and beyond, provided that we comply fully with the requirements and objectives of the program. In this regard, we remain on track to receive the first phase of conditional debt relief from our European partners, as described in the Eurogroup statements of November 27 and December 13, 2012." (page 71)

The same was stated in May 2014 Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding from the Greek authorities (see: http://www.imf.org/external/np/loi/2014/grc/051414.pdf). On foot of the IMF press conference statement on same (see: http://www.imf.org/external/np/tr/2014/tr050814.htm).

And so on, to no end and… no closure from the European partners…

13/1/2014: Seeking MEPs support for legacy debt resolution?

Today, Irish Times is covering the intention of the Minister Noonan to seek support for a retrospective debt deal for Ireland from the EU MEPs. Here's the full article: http://www.irishtimes.com/news/politics/noonan-to-seek-meps-support-for-debt-relief-over-banks-1.1652911

Couple of thoughts in relation to this intention:

1. This is the 7th year since the ill-fated banks guarantee that started the process of transfer of banking sector losses away from (some) investors in the banks (majority of unsecured and all secured and senior bondholders)  to the taxpayers. This, it appears, is the first instance in which the Irish Government is officially attempting to enlist support for the retroactive resolution of these transfers from the EU MEPs. Why? The Ireland Says No campaign of ordinary citizens and residents of the state have requested such assistance in a number of meetings with the MEPs. People like myself, whenever asked to brief the MEPs on the issues relating to the banking crisis have done so on a number of occasions. Irish Government, it seems, is only now coming around to a realisation that having MEPs support can be of value in addressing the problem? Why? I spoke to the ECON committee members some 6-8 months ago and asked them to support Ireland's efforts. Why is the Irish Government only now officially attempting to do the same?
2. Per article: "The argument that Ireland’s significantly high debt to GDP ratio of almost 120 per cent means that it needs further debt relief has emerged in recent months as a key strand of the Government’s campaign to secure support on legacy bank debt." Why? Sustainability of our debt has been , allegedly, tested by the Department of Finance, by the Central Bank, the Troika etc, and yet none of these entities and organisations ever once voiced any serious concern with sustainability of debt. How can the same Government that continues to claim that everything is sustainable, that Ireland is in a recovery, that we will repay every red cent of our debts etc etc etc now turn around and credibly claim that "it needs further debt relief"? What has changed "in recent months" to alter Government position? Did Government alter its position?
3. In June 2012, Irish Government announced that it has reached - claiming its own effort to credit - a 'seismic deal'. There were no qualifiers used, no caution given, no room for 'may be it won't happen' doubts allowed. The deal was the deal and that was it: Ireland was to get retroactive debt relief. Since June 2012, this 'seismic' deal was thrown like a proverbial banana peel into every gathering of voices doubting the Government achievement or debt sustainability dogma. And now, is Minister Noonan finally admitting there is no deal? Because if the deal is just a matter of time - an 'when' not an 'if' - and has only to wait until the SSM comes into force, then why does Minister Noonan need the MEPs support?

Lastly, as the readers know, this blog position has been that Ireland's total economic debt levels (household, Government and non-financial corporate, combined) are not sustainable. Non-sustainability  of debt in the context of my arguments always involved the view that Ireland is facing a choice: either fund current levels of debt and face long term structural collapse of growth in this economy, or we will need to restructure our debts. In terms of restructuring our debts, I have consistently suggested that the best target would be banks liabilities. The opposing side in the argument always put forward the planned/projected declines in debt/GDP ratio starting with 2014 as a sign of debt sustainability. the cost of such 'reductions' in debt liabilities on the economy (growth and investment effects) and society (health, psychological costs, social costs etc) never phased those who argued that the debt is sustainable. The Government has expended significant effort attempting to argue against the view that our debt is not sustainable. Is the same Government now directly agreeing with the positions they disputed? Are they really saying that we are facing a risk to our debt sustainability?

Setting aside the above issues, if Minister Noonan is indeed committed to seeking MEPs support for a retroactive debt relief for Ireland in relation to the debts related to our banking crisis, I am happy to help in any way I can. it's been long (too long) overdue.