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Thursday, November 17, 2011

Greece: Current Account and Foreign Debt (2001-10)

in EUR billions

2001 2008 2010 2001-10
Revenue from abroad

Exports 12 20 17 146

Services (e. g. tourism) 22 34 28 268

Other income 2 6 4 34

Current transfers 6 7 5 62

---- ---- ---- ----------

Total revenue from abroad 42 66 54 510

Expenses abroad

Imports 33 64 45 446

Services (e. g. tourism) 13 17 15 131

Other expense (e. g. interest) 4 16 12 96

Current transfers 2 4 4 35

---- ---- ---- ----------

Total expenses abroad 53 101 77 707

Net foreign deficit (current account) -11 -35 -23 -197

Foreign debt

Central Government ? 192 182

Financial Sector ? 147 204

Others ? 24 18

---- ---- ----

Total foreign debt 121 363 404

Some conclusions from these trend statistics 2001-10

1)      Total expenses abroad exceeded total revenues from abroad by 39%, leading to a net foreign deficit (current account) of 197 BN€.
2)      Put differently, Greece as a country spent 197 BN€ more abroad than it earned abroad.
3)      Had Greece financed this deficit with equity capital from abroad (e. g. foreign investments; remittances from Greeks living abroad; EU-grants; etc.), then Greece would not have a foreign debt problem today.
4)      Greece financed this deficit exclusively with foreign debt. In fact, foreign debt increased by 283 BN€ which means that foreign debt was also used to finance domestic activity (and some of that “domestic activity” consisted of transferring private money to foreign bank accounts).
5)      Unless Greece can sustain her ability to attract foreign debt, something else must happen in order for the books to balance: reduction of imports; increase of exports; increase of revenues from tourism; increase of foreign investment or EU-grants; or a combination of these factors.
6)      It must be noted that a reduction of imports translates into a reduction of the standard of living. So much more is it important to primarily operate with the other variables in the above combination.
7)      A return to the Drachme would quickly correct these imbalances: imports would become more expensive for Greeks and decline; exports would become cheaper for foreigners to buy and increase; vacations in Greece should become less expensive for foreigners and revenues from tourism should increase; foreign investment might increase if Greece becomes competitive from a financial cost standpoint (however, Greece would also have to become competitive from the standpoint of the ease of doing business in the country).

PS: a return to the Drachma would also wipe out a good portion of the value of the roughly 200 BN€ savings in Greek bank accounts and it would have an unpredictable impact on Greek banks and pension funds.

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