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Greece – a Varoufakis Conversion

Cook, C. (2015) “Greece – a Varoufakis Conversion“, Pieria Online, 06 Φεβρουαρίου.


Greece’s new Syriza government has two major economic challenges to address: a Resolution of Greece’s unsustainable debt burden followed by a Transition to a long term sustainable economy.

Conventional resolution of sovereign debt is a debt for debt swap: replacing existing debt with new debt which requires a smaller percentage of Greece’s national income and resources to service.

So it is that Greek finance minister Yanis Varoufakis has already tabled a proposal for two new types of debt, one linked to GDP for the IMF and holders of Greek sovereign debt, and the other of perpetual debt, which would replace Greek debt held by the ECB and which would be repaid as and when Greece is in a position to do so.

During 2014 the average duration of Greek liabilities was about 16 years, and the interest payments by Greece required (net) some 2.6% of GDP to service.

This proposal is for a conversion of the existing dated ‘debt’ liabilities into a modern form of the undated credit instruments (‘stock’) which pre-date modern banking by hundreds, if not thousands of years.

The Proposal

Firstly, Greece would dedicate an agreed proportion of tax income to long term funding. Let us say 5% of Greek tax income and an initial allocation of €12bn.

Greece then issues stock (undated credit instruments) at a discount, each of which is returnable in payment for €1.00 of Greece’s taxes. This new issuance would then be allocated between the different creditors in a way reflecting the repayment date and interest rate of Greek liabilities.

From then on Greece would use 5% of its tax income to buy back this stock for cancellation, and the faster the growth of Greek GDP and taxation, the faster would be the rate of return of the stock.


Greece has existing aggregate public liabilities of €320 billion (rounded up to the nearest €10bn).

Let us say that Greece exchanges 480 billion prepay tax credits of €1.00 value each for the outstanding €320 billion debt. The holders of these instruments will make an aggregate profit of €160 billion or 50% when these instruments are returned by being bought back at €1.00 par value.

The rate of return per annum then depends upon how many years it takes for Greece to buy back these instruments. At a constant GDP/rate of tax collection this will take 40 years (€480bn divided by initial tax allocation of €12bn).

So the rate of return will be 50% profit divided by 40 years or 1.25% per annum.

If tax collections fall (a separate subject to be addressed under the Transition heading) the rate of return will be less (slower), while if tax collections rise, whether from increased GDP or more effective tax collection or both, then the rate of return will be higher (faster).


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