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How the Greek public debt can appear (much) lower than 60%


By Elias G. Bellos

Few noticed that on Tuesday June 2, by decision of the Deputy Finance Minister Dimitris Mardas, working groups were created to accelerate the formation of a new framework for the monitoring of government finances, and the implementation of International Public Sector Accounting Standards or, briefly, IPSAS.


Even fewer might be aware of the work and efforts made by Paul Kazarian, the founder, Chairman, and CEO of private investment firm Japonica Partners. The investor that has made a large investment in Greek bonds and for more than a year has been making presentations here and abroad on IPSAS. The interesting part is that Kazarian, citing accounting illustrations from big independent auditing firms based on IPSAS, claims that the ratio of (net) Greek public debt to GDP is only 18%!

       ()    60%


Of course this is not the accounting standards used by EUROSTAT. But the case is of great interest especially after the governments decision to showthe public finances figuresbased on IPSAS, whichdepict a considerably better picture than the one we know.


Just before the elections, Paul Kazarian portrayed another picture of the Greek debt that wasin compliance with IPSAS standards, which aresimilar to the International Financial Reporting standards used by companies. Comparing Greece with other countries of the European region, the investor of Armenian descent concluded that if the debt was reported in terms of net present value, Greece has a huge competitive advantage. Specifically, citing accounting presentations from an unnamed large independent auditing firm that were requested from Japonica Partners, the debt to GDP ratio is only 18%, while Ireland’s is 76% and Portugal’s at 70%.


Paul Kazarian admits that the depiction of debt in the Eurozone and in other international economies does not follow the accounting standards used by companies, but incorporates many other conflicting legal rules and guidelines set by the EC, OECD, IMF, or the World Bank.


But the approach, in as simple terms as possible, focuses on the fact that debt with interest rates close to zero which has to be repaid in 40 years has a different value with an equal amount of debt that has to be repaid sooner. Inflation over time will significantly reduce the value of the Greek debt.

Hence if the net debt of Greece is calculated – which is equal to gross debt minus the financial assets of the country (such as stocks and bonds) - under the rules of IPSAS, the GAAP for the public sector, as mentioned above, ceases to seem huge. If the debt figures of other countries are calculated in the same way, the Greek debt is lower than that of Italy, Spain, Portugal and Ireland.


Turning again to the developments this week in Athens, the announcement of the Ministry of Finance states: "Starting with the countrys obligation to incorporate Directive 2011/85 into national law, and to specify certain provisions of European Regulations, law 2362/95 on public accounting was repealed and replaced by the new legislative framework (law 4270/14) passed in June 2014 by Parliament. We are now in the second phase of amending fiscal legislation. These amendments will focus on the necessary changes in matters of audit and payment processes, the steps that will follow on the role of the accounting officer for the Public Investment Program, and on the increase in the independence of Independent Commissions through improvements regarding transparency in the drafting and approval of their budgets”.


Kazarian himself has repeatedly noted, however, that the method by which the Greek debt is estimated at about 180% is defined by European treaty (Maastricht) and can only be changed by a unanimous decision of the European Council. However, Kazarian also notes that the European System of Accounts, known as ESA 2010, when correctly applied, would also show a Greece net debt number closer to the 18% than the 180%.

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