Sunday, December 28, 2014

The Greek dance with debt

If you thought that the Greek debt crisis was over; think again. Tomorrow, the Greek parliament will try, for the third time, to agree on who will be the next president. If parliamentarians cannot agree (and that now seems likely) we are headed for the first potential rock in the road to recovery for 2015.  There is a real danger that the Greek debt crisis will emerge with a vengeance and, once again, throw world financial markets into turmoil.

Under the rules of the Greek constitution, if no candidate receives an absolute majority, parliament will be dissolved, and there will be a general election, most likely in early February. If that happens, all signs point to a victory by Syriza, a left of center party that proposes to renegotiate the Greek debt.

A Syriza victory would force the core Euro countries to decide either to give up on the project of European integration, or to move to the next stage of full scale fiscal union in which German taxpayers assume responsibility for Greek debt.

If the Euro breaks apart, the fallout will be global. The world economy has been hit by a falling demand for raw materials and oil is trading at less than US$60 a barrel. Some of this is caused by newly discovered proven reserves and that is a good thing. But Jim Hamilton has argued that  falling world demand is a big part of the reason for lower oil prices and that does not bode well for a truly global recovery.

The US economy has been the single flickering light in a dark sky. If the Euro collapses, the knock-on-effect will derail the US recovery and send the entire world economy back into recession.

Is a Greek default and a breakup of the Euro the most likely outcome? Probably not. But it is the first of many building storms that the global economy will need to weather in 2015. All eyes on Greece tomorrow!


  1. Actually, following the Greek bailout and that of Cyprus, there are now rules in the Eurozone allowing, indeed forcing a Member-State to "borrow" from the banks in its jurisdiction as well as to introduce money and capital controls, in an emergency. The medicine has been tried in Cyprus already. It would seem that the Greek voters might like a taste of it. However, it is pretty unlikely that the "whole project of European integration" depends on them any more.
    The debt of Greece is actually a sideshow. Starting in 2016, its annual servicing is about 8 billion euros annualy. The real problem is the hidden debt of pensions, bleeding 27 billion per year to 2,7 million taxpayers each receiving an average of over 900 euros per month pre-tax. This is the real burden of past sins. One should consider the distortion of incentives to work, in an economy where the newly-starting workers receive less that 500 euros per month !

    1. Yes - we need more 85-year-olds to not be discouraged from working! Take away those super generous €10800 per year pensions and make those old people work again!

    2. Well, here :
      is the latest monthly pension payments report for December 2014. It is in Greek, but the statistics are plenty clear :
      Average pension (page 4) was :
      948.16 euros in October 2014
      950.05 euros in November 2014
      953.58 euros in December 2014
      Still rising in the deepest of the crisis ! So the annual payment sums up to closer to 11,500 euros per year. For 2.77 million in a total population of less than 11 million. Clearly unsustainable !
      But there is worse in page 10.
      There were 10,722 people newly pensioned off in December 2014. About 5900, a 55% majority, were aged less than 65 ! Again in the deepest of the crisis ! This is how one ends up with so many pensioners in the population.
      Further to the damage to incentives, one should consider that the young pensioners have stopped paying social insurance contributions, so the Greek government, of whatever colour, ends up begging Mrs Merkel and the Slovak prime minister to fill the funding gap. Except neither Slovakia, nor even Germany, offer pensions on so scandalously generous terms ...

    3. Yes, the pre-tax bit was already stated in the Dec.28 2014 comment.

  2. I can't see any solution with and without euro. It is the Mother of all the Conflicts!

  3. One hour ago Parliament decided to have an election by Feb. 1st
    Most likely scenario (60% probability):
    SYRIZA tops the polls without a Parliamentary majority.
    Only potential, anti-MOU, coalition partner, right-wing ANEL party, does not enter Parliament by some 0.3 percentage points.
    Only possible coalition partner(s) are the conservative ND of incumbent PM, PASOK, or POTAMI.
    None of these three can, or will, stomach the programme of SYRIZA.
    The left wing inside SYRIZA will not stomach any compromise on the campaign programme.
    New elections are anounced for sometime late Feb or beginning March
    The bailout programme expires on Feb 28
    Rating agencies downgrade Greek debt and ECB cannot accept it as collateral. ELA is the only mechanism for financing Greek banks and the Athens bourse tanks; as I write, it is down 10%.
    Armageddon for the Greek economy.
    Brussells, Berlin, and Frankfurt "shrug shoulders" and carry on "business as usual".
    EURO is saved(!!!) at a bearable cost.

    Disclaimer: I am about to lose something like 50% of the purchasing power of my pension on top of the 45% I have lost since 2010

    1. The suffering of the Greek people is tragic. I am deeply sympathetic to your plight. There but for the grace of God....

  4. If the Fed takes appropriate corrective action, maintaining NGDP growth, why should Greece's departure from the Euro or even that of several others harm the US economy? True the ECB could do something stupid and cause an ever larger recession in the Euro zone, but even that could be offset by the Fed.

  5. Not one word about the suffering of the Greek (and portugese, and spanish) people: I guess they should be glad that they are helping keep the bond vigilantes and confidence fairy happy
    F** the global economy: it can't provide housing and food, it deserves to die

    1. @Soccer Dad, @Unknown seems to disagree with you. He/she also offers links to a cogent analysis of the Greek situation.

  6. Actually the Athens Stock Exchange closed "only" 3,91% down for the day.
    Most likely scenario is the "Cyprus" one, multiplied by 20, but noting that Greece is only about one fiftieth of the European economy. There will be money and capital controls, such as are still in force in Cyprus.
    A less likely scenario could see the next Greek government, whoever that may be, tempted to repeat the wipe-the-slate-clean policies of the government of the Liberation of 1944. That government took over from a collaborationist government but exacerbated inflation many times over, eventually having to inflate all debt, public and private, away. The consequences of this 45-day debacle included civil war in the center of Athens and in many other places in Greece, plus a regular civil war, one and a half years later that only ended in 1949. Greece was left without a national currency for at least 8 years. As late as 1967, there were transactions (high-value ones) in gold sovereigns. The architect of this fiasco was rehabilitated to the point of serving as central bank governor for more than 20 years, Finance minister at various times and interim prime minister in 1989-1990. He died a few days short of age 100. Who said that failure does not pay ?

  7. On the matter of suffering, the worse off have been pretty well cared for, in Greece any way. It is the relatively better educated and better off who have suffered, since it was they who had benefited most from the previous credit-induced boom.
    Here is a pretty good account of the economics of the whole affair :
    And a more readable one :

    Incidentally, on average terms, even allowing for the precipitous decline in living standards in Greece since 2007, Greek incomes are higher in real terms than they were before Eurozone entry in 2002. Moreover, incomes growth since 2002 is still higher than in Spain and Portugal .

  8. Thanks @Unknown for these links. I have tweeted out the 'more readable' piece. The analysis is both perceptive and disturbing.

  9. Not accusing you in particular of this, but more generally, it would be good if mainstream economists could think outside the Neo-classical model box and their obsessions with rational expectations and Ricardian Equivalence, and look at the history of Greece and perhaps even consider some Marxian theory to understand its predicament. (Too much to ask of course - you are fighting a great impulse to go straight to Model, use "high tech" maths and for that purpose a lot of abstraction and nonsense.)

    Marxian theory highlights dependency between countries, rather than mutually advantageous interdependence and win-win outcomes from exchange through comparative advantage and which is at the heart of neo-liberal theory in political science and I think neo-classical economics. 500 years of Turkish occupation has not been good for Greece, something from which it never really recovered, similar in some ways to the legacy of colonial dominance in places like Africa and the Middle East. A diversified import substitution structure never developed, unlike China or Japan which maintained strict capital controls and closed economies for important periods of their history, and were then gradually integrated into the international system. The result in Greece was a dependence on crucial imports and capital and a terms of trade structure that ensured the country was vulnerable to balance of payments and exchange crises. The "solution" in the past was always devaluation or inflation. But of course, Greece really never went forward in its industrial development or secured a stable currency. Unsurprisingly, as bad as things are, many Greeks do not want a return to such a past. (Italians also remember the Lira days - its problems probably go back to relatively recent unification and resulting regional disparities.)

    One of the great faddish things going around mainstream economists at the moment that all is well if you borrow in your own currency (no doubt attributable to Model); well, try saying that to a Greek. Clearly it depends a lot on the real structure of your trade and economy whether your own currency has currency in the adjectival sense of the word. If it does not you are forced to buy hard currency with your own, which may not be easy. (A little bit of epistemological discussion about what foreign debt actually means would also be useful; really we mean foreign currency denominated debt, not necessarily debt in our own currency owed to foreigners.)

    I think another big shock overlooked on the Eurozone was the competitiveness effects of the expansion of the European Union eastwards on the southern periphery.

    I see the only positive future for Greece as being a member of the Eurozone which includes a centralised fiscal system. This will lead capital flows from high K/L areas to where the demand for such capital is the highest. But really can you have that without political union? Can you make decisions about fiscal transfers above democratically elected national parliaments?

    1. As luck would have it, I am about three fourths of the way translating into English a lecture I gave last May on the history of the Greek defaults. Maybe I will give a link here when I am done.
      In the 193 years of existence of the modern Greek state there have been at least seven defaults. The first six were clearly related to the long wars that Greece felt it had to wage, so as to bring as many of the Greek people into one nation-state. Only the latest default seems to be in a class of its own.
      As for seeking "a diversified import substitution structure", it was tried in Greece very insistently in 1955-1972 at great cost to anyone who could eke out a surplus out of his economic activity (negative 10% real interest rate on deposits, for the state to build "infrastructure" and for the well-connected to get loans at negative 10% real interest rate) with disastrous consequences. Unless one wants a fortress economy (Cuba, North Korea), export-oriented development is the only way forward for a small economy.

    2. "Unless one wants a fortress economy (Cuba, North Korea), export-oriented development is the only way forward for a small economy."

      Interesting and important work Unknown. We look forward to reading it. It is true that import substitution failed in many countries - especially in South America. But you really need to understand the history of why it succeeded in some countries but not in others - this is where we need widely and deeply informed country specialists who understand those countries institutional structures and history and do not start their analysis with/ or are contained by the philosophy that arose from the Edgeworth Box. Your work is important, and you are precisely the type of person the economics profession needs right now.

      On export oriented development. True, countries did emphasis export growth, but this was to overcome foreign exchange crises ( this included Japan and China now). It was to ensure there was the foreign exchange for essential imported inputs and for the import of technology. Industrialising countries throughout Asia, large and small, took a selective approach to the import of capital - and in many ways goods as well. They never got themselves into what a Marxian refers to as "a dependency trap with the core".

      I suspect the reason why import substitution failed in Greece is that it started on a weak foundation following its independence from Turkey. Defaults, I suspect, were avoided through devaluation/inflation before the Euro. But I look forward to your views.


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