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Posts Tagged ‘Greek debt’

Greece’s Debt Obligations April to September 2015

xronos

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Greece’s Debt Due: What Greece Owes When

February 23, 2015 Leave a comment
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Is Pandora’s Box about to be Opened?

The current situation or standoff can only be described as a dire situation. I suspect that no economist in his right mind would ever argue that austerity is the proper way to exit a recession. Of course, there are other reasons for austerity, including political reasons, which I outlined here: The Political Economics of Europe’s Resurrection. But a collision course with Europe can lead to default, Argentinization and a return to the drachma. My take on that remains what I argued before, on September 22, 2011:

“If Greece exits the Euro either on its own accord, in order to return to the drachma and devalue it, or due to eventual pressure from its partners, the Greek debt that was issued in Euros will cost multiple times in drachmas. Greece will then default with a bang. The impact on the Greek banks holding Greek debt and their access to capital is also quite uncertain then. Not to mention that a return to the drachma would be political suicide for any government. Entry into the Euro zone was sold as one of Greece’s biggest achievements that, unlike the drachma, offered stability and membership to an elite club of economically advanced countries.

The second part of the answer has to do with Greece’s longer-term prospects within the Euro zone, once default (to any degree of severity) has occurred and enough time has passed so that Greece has regained access to credit markets. Is it to the net benefit of Greece to be in the Euro zone in the long run? Well, did Greece benefit from being in the zone before the crisis erupted? Greece arguably enjoyed lower interest rates for its sovereign debt and more access to credit than it would have faced otherwise. This affluence of credit in fact led to Greece’s current troubles. On the down side, entering a currency union in which the joint currency appreciated about 40% because of the strength of Greece’s Northern European partners did have a significant effect on Greek exports…In all, if market forces drive the Euro down in the long run, which should happen once the US economy really turns around, I am inclined to vote for Greece staying in the Euro zone.”

Finally, there is a more imminent problem we all worry about immensely, that we may not want to raise publicly…

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The Political Economics of Europe’s Resurrection

EurFeatured imageope has died and resurrected itself several times in the past but more recently during the first and second world wars. Understandably the European Union’s inception is rooted in the dismay against these wars. Many Europeans now proudly place Euros on the graves of their ancestors who died during the second world war; ironically they succeeded where their ancestors failed.

Greece suffered from political turmoil and a weak currency in the past. Economically premature ascension to the European Union and to the Eurozone, possibly fueled to a small extent by creative accounting arguably done by other countries as well, was the means to secure political stability and a stable currency. For a country that relies on imported consumption and investment goods, the constantly needed Drachma depreciation caused imported inflation and instability. The added benefit of joining the Euro was easy access to credit at terms near those for Germany. But when in recession, you cannot bail yourself out by depreciating your currency, since the value of your currency is now controlled by a group of other countries. And so the problem is born.

Germany, in particular, knows well that a depreciated Euro effectively reduces the prices of European goods. But Germany does not need this because it can still move its Mercedeses, BMWs and Porsches at higher prices. Plus their accumulated wealth and purchasing power is in Euros. Germany also argued that they were operating near capacity and had no room for productive expansion. Yet their output gap was negative, with room for expansion. Some people argued that if Germany exited the Eurozone it would be a win-win situation (the Deutsche Mark would appreciate and the Euro would depreciate). But Germany has now reluctantly accepted ECBs quantitative easing, so there may be no scope for that. And Germany, the engine of Europe, is a net contributor of funds.

Most economists probably agree that once the public debt-to-GDP ratio exceeds 90% or so the debt cannot be serviced. The Maastricht criteria in Europe stipulate a limit of 60%, perhaps so that even with miscalculations or misfortunes the real debt-to-GDP ratio will be reasonable. There is more market leniency with countries whose debt is held internally to a large extend (e.g., Italy) or have a strong industrial base (e.g., Japan). Private debt is typically ignored when the country is developed enough so that such debt is collateralized (e.g., Ireland).

The Greek governments tantalized by easy credit, and while experiencing economic euphoria and high growth rates, before the crisis erupted, thought they could get away with a high debt-to-GDP ratio because the heavyweights, Germany, France and Italy, exceeded the 60% threshold, and second, a favorable GDP expansion would restore the ratio. But the market dice were cast against them.

Whereas the Fed has an inflation and unemployment mandate, the ECB only has an inflation mandate which is exacerbated by German excessive fears of inflation (traced back to hyperinflation in the Weimar Republic). So while the Dollar was correctly being depreciated through quantitative easing policies in the U.S., the Euro was kept strong yielding unnecessary high pride to the Europeans. And high were kept the interest rates to ease fears of inflation. And a problem which could have been solved in short time through expansionary monetary policies blew itself into gargantuan proportions. Many people speculate that if the current ECB President were not Italian, we might have not seen the quantitative easing policies recently announced. But are they a little too late?

And we come to the “troika” (i.e., European Commission, ECB and IMF) prescribed, well-intentioned but bitter, medicine: austerity coupled with structural reforms. Why austerity? To pay back the loans and regain access to credit markets as soon as possible. And to penalize the Greeks for not playing by the rules. After all, if you tolerate moral hazard and reward it with forgiveness, it is bound to happen again. Why reforms? To stimulate growth and economic development. But structural reforms will primarily bear fruit in the long-run. And austerity jeopardizes short and long-term growth prospects during a recession. In other words, a well-intentioned, albeit ill-conceived plan. Some people may argue that the surgery was successful, as pre-election economic data for Greece connoted, but the patient has certainly died. It does not take much to see this, just drive around Athens and see the pawn shops (almost unheard of in Greece before the crisis) and the people searching the garbage dumpsters for items to pick up and sell. Are they given a death sentence for electing inadequate politicians? It may be a more efficient use of resources to let unproductive companies default and dissolve. But can this be done to a whole country, indiscriminately to all its citizens, when this country happens to rightfully be the cradle of western civilization?

And so we got polarization. New Democracy and PASOK, the culprits behind the economic failure and the undersigners of the hated (by the people) Memorandum of Understanding that brought about the austerity and reforms, fail tragically in the recent elections. Why did Samaras rush into trying to elect a President prematurely? Because he had lost public support and presumably had warned the troika that the latest demands would make the government fall anyway. Self-fulfilling prophecies perhaps? And here we are, a few steps before the finish line, back on the hills below the mountain, like Sisyphus. The Greek tragedy is not an uncommon tragedy.

Is Tsipras’ new government on a collision course with the troika? It certainly wanted the Greek public and the troika to think so. But default as a threat point is not credible here. The promised default cannot be delivered now. Debt restructuring should have happened before Greece sought IMF and European help. There is no default premium on IMF and ECB loans, and it is imperative that they are not defaulted on. But a large chunk of debt is held by Greece’s Eurozone partners. It would be national suicide to default on these loans. Granted, the virtually dead have nothing to lose. But they do. All it takes is a few wrong steps to lose European political support and be outcasted, having to resort to the dreaded Drachma in order to pay the abundant governmental employees. And then what? Immediate serious devaluation and Argentinization (in Greek, Αργεντινοποίηση). The good case scenario is an agreement on further extending the maturity of the loans with slight improvements in the interest rate terms. If Syriza also follows up with fighting corruption (a promise which at least initially has already been followed through the appointment of a proven anti-corruption czar, secretary Nikoloudis), this is a good start. Will the Greek public swallow a simple extension of the loan maturity instead of the promised haircut and abolishment of the “Memorandum”? Maybe yes, maybe not. It will be up to Tsipras’ rhetoric to convince them; and he is good at that. If not, the new government will collapse in the near future. And then Samaras will take the reins again.

So what’s needed for resurrection? Quantitative easing is a good start, albeit late in the game. Europe needs a Pan-European growth vision, needs more money directed towards R&D, education, innovations and entrepreneurship, especially in the South. Europe has now exhibited solidarity, but if they cannot handle the Greek problem convincingly, they certainly cannot handle the much bigger Italian problem. And Italy is too big to save. Either the EU is dissolved, or there is more integration. In the first case, the Euros on the European graves will be meaningless. In the second case, Europe can go back to its root principles of social egalitarian democracy and avoid the Sisyphus vicious cycle. Only full stakeholders should remain in an integrated Europe. You cannot be enjoying the benefits of a customs union and a common market without willingness to share the risks. And for God’s sake, change the ECB mandate.

BBC: Who does Greece Owe?

_80549569_greek_debt_624_blockGood reminder of Greek debt decomposition.

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The Debt Problems of the European Periphery

November 17, 2010 Leave a comment

This article is a must read in my opinion.

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I Anadiapragmatefsi tou Hreous Einai i Moni Lisi

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The Type of Help Greece Needs from Europe

George BitrosIn life there is the golden rule that prevention generally costs less than the cure. But prevention requires a mindset of systematic care, a quality that does not characterize contemporary Greeks either as individuals or as a country. I will refrain from giving examples in this regard so that I may focus on the sharp downturn of Greece’s state finances. Unfortunately the arguments I and a few other Greek economists put forward in the last three decades to put our house in order were denigrated by politicians of all persuasions and now we have reached the brink of bankruptcy, which has become quite imminent due also to the on going global economic crisis. Personally I have strong reservations whether Greek politicians realize how from the proclamation that “Greece belongs to the Greeks”, of Mr. Andrew. Papandreou back in the early 1980, we have come to the “Greece belongs to her lenders”, of Mr. George Papandreou. But now all margins to hide the gross mismanagement of the economy from Europe and the international markets have vanished and it is time to assume full responsibility for the mess our leaders have created and reach out frankly and openly for help. So the question that arises is from whom we can expect and what kind of help.  My answer is as follows.

As correctly pointed out a few days ago by the Chancellor of Germany Mrs. A. Merkel, Europe has a huge responsibility in the case of Greece. I do not know what exactly she had in mind. But from my point of view Europe is responsible because it tolerated for too long the transgressions of Greek governments. The usual argument is that Greek governments misled the supervisory authorities of the European Union (EU) by submitting stabilization programs that they did not intend to apply in the first place and that the national income statistics that they reported were consistently and intentionally diluted. However, this argument is trivial and it is not worthy of any consideration. The EU agencies knew or had the capability to know what was happening in Greece in the last three decades. But they did nothing to avert the uncontrollable growth of corruption that accompanied the public management of the huge transfers of financial aid from European coffers. Perhaps this oversight transpired because dominant in the minds of European leaders were the political criteria of the Union and the false hope that in the vast European area the Greek political system would return gradually to the virtuous cycle of economic policies. However, the truth of the matter now is that Europe has an obligation to help Greece. But for God’s sake, not with further financial aid, because the current crisis constitutes for Greeks an excellent opportunity to put our country right.

The help Greece needs from Europe is twofold. On one hand, the European leaders must convince international markets that Greece will not be allowed to default on its debt. This will provide the Greek government with enough time to enact appropriate policies and leeway for these policies to yield the expected results.  On the other hand, the same leaders must make clear in unequivocal terms that their above commitment is subject to the immediate adoption of drastic policies in the following directions:
1. All public expenditures should be treated as downward elastic. The claims that one hears frequently in Greece that particular public expenditures are rigid and cannot be adjusted downwards are hypocritical because they are intended to perpetuate the hold on power by the two major political parties. On the contrary, all public expenditures, including the salaries and the number of public servants are flexible and they should be reduced immediately.
2. The classes of citizens that evade taxation and other financial obligations to the state are well known and the available technology makes it feasible to increase public revenues right away, without increasing tax rates and thus running the risk to hurt the economy. The lack of trust in the government and the rampant state promoted corruption are social phenomena that can and should be confronted now, not in the future, because they give rise to extreme individualism that undermines social cohesion.
3. At the very least education and health services should be distributed according to the principle of selectivity. This means that, apart from the category of those citizens who are considered as “have-not on the basis of their total wealth”, all Greeks should bear the costs of public services they enjoy.
4. Granting of public subsidies should be subject to the principle of substitutability. This means that if the government decides to subsidize a particular public service or class of citizens, the cost of subsidies should be offset by equal reductions in other public expenditures.
5. The State’s obligations to various public insurance schemes should be limited to a minimum guaranteed pension for all, and the responsibility for additional retirement supports should be transferred to citizens themselves.
6. In state enterprises the government should exercise its rights as a key stockholder, but stop interfering in their day-to-day operation. In other words, the government should stop guaranteeing the loans of these enterprises and their supervision should be transferred to pertinent independent regulators.
7. In the private sector the government should eliminate all taxes on behalf of third parties, open up all closed professions, etc, so as to enhance competition and stimulate entrepreneurship.

If by using appropriate policies of “carrot and stick”, i.e. on the one hand providing moral support and cover from the risk of bankruptcy, and on the other by applying pressure to introduce the necessary structural reforms, the Greek government does not respond in the next few months, the EU should leave Greece to default for two reasons. First, to protect the credibility of the euro, and, second, to warn credibly other member countries, which are close or in the region of defaulting, My expectation though is that under constant pressure from EU, this time the Greek government will respond.

IMF or European Subordination

February 18, 2010 Leave a comment

And the answer, in my opinion, is IMF. Either way it is going to be costly in terms of market sentiment against Greece and higher risk premia. But the political costs of getting a loan directly from France or Germany are not only subordination to that country, in addition, they will likely include commitments from Greece to purchase overpriced military equipment from them and show them preferential treatment in procurement. Simon Johnson of MIT makes a different point that “by approaching the IMF, Greece will get a better deal from the European Union” (read his article on The Huffington Post).

May 7, 2010 update: read the following related article in Kathimerini (in Greek).

May 10, 2010 update: read the following related article in Ethnos (in Greek).

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Moral Hazard

February 16, 2010 Leave a comment

Moral Hazard in economics refers to a situation in which economic agents undertake private actions with stochastic effects on final outcomes. Notice that I have highlighted “private” and “stochastic”. Corruption is an example of moral hazard. Public officials can undertake actions which are not observable by the public or they are not verifiable to the courts. The fact that they are not deterministic (in other words because the public cannot tell if unfavorable events are due to inaduequate actions by public officials or due to random, probabilistic events) can make it virtually impossible to make a case against these agents. The actions of these agents can provide private benefits to them. Has moral hazard and the associated corruption played a significant role in shaping up Greece’s economic woes?

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