How big a debt hole?

Photographer: Milos Bicanski/Getty Images

Greece Isn't 'Crying Wolf' on Debt Relief

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Paul Kazarian says he’s spent “tens of millions of dollars” mobilizing a team of a hundred analysts to scrutinize Greece’s assets and liabilities. According to him, everyone else -- including the International Monetary Fund, the credit-rating agencies, the European Union and the Greek government itself -- is massively overstating the problem of the nation’s debt burden relative to economic output. The problem is, the more he tries to convince the world to accept his version of the numbers, the harder it may get for Greece to win the additional debt relief that most economic observers agree is vital to its recovery.

Kazarian, an alumnus of (where else) Goldman Sachs, says the investment firm he founded in 1988, Japonica Partners, is the largest private holder of Greek government debt. Since he first made his interest known about four years ago, he’s declined to be specific about how much he’s invested, or what prices he paid, or whether he’s up or down or sideways on the trade.

This isn’t just your standard tale of a bondholder trying to boost the value of his investments by talking his book. What Kazarian has tried to do for the past four years is treat the sovereign nation of Greece the same way he might a private company he’d taken over: by detailing its assets and liabilities, looking for ways to enhance asset value while reducing liabilities, and, most importantly, seeking to install his own managers to take charge. The more you reflect on that latter notion, the more disturbing Kazarian’s larger-than-life presence on the Greek financial scene becomes.

As the keynote speaker at a conference organized by the American-Hellenic Chamber of Commerce in Athens on Monday, the bespectacled, straight-talking American succeeded in turning the afternoon into The Paul Kazarian Show, berating his audience and his fellow speakers with an odd combination of derision and self-effacing charm and dominating the proceedings by sheer force of personality. (In a previous existence, he gained notoriety for firing BB guns into the empty executive chairs in the boardroom of a company he’d seized control of, accompanying the shots with shouts of “Die!”)

Presenting a selection of gems from a presentation that runs to more than 110 slides (Kazarian clearly knows them all by heart), the financier leveled a damning accusation against his hosts: Greece, he said, is “crying wolf for debt relief.”

Give or take, everyone else agrees that Greece’s debts are equal to about 170 percent of its gross domestic product. That’s far and away the highest debt among euro zone countries, and  makes a mockery of the 60 percent limit laid down in the original Maastricht treaty for members of the common currency.

But Kazarian says people who arrive at that number are suffering from “a major, major, major, major flaw in their model.” He gets to a much more manageable (or downright virtuous) debt ratio of 45 percent by accounting for every previous restructuring as a debt cancellation, and treating all of the supposed assets of the country as if they were the factories, inventory and intellectual property of a company. (For what it’s worth, when he persuaded Matt Klein at the Financial Times to investigate his claims a year ago, the figure was 39 percent.) His calculations involve creating a consolidated balance sheet for Greece which he says shows a total amount of assets and liabilities worth 500 billion euros ($529 billion) for an institution employing 600,000 employees with annual expenditures in excess of 90 billion euros.

There’s a chunk of laudable method in his apparent madness. Basically, if you do treat every previous debt restructuring as effectively a cancellation that wipes the slate clean and starts from scratch, the burden shrinks. And by extending maturity dates, giving payment holidays and cutting interest rates, there’s no question that Greece’s official creditors have already eased a lot of the pain. But stacking up a country’s assets against its obligations to come up with a net debt figure seems intuitively crazy -- Kazarian says including the Parthenon in his spreadsheet makes such a tiny difference to the total that it’s a “rounding error,” but you can see how such moves tend to undermine his arguments. Under his accounting method, other countries such as Italy or Portugal don’t benefit in the same way because they haven’t enjoyed similar official debt restructuring programs.

In the panel discussion following Kazarian’s presentation, Frank Gill, who runs European sovereign ratings for credit agency Standard & Poor’s, tried to argue that while Greece’s debts are affordable, its position is not sustainable when GDP has shrunk by 30 percent in the past five years, pointing out that non-liquid assets such as the Parthenon can’t help avert a default. Battling constant interruptions from Kazarian as he stuck to the orthodoxy that the debt ratio is about 170 percent, Gill eventually tried to carve out some airtime for himself, to no avail:

Gill: You just spoke for about 20 minutes.

Kazarian: That’s because I was the keynote speaker and you weren’t.

Grandstanding aside, it’s Kazarian’s attempt to nominate himself as headhunter general for the Greek administration that offends my liberal sensibilities, especially in the home of democracy. Last year, he used his bully pulpit to demand a “five-star” finance minister, paying for advertisements in domestic and international newspapers to argue his case. This week, he told the audience of government officials and business leaders at the Athens conference that the current Greek administrators simply aren’t qualified to run an enterprise of this size and scale. “It’s not the debt that’s the problem, it’s the management,” he says. Urging the government to appoint a professional with at least two decades of debt and accountancy experience to restore what he calls the “trust and confidence of taxpayers and the global capital markets,” Kazarian said he’s drawn up a list of suitable candidates: “We’ve interviewed them. They’re out there.”

The idea of implementing a version of Chapter 11 bankruptcy proceedings for countries has long had an intuitive appeal. Sovereign defaults are messy, arbitrary and painful for both borrower and lender. But there’s a crucial, insurmountable difference between a bust company and a bankrupt nation: In the latter, the creditors don’t (and indeed shouldn’t) get to decide who’s in charge.

When he’s not interviewing potential candidates in a role he doesn’t have for government positions that don’t exist, Kazarian also spends time trying to get airtime in the media for his views, reckoning to have met more than 80 journalists during his crusade. Having heard him speak both this year and last, not to mention enjoying the dubious pleasure of having my personal space invaded and my arm gripped as he pressed home his arguments, my conclusion is that Kazarian is a fantastic storyteller. But his insistence that governments can be treated just like companies, both for imposing new management in a restructuring and applying international accounting standards that offset assets against liabilities to produce a lower net debt figure, doesn’t convince me.

After shrinking this year and last year, economists are forecasting growth of just 1 percent in 2017 (lower than the official forecast). Sympathizers ranging from the IMF to President Barack Obama remain convinced that Greece cannot escape its doldrums without a further reduction in the debt burden. EU minister say they will discuss the issue when they meet next week. Investors may currently be fixated on Italian politics, but Greece’s problems could also boil over.

The prominent role Kazarian played in the Athens conference with a speaking slot right after Finance Minister Euclid Tsakalotos, as well as his role as a special adviser to a Center for European Policy Studies task force investigating EU government balance sheets, suggest he’s gaining traction in the corridors of power in Brussels and elsewhere. If so, I fear he may end up doing the country a disservice.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net