Reforming the Monetary System in Greece (1) – A Varoufakis Conversion

Yanis Varoufakis Subversive interview 2013 cropped

originally published

Greece’s new Syriza government has two major economic challenges to address: a Resolution of Greece’s unsustainable debt burden followed by a Transition to a long term sustainable economy.

Conventional resolution of sovereign debt is a debt for debt swap: replacing existing debt with new debt which requires a smaller percentage of Greece’s national income and resources to service.

So it is that Greek finance minister Yanis Varoufakis has already tabled a proposal for two new types of debt, one linked to GDP for the IMF and holders of Greek sovereign debt, and the other of perpetual debt, which would replace Greek debt held by the ECB and which would be repaid as and when Greece is in a position to do so.

During 2014 the average duration of Greek liabilities was about 16 years, and the interest payments by Greece required (net) some 2.6% of GDP to service.

This proposal is for a conversion of the existing dated ‘debt’ liabilities into a modern form of the undated credit instruments (‘stock’) which pre-date modern banking by hundreds, if not thousands of years.

The Proposal

Firstly, Greece would dedicate an agreed proportion of tax income to long term funding. Let us say 5% of Greek tax income and an initial allocation of €12bn.

Greece then issues stock (undated credit instruments) at a discount, each of which is returnable in payment for €1.00 of Greece’s taxes. This new issuance would then be allocated between the different creditors in a way reflecting the repayment date and interest rate of Greek liabilities.

From then on Greece would use 5% of its tax income to buy back this stock for cancellation, and the faster the growth of Greek GDP and taxation, the faster would be the rate of return of the stock.


Greece has existing aggregate public liabilities of €320 billion (rounded up to the nearest €10bn).

Let us say that Greece exchanges 480 billion prepay tax credits of €1.00 value each for the outstanding €320 billion debt. The holders of these instruments will make an aggregate profit of €160 billion or 50% when these instruments are returned by being bought back at €1.00 par value.

The rate of return per annum then depends upon how many years it takes for Greece to buy back these instruments. At a constant GDP/rate of tax collection this will take 40 years (€480bn divided by initial tax allocation of €12bn).

So the rate of return will be 50% profit divided by 40 years or 1.25% per annum.

 If tax collections fall (a separate subject to be addressed under the Transition heading) the rate of return will be less (slower), while if tax collections rise, whether from increased GDP or more effective tax collection or both, then the rate of return will be higher (faster).

“This Innovation Will Never Work”

Well, actually UK sovereigns funded their expenditure in precisely this way for centuries, and the evidence of that remains in the English language to this day. The phrase ‘tax return’ refers to the annual accounting event at which the tax credit instrument (tax prepaid at a discount) was returned to the Exchequer for accounting and cancellation.

The phrase ‘rate of return’ was literally the rate over time at which an undated credit instrument could be returned to the issuer for cancellation against value supplied by the issuer. Finally, the ‘stock’ was the name given to that half of a split wooden tally stick accounting record which was given to the creditor, while the issuer retained the ‘counter-stock’.

This ancient asset class of undated stock – credit instruments – in fact pre-dates the conflicting forms of financial instrument which came later: common stock (shares in a Joint Stock Company) and loan stock (fixed interest ‘debt’).

A “Varoufakis Conversion”

The consolidation of existing liabilities is not a new concept either, and the most relevant example (albeit the UK was anything but in economic distress at the time) is the way that UK Chancellor George Goschen consolidated all existing annuities (these liabilities were not misrepresented as debt in those days) into a single class in 1888.

So my proposal to Yanis Varoufakis is to take a leaf out of Goschen’s book; create a new class of consolidated annuities for Greece; and carry out a debt/equity swap with Greece’s creditors.

Maybe he’ll start a fashion?

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