New Calculations

Can Statistics Save Greece?

Source: DPA
Statistics might make it easier for this man to find a job.
  • Why it matters

    Why it matters

    The health of Greece’s economy is tied into how markets and banks view its debt situation. Improving perceptions could speed up its recovery.

  • Facts


    • Paul Kazarian is one of the largest private creditors of the Greek government.
    • By Mr. Kazarian’s calculations, Greece’s debt-to-GDP ratio is only about a third its official rate of 180 percent.
    • The poor image created by Greece’s public finances makes borrowing for businesses more expensive.
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It’s a controversial statement for a country that has long been under the watchful eye of other European governments and the markets for letting its debts spiral out of control. Paul Kazarian, a long-time financier, is tirelessly trying to convince other investors but also the Greek government, to change the way they calculate debt.

His simple accounting trick could heal Greece’s long-suffering economy. Changing the perception of Greece’s debt situation, making it seem more sustainable, could make banks more willing to lend money to its struggling businesses, which in turn could lead them to hire more people and increase consumer demand.

Mr. Kazarian is hoping to get governments to convert their way of calculating debt to the International Public Sector Accounting Standards (IPSAS), which is similar to the International Financial Reporting Standards that are common for businesses. The idea is that debts and assets should calculated not by their nominal value, but rather by their market value.

At stake in his simple accounting trick could be the health of the Greece’s long-suffering economy.

The results of the new calculation are quite dramatic. Greece’s national debt as a percentage of economic output, or GDP, lies at under 60 percent. That is about a third of the nearly 180 percent nominal debt-to-GDP ratio familiar to most investors for Greece.

This surprisingly low quote is helped substantially by the numerous concessions that have been granted Greece by its international creditors, such as lowering interest payments and extending repayment times for outstanding debt. The concessions mean that the country’s existing debt is worth much less on the market now than when it was first issued.

Greece is not the only country that would benefit. By Mr. Kazarian’s own calculations, which he had cross-checked by many auditing companies, Ireland comes to a debt-GDP ratio of 76 percent, Italy 112 percent, Spain 63 percent and Portugal 70 percent. Under these numbers, five of the six southern European countries would fall below the 80 percent government debt threshold that is required under E.U. rules.

In pushing for the new way of looking at debt, Mr. Kazarian has his own interests at heart: He is one of the largest remaining private creditors of the Athenian government. The majority of Greece’s outstanding national debt is in public hands, including other euro zone governments. The financier has not disclosed his holdings, but it seems clear that he has invested more than a billion dollars. His investor group, known as Holding Japonica, which he leads himself with a handful of unknown partners, manages about $10 billion in total assets.

The government in Athens is not ready for experiments. Mr. Kazarian sees that as a mistake.

Last autumn, in an interview with Handelsblatt, Mr. Kazarian forecast that Greece might be able to refinance in 2014 at an interest rate of less than 5 percent. He was not far off. Currently, the yield on a five-year bond lies under 4.7 percent and for 10 years at about 6.4 percent.

The investor does not stand alone with his criticism of traditional accounting methods. The International Monetary Fund has recommended countries use the IPSAS method for calculating debt at least as a supplement to classic bookkeeping. And about a year ago, Klaus Regling, chief executive officer of the European Financial Stability Facility, the euro zone’s main crisis-fighting mechanism, described Greece’s nominal indebtedness, which lies at almost 175 percent, as “not convincing” because the payment alleviations were not accounted for in this metric.

It seems surprising that Mr. Kazarian has had such a hard time trying to convince the Greek government. He would like to convince the politicians in Athens to publish the statistics each month under IPSAS’s rules, which in his view would offer capital markets a more realistic picture of the economic situation. But apparently the government in Athens is not ready for experiments – possibly from concerns that the new accounting model could be seen as an attempt to make its own situation seem better than it really is. Mr. Kazarian sees that as a mistake.

One of the biggest problems for Greece, but also for its creditors, according to Mr. Kazarian, is that the European Central Bank only accepts Greek state bonds with a haircut of 57 percent as collateral from banks.

Mr. Kazarian’s figures are not based upon a complete shift to IPSAS standards, as he has only used the metric to calculate Greece’s newly issued debt. However, that makes no difference for the debt ratio as measured by economic output, or GDP. The enormous difference between the traditional nominal debt level and the real debt implies that, under IPSAS, debts with a reduced interest rate burden will be valued as overall smaller sums on the market. Extending maturities also lowers the value of the debt, as with customary investment calculations in companies, in order to take interest over time into consideration.

In the past, Mr. Kazarian made a name for himself in private equity, taking over stricken businesses and profiting on restructuring gains. His investment in Greek bonds follows a similar logic, only this time he is dealing with a whole country.

Mr. Kazarian offers other key performance indicators to prove that Greece’s debt is more sustainable than it seems at first glance. For example, the government in Athens has more time to pay back its debts. According to his estimates, the average repayment term of government-issued bonds is a full 19 years. That compares to Ireland at 11 years, Portugal at eight years and Italy and Spain at six years. As a result, only about 15 percent of Athens’ outstanding debt will be due by the middle of 2016. Ireland does better here with 9 percent, but Portugal lands at 24 percent, Italy at 29 percent and Spain will have to repay 36 percent of its outstanding debt by then.

One of the biggest problems for Greece, but also for its creditors, according to Mr. Kazarian, is that the European Central Bank only accepts Greek state bonds with a haircut of 57 percent as collateral from banks. That means it expects banks to put up 57 percent in extra funding for Greek bonds if they want to park them at the central bank, because they are supposedly too uncertain. This is in contrast to only 13 percent for Portugal and 5 percent for each of the other problem countries in the euro zone. Thus, these papers become unattractive for banks. In addition, the high haircut puts the brakes on hedge funds, which want to leverage their returns with credit.

Reevaluating Greece’s debt could help its economy recover from recession. Mr. Kazarian noted that the poor image created by Greece’s public finances means borrowing for businesses has become more expensive there as well, another key reason the economy has suffered. He takes the example of Gerresheimer Glas in Germany, which pays interest of 1.7 percent on a five-year loan, compared to 6.9 percent for Frigoglass in Greece.

Of course, improving Greece’s debt situation could also increase the value of Mr. Kazarian’s own Greek-held bonds. In the end, it would seem that his own interests align with those of the Greek economy.


Frank Wiebe writes about finance for Handelsblatt. To contact the author:

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