“I was right about the debt, and you know it!” – My reply to Kathimerini’s latest tirade


In a recent article entitled “Varoufakis and the 2015 debt talks – behind closed doors”, published on the English language site of Kathimerini, Yannis Paleologos is putting forward an innovative new criticism of my 2015 negotiating stance regarding Greece’s public debt.

His criticism’s first leg is standard troika-speak, insisting that by pressing for a deep re-structuring of Greece’s public debt I brought “the country to the brink of absolute disaster”. As this is uninteresting and repetitive,[1] I shall concentrate on the second, more novel, leg of his accusation: That I clashed with the troika even though my analysis of the Greek debt burden was not that dissimilar to the pro-troika Samaras-Venizelos government (or to Mr Klaus Regling’s, the ESM’s Managing Director).

To substantiate his claim (that I was unadventurously mainstrean in my analysis while belligerent in my stance), Mr Paleologos is quoting from a non-paper that I circulated prior to the Eurogroup meeting of 16th February, 2015. The reader is encouraged to read Mr Paleologos’ article in full with the following caveats in mind, before assessing his claims about my debt analysis:

The non-paper

When Mr Paleologos writes the following,

However, a document… 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.

… he is neglecting to mention that it was I who had made public the said non-paper on 18th February 2015 in the context of my transparency campaign for which I was vilified by the troika, and by Kathimerini, on the grounds that I broke with the tradition of Eurogroup ‘confidentiality’. Glad, and proud, that I released this and other important material pertaining to those crucial Eurogroup meetings, I am happy that Mr Paleologos has, at last, come around to reading and using it.

The motivated ‘misunderstanding’ fuelling crippling austerity

Mr Paleologos quotes my non-paper’s section entitled ‘A misunderstanding’ in which I explain that public opinion had the wrong impression of the effective level of Greece’s public debt in that, in present value terms, Greece’s public debt was closer to 135% of GDP (in contrast to the headline 175% figure that referred to its face-value). Noting that my estimate was similar to that of the Samaras-Venizelos-Regling estimate, Mr Paleologos asks:

So, the question inevitably arises: if Varoufakis believed all this, then why did he lead the country to the brink of absolute disaster…?

Setting aside the inflammatory character-assassination language so beloved by Kathimerini, the answer to his real question (Why did Varoufakis clash with the troika over debt restructuring if his debt analysis was similar to theirs?) is, of course, obvious and clearly stated in a paragraph that he only partially re-produces:

“Indeed, if Greece’s debt was calculated in Net Present Value (NPV) terms, say with a 5% discount factor, the Debt-to-GDP ratio would already be as low as 133% of GDP…, and reach 127% in 2020 (as expected by the IMF in nominal term) with a primary surplus maintained at 1.5% of GDP instead of 4.5%.” [Emphasis added]

In short, my argument was that, even by the troika’s own analysis, we did not need a primary surplus target of more than 1.5% in order to stabilise, and indeed, contain Greece’s public debt. The debt restructuring I was demanding was crucial in order (a) to reduce the short-term fiscal stress on the Greek state’s finances, and (b) to signal to the world of investors that our public debt is no longer going to be at levels that they need worry about. In other words, my emphasis was, correctly, on pointing out that the troika’s obsession with primary surplus levels between 3.5% and 4.5% was both absurd and damaging.

The need to end austerity is what my 2015 clash with the troika was about: An extract from a complementary non-paper

For the benefit of Mr Paleologos, and our readers, here is how I explained to my fellow finance ministers in he Eurogroup meetings of February 2015 why ending austerity was essential to restoring Greek debt sustainability (yes, the meetings when I was accused of speaking… macroeconomics!). The following is an extract from another, slightly more technical, non-paper I tabled during the same week of February 2015:

“Through massive sacrifices caused by a depression-level slump, Greece is now running a structural primary budget surplus of around 1.5 percent of GDP. Our new government is not calling for a return to primary deficits. We are merely proposing that the primary surplus be stabilised at the current structural level of 1.5%, rather than raising it to between 3.5 and 4.5 percent of GDP for the medium to long term, a fiscal stance that has few precedents in economic history.

Any primary surplus target above 1.5% will lead to new shortfalls in GDP – exactly as happened since 2010 due to the underestimation of the fiscal multipliers that the IMF now readily admits to. Looking at the experience of 2010-2014 it is clear that a reasonable estimate for our multiplier is well above 1. Let us consider what will happen if our government were to agree with the demands for a primary surplus of 3.5% to 4.5%.

Any given increase in primary surplus (call it X) must equal the reduction in government spending involved (-Y) times (1-mt), where m is the multiplier and t is the effect of a one-euro change in GDP on tax revenues and/or cyclically linked spending like unemployment benefits. [i.e. X = Y(1-mt)]

Most economists, including the IMF’s, these days agree that the Greek economy’s m is around 1.3 and its t around 0.4. So, to get to the high primary surplus targets that the previous agreement has set, i.e.to set X to between 2% and 3% (so that our primary surplus is boosted from 1.5% to 3.5% or 4.5%), we need to impose new austerity to the tune of 4% and 6.25%. But given a multiplier greater than one, this would lead to a loss between 8 and 11 billion euros. A most self-defeating strategy.

In conclusion, it would be an own goal for both Greece and its creditors to maintain a primary surplus of more than 1.5%. This should be our red line, not just Greece’s red line but the Eurogroup’s as a whole.

To paraphrase Bill Clinton, “it was the new austerity, stupid!” (which the troika was obsessively insisted upon) that led to the 2015 clash with the troika. And it was our defeat that led, via the implementation of the austerity I fought against, to the tragic continuation of the Greek social economy’s debt-deflationary cycle to this day and beyond.

To sum up, my argument and proposal in those Eurogroup meetings was simple:

  • First, less austerity (i.e. a primary surplus of no more than 1.5% of GDP) would help contain Greece’s debt, rather than the opposite.
  • Secondly, there was an urgent need to frontload reductions in the debt repayments of the Greek government (e.g. in 2015 I had to find €22 billion euros just for debt repayments, out of a state revenues of no more than €47 billion).
  • Thirdly, I was proposing debt swaps that would link Greece’s repayments to our nominal GDP level and growth rates, in a manner that creates incentive compatibility between the Greek government and its lenders (turning the latter into equity partners of Greece’s recovering economy)

Throwing in a baseless claim, for good measure

Of course, Mr Paelologos, not content to ‘misunderstand’ my point about the importance of lowering the primary surplus target to 1.5% and the ingenuity of the proposed debt swaps (see here and here), chose to refer extensively to the amusing musings of Paul Kazarian, of Japonica Partners – a gentleman that had the unfortunate epiphany of investing in Greek government bonds at a time when their devaluation was inevitable.

While I sympathise with any investor clinging on to wishful thinking regarding his portfolio, and thus respect Mr Kazarian’s protestations that Greece’s debt is sustainable, it is remarkable that Mr Paleologos chose to adopt Mr Kazarian’s extraordinary claim that my proposed debt swaps would have increased the costs of Greece’s public debt servicing. This results from no interpretation of the numbers consistent with even primary school arithmetic. The only reason Mr Kazarian’s views have been given another airing by Kathimerini is that they were deemed useful in putting together another instalment in their ‘Get Varoufakis!’ campaign.


At a time when the IMF is about, once again, to proclaim Greece’s debt unsustainable, and the Greek government is being pushed to issue new bonds despite its insolvency, the Greek oligarchy’s official organ, Kathimerini, is continuing its valiant efforts to distort the facts about my 2015 negotiation with the troika. My recommendation to readers is: Read their articles carefully and critically. For their quasi-skilled distortions are full of insight regarding the troika’s dead end in the face of a Greek ‘program’ that was imposed with as much brutality and the incompetence on which it was based.


[1] Whether it was I who caused the clash with the troika or the troika that used all ways and means to suffocate our government even before we were elected, determined to avoid a serious restructuring of Greece’s public debt, I shall leave to the reader to judge. My recent book Adults in the Room contains all I need to say on the matter.