Varoufakis and the 2015 debt talks – behind closed doors

A few days ago, when Greece's former finance minister Yanis Varoufakis wrote about the “parallel payment system” he had been preparing in 2015, he argued that its implementation would have enhanced the government’s negotiating position with international creditors.

“If they know about this, it will be more difficult for them to try to strangle us, since they will not be able to rely on the conviction that we will back off and capitulate over the big issue at stake, which is the restructuring of the Greek debt, if they threaten us with the closure of the banks,” he alleges to have told the Greek cabinet about the creditors.

In the name of this “big issue,” the Holy Grail of the ruling leftists SYRIZA, Varoufakis pushed the negotiation process to the extremes, with terrible consequences for the Greek people and the Greek economy.

His constant refrain ever since has been that his “conscience would not allow him to sign an agreement that would keep Greece stuck in a state of stalemate and bankruptcy.” SYRIZA used to severely criticize former conservative prime minister Antonis Samaras and ex-finance minister Evangelos Venizelos of socialist PASOK, both before the January 2015 elections and after the leftists came to power, for suggesting that the Greek debt had been brought onto the path of sustainability thanks to the PSI (Private Sector Involvement) writedown of privately held debt.

However, a document (see link below) that had been circulated by the Greek side at a Eurogroup meeting on February 16, 2015, which is at Kathimerini’s disposal, shows that Varoufakis, despite his public pronouncements, was much closer to the positions of the reviled Samaras and Venizelos.

In this document, the debt-to-GDP ratio is calculated in terms of net present value and estimated at 135 percent. The document dating from just three weeks after the elections – and repeatedly citing the head of the European Stability Mechanism, Klaus Regling – states in a special appendix that: “The misunderstanding regarding Greece's solvency is owed to the fact that the blunt 175 percent debt-to-GDP number does not fully describe the actual burden of public debt over the Greek economy.” The borrowing conditions of the European Financial Stability Facility (EFSF) as well as Greek Loan Facility (GLF) loans (the latter being the bilateral arrangements of the first bailout) are characterized as highly concessionary.

So, the question inevitably arises: if Varoufakis believed all this, then why did he lead the country to the brink of absolute disaster, while dramatically exacerbating Greece’s debt-servicing prospects?

An investor's view

Paul B. Kazarian, the CEO of Japonica Partners, which is one of the largest private holders of Greek government bonds, is infuriated with Varoufakis’s behavior.

In June 2015, Japonica conducted an analysis of the Finance Ministry’s proposal for debt restructuring (through the revaluation of EFSF and GLF loans and the repurchasing of International Monetary Fund loans utilizing the projected profits of the European Central Bank's SMP bond-buying program). According to the analysis, Varoufakis’s proposal would more than triple cash interest payments in 2015 by 6.5 billion euros.

Japonica discovered a multitude of errors and unrealistic estimates in the Greek proposal, concluding that it did not appear to conform to either international accounting standards or government finance statistics methodologies. The analysis specifically highlighted the ministry’s statement that the Varoufakis proposal did not involve a nominal haircut of Greece's obligations and that there would be no cost to creditors, while fully disproving these claims.

“I had offered to give $100,000 to his favorite charity if he would debate me in public, but he declined,” said Kazarian about the former minister. “It was a crime of premeditation, he destroyed the banking system – all for his own personal aggrandizement.”

The Armenian-American investor places Varoufakis in a category for which he reserves particular scorn: theoreticians. “They don’t know about accounting and financial management,” he said.

Kazarian places the few remaining debt “reality-denying” economists and politicians promising more debt relief in the same category, noting that the prospects for additional debt relief from the European creditors should only be viewed as insurance if all reforms are executed in a timely manner and GDP does not meet the growth targets.

Kazarian contends that he has not sold a single euro of the Greek government bonds he bought approximately five years ago. Would he buy more in a new issue? “Yes, we and other long-term holders would buy if there was a commitment to adopt international accounting standards,” according to which, he says, Greece's debt-to-GDP ratio is a mere 75 percent.

Adopting international accounting standards, he insists, would be a crucial reform in order to attract the big sovereign wealth funds, which today are absent from the Greek government bond market. As regards the issuance of new bonds, he believes that a “reasonable goal” would be 5 billion euros in 10-year bonds with a 3.9 percent yield in July or August.