Is Greece's Debt Odious?

There is a legal concept called "odious debts."   It can be traced back more than a century.  The US helped create a precedent for it by denying Cuba's responsibility for the debt incurred under Spanish colonial rule.  The concept took on added significance in the post-colonial era more broadly.  

The issue here is the continuity of legal obligations from one regime to another especially as it pertains to the debt acquired.  The odious debt concept attempts to provide a moral and legal basis for rejecting in whole or part the debt incurred by the previous regime when the funds are used in ways that are not beneficial, or actually harmful, to the interests of the population.   Legal scholars also note that it is usually important to show whether or not the creditor knew or should have know of these circumstances at the time the credit was extended. 

The parallel on an individual level is coercion.  An obligation made under duress may not be enforceable.  It is not a legitimate debt.   Legal scholars cite several types of sovereign debt that can be odious.  Two common ones are "hostile debts" which are incurred to suppress a secessionist movement or to conquer peoples, and "war debts" which are contracted by a sovereign to finance a war that it loses and the victor is not obligated to pay the debt.  

If Greece's debt is odious, it does not fit into these two categories.  Yet the broad principles may still apply though the Syriza government has not explicitly called it such.  Both Greece's Prime Minister Tsipras and Finance Minister Varoufakis have argued that the previous governments should not have borrowed the funds that could obviously not be paid back.  Other reports have indicated that the IMF violated its own lending rules by extending so much credit to the Greece.   DSK reportedly overruled staff and US objections.  There have also been reports indicating that the EU was well aware before the crisis had erupted that Greek figures did not add up but closed a blind eye due to narrow political considerations.

The Syriza government can make the case that funds borrowed since the 2010 were odious and against the interests of the people.  The bulk of the new debt has been used to service past debt.  Through the SMP program, ECB bought out many private foreign creditors and then claims that the debt is exempt from the debt restructuring (PSI).   A number of European officials have acknowledged that the new debt incurred by Greece was to keep its creditors whole. 

The Greek people have not been bailed out.  Unemployment has increased three-fold while the economy has contracted by a quarter.  With deflation, nominal growth has collapsed and continues to contract, even though real growth was positive in the middle of 2014.  Minimum wages and pensions have been cut, and living standards have been reduced. 

Whether Greece's debt can be considered odious is a thorny legal issue and well beyond the competence of this currency strategist.    The Syriza government has not claimed that it is odious.  Nevertheless, its arguments are consistent with some of the precedent that has been established.   Perhaps, if the official creditors continue to balk at extending Greece credit, this could be a course that it may consider.  Tsipras has threatened not to service its debt if the creditors do not release new funds.  

There are two drains on the liquidity of Greek banks.  First, deposits have plummeted by about 5%  (a month in the December-February period (for a total draw down of almost 24 bln euros) Although the flight appeared to slow earlier this month, an estimated 1.5 bln euro fled last week.  Second, interbank funding has dried up.  It fell by almost 29 bln euros in the same three month period, which is a 69% decline.  The Greek central bank is offsetting this drying up of credit by providing 59.4 bln of liquidity through the ELA facility.

Tomorrow the EuroWorking Group will hold a teleconference to review the reform list submitted by the Greek government.  Greek officials sounded optimistic when they submitted the first two lists of reforms that were rejected.   European officials seem less optimistic; while progress has been made, more work is needed.  The signals appear most likely new funds will not be released to Greece in time for the April 8 IMF payment of roughly 450 mln euros (really an SDR obligation).   Greek officials have intimated that they have a back plan of 1) additional reforms if needed, and 2) a way to service the IMF debt.