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Applying Revenue-Based Finance Theory to Cyprus and the Debt Crisis

Updated: Jun 1, 2022

A year ago in the Harvard Business review Yale University Professor of Economics Robert H. Schiller proposed a, mostly theoretical, new take on national finance:

“Countries should replace much of their existing national debt with shares of the “earnings” of their economies. This would allow them to better manage their financial obligations and could help prevent future financial crises. It might even lower countries’ borrowing costs in the long run…. We propose that they pay a quarterly dividend equal to exactly one-trillionth of a country’s quarterly gross domestic product, the simplest measure of national earnings. We could call these shares “Trills.” A Trill issued by the U.S. government, for instance, would have paid $13.22 in 2010, in four quarterly installments. The payoff in future years would vary, of course. If the economy surprised us on the upside, dividends would go up; if it slumped, dividends would fall.”

He’s essentially proposing that fixed-rate national debt be replaced by a revenue-based financing instrument. (Although his exact proposal is more like preferred equity than Lighter Capital’s debt instrument.) Obviously, GDP is not the best metric off which to base the repayments and Schiller spends quite of bit of the article discussing and defending that selection. I won’t reiterate that discussion here, but only note that to continue our comparison of his proposal to our RevenueLoan product, a better analog to net cash receipts would be tax revenue. But that metric also has plenty of pitfalls. Regardless, it is an interesting application and study of revenue-based finance.

Just this week, University of Cyprus Professor of Finance Lenos Trigeorgis published a follow-up post that was much less theoretical. He presents an interesting update to Schiller’s idea with some details on how it might be implemented in a Cyprus bailout deal.

He opens with the exact mantra of revenue-based financing: investors are aligned with the borrow, and payments flex with business cycles.

“[EU politicians] have insisted (in principle, correctly) that troubled countries get their financial house in order as a condition for receiving bailout money. But the specific austerity measures chosen are killing any chance these countries have to grow, and therefore repay their lenders. This creates a vicious cycle, as the less borrowers are able to pay, the tougher the repayment terms get. Clearly, a new approach is desperately needed….  tie the interest from rescue loans to the rescued country’s rate of economic growth. So, when the economy is in recession, the interest payment will be lower, helping the country to boost growth; when the economy picks up, interest payments will in turn go up, precisely when the country can afford it.”

He makes an interesting observation about how the revenue-share obligation in effect smooths out boom and bust cycles, and helps prevent the spiraling bull-whip of higher-growth leading to higher-spending, more debt, and a bigger crash:

“In essence, during recession, lenders will be subsidizing troubled euro zone members, giving them a much needed influx of cash, in exchange for a potential higher payout during good times. A side benefit is that the increased interest payment in good times would make it harder for Cyprus to get into bad spending habits when they feel flush with cash.”

One of of his last points clearly bridges his proposal to classic revenue-based financing, as he mentions the classic industries that use royalties or revenue-sharing:

“We know that investors are willing to accept lower returns in the short-term in exchange for the chance at a higher payout later. Just look at the venture capital industry, the pharmaceutical industry, or the movie industry—all of which owe their success to actively managing portfolios with low probability/high growth prospects.”

It’s a fascinating idea, and it follows the same tenets of our investment thesis: “Surely, it is worth considering alternative win-win solutions that effectively allow these countries to borrow revenues against a more productive future, rather than condemning them to decades of no growth.”

Bonus: Professore Trgeorgis has published a book on Real Options and clearly has an interest in it. I personally love his addition of convertible options into commodities.


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