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Monday, February 20, 2012

Greece is "burning" 50 BN EUR annually of other countries' savings!

At year-end 2009, the external debt of Greece was 413 BN EUR. At year-end 2011, two years later, that external debt was approximately 510 BN EUR, almost exactly 100 BN EUR higher.

Please ponder the dimensions of these figures!

A country of about 11 million people with a GDP of about 230 BN EUR added about 50 BN EUR per year (that is: fifty billion Euro!) in external debt in the last 2 years (for the period 2001-10, it was about 40 BN EUR per year). And there is no reason to believe that this number will be a lot less in 2012.

Here is a country literally "burning" the savings of other countries. And that trend is not stoppable as long as Greece adheres to the free movement of goods and capital (EU-freedoms). Some people even argue "as long as Greece remains in the Eurozone".

Again, it is the dimensions of the problem and the inability to stop the process within existing EU-treaties!

This blog has argued from the start that Greece urgently needs to implement special taxes on imports and capital controls. Not having done this yet has cost the savers of other countries 100 BN EUR in the last 2 years.

If special taxes on imports and capital controls are not implemented any time soon, then I will have to change my position and argue that the sooner Greece exits from the Eurozone, the better for her (and all the others). Then the EU should even consider giving Greece a grant of, say, 100 BN EUR to handle the Drachma-transition for the next couple of years.

That 100 BN EUR would be an investment for the EU (and not an expense).


  1. Or to put in another way.

    The 50 million taxpayers (50% of population, probably too high) in Germany, Netherlands, Finland and Austria must each pay €1,000 per annum, forever, so that 11 million Greek men, women and children can each receive €4,500 per annum, forever.

    Another something to make one go - Hmmm!

    I've hid the same thought as yourself, give Greece a grant to quit the Euro rather than a Bail-Out loan. But if Greece, why not Portugal and Ireland.

    I don't think the treaties will allow Greece to impose controls on capital outflows, introduce tax free zones, impose import restrictions etc. They would contravene the four basic principles of free movement of capital, goods, people and services.

    I acknowledge the Four Freedoms are more honour'd in the breach than the observance. But if exceptions were made for Greece, then why not everyone.

    The fundamental failing of the EU is the belief that one size fits all.

  2. Of course, and as I mentioned, my proposal would breach 2 out of 4 EU-freedoms. But treaties are there to be amended when parts thereof no longer serve the original intent. Why not other countries as well? Actually, why not? If it makes sense for them, go ahead. Something needs to happen to rearrange trade and capital flows within the Eurozone. It would be a lot nicer if free market forces were to accomplish that (and they would with local currencies...) but if they don't and if the alternative is the break-down of the Eurozone, then amending a treaty would seem to be a much better alternative!

    1. Excuse me, but how you calculate that increase and you count that related with Greece's external debt ?
      Belgium has external debt around 260% of GDP. The Netherlands around 340% of GDP without being "net international creditor".
      In the case of Ireland wich is around 1165% of GDP? Greece if we say GDP is around 217b € is almost 235%.

      I don't understand how you measure the increase as a loss because public dept of Greece is going to close around 365-370b € in 2011. The other "accounting" debt is held by either households or private corporations which is never paid at once and their size is less than 60% of GDP!
      Technically you add TARGET inputs from Germany and other countries?

      I totally agree that either capital flows and investments foreign or Greek might be a solution.

      But also a specific model for development never worked or even implemented partly not like Germany but even like Italy because the approach is tortuous not detailed and not supported from most political parties.

    2. Treaty changes that don't include the creation of a Eurozone transfer union and a Eurozone central treasury, and the dismantling of the Eurozone national central banks will be a band-aid solution until the next crisis.

      IMO the only way the Eurozone can work is as a single economic unit. But that wont happen without a Eurozone parliament from which a Eurozone government is formed. And those institutions would inevitably come into conflict with the EU Commission and the EU Parliament.

      So I can't see those things happening from the current treaty base. Hence I've come to the conclusion that it's in the long term interests of the European People and Project that the EMU be dismantled.

      To provide near term relief to the weaker Eurozone states, the Finns, Dutch, Germans and Austrians could exit the Eurozone and reinstate their own national currencies. But not a Euro Mark II based on the flawed architecture of Euro Mark I. A mechanism to relieve/forgive them of their "TARGET" liabilities would need to be implemented. But this won't solve the structural problems inherent in the EMU/Eurozone architecture.


    3. No, you are wrong! Just because the Eurozone has been mismanaged the first time around doesn't mean you have to "throw out the baby with the bath water". Give it a second chance and hope that it will be done right the second time around.

      If the USA, with a central government and a centralized fiscal authority, had been managed the same way as the Eurozone, we would today see discussions about the break-up of the USD and the American Union.

      You can have a currency union with unequal partners and unequal productivities. You just have to accept that there will be different standards of living in the union. There are very different living standards in states of the American union.

      There is only one reason why the Greek living standard could explode beyond reasonableness: money was irresponsibly lent to Greece to finance that. The money was perhaps being lent because everyone thought that the Eurozone was one and the same risk.

      Pardon me! That's the problem of those who thought that way and they should pay the price! If they had read and believed EU treaties, they would have known that the opposite was intended.

      Sub-prime did not almost bring down the world of finance because the system was wrong. It almost brought down the world of finance because the users of the system made very, very stupid mistakes which they wouldn't have made if it had been their own money which was at stake.

      You can never effectively change behavior by changing the system. Only by changing the incentives. The (perceived) incentive for lenders was that Greece was the same risk as Germany and therefore it was better to lend to Greece at a bit higher rates than to lend to Germany. For that mistake, many banks should have been allowed to fail 2 years ago instead of keeping them alive via making loans to Greece. This is why I have a post that there should be something like Nueremberg Trials for EU-elites.

    4. Herr Klastner, I think we are in agreement on the basic issues and most elements of long term solutions.

      Our differences are in deciding where we should we be when we start applying remedies; from where we are or from some other place. Normally I'd agree with you, lets start from where we are; but on this one I have to agree with the Irishman who, when asked for directions, responded with "Well, if I was going there I wouldn't be starting from here" :-)

      I don't think the political will and capacity exists nor the popular support to allow substantial revising of Treaties.

      If a financial engineering solution could be found to unwind the Eurozone without causing unbearable hardship then it could get popular support. Maybe Goldman Sachs could redeem themselves by devising such a scheme, but where are the politicians who have the courage to say they were wrong.

      Regarding Nurumberg Trial's for EU elites. I don't think the people you have in mind killed anyone, unless you're thinking about their failure to act in respect of the Yugoslav Wars in the 1990's. That they weren't frog marched into the ICTY suggests to me that those who stand idly by will never stand trial in a criminal court.

      A Truth & Reconciliation Tribunal might be a better vehicle to expose the failure of EU-elites to impose regulations that would have prevented commercial banks from lending money to half-sovereign states. But we'd better hurry up, because soon they'll all be senile or dead - as some already are.

      Merkel may have acted incompetently in trying to clean up the mess; but she didn't create the mess, unless we think Ministers for the Environment were responsible.

      Sarkozy is different, between 1994 and 1996, when he was French Budget Minister, he increased France's public debt by the equivalent of €200 billion, which was a yearly budget deficit of six percent of GDP. Maastricht requires yearly budget deficits to not exceed three percent of GDP.


  3. The source of information is the Bank of Greece. The percentage of GDP figures are not necessarily very comparable because many countries (like the US!) have many external assets offsetting external liabilities. Greece does not (at least not a significant amount).

    So it is less the level but, instead, the amount of increase and what the increase is used for. In the case of Greece, the net increase in external debt was used for the financing of the current account deficit (caused by horrendous imports), the budget deficit and, in the last 2 years, gigantic deposit withdrawals from banks (about 65 BN EUR).

    Financing the budget deficit is ok, because it needs to get financed and one cannot turn a budget around from one day to the next. Using foreign tax payers' money to finance horrendous imports of consumption goods and capital flight is a prodigal sin in times of economic emergencies. I mean, explain to European tax payers that their money is sent to Greece so that, among other things, wealthy Greeks can send their money to private accounts in, say, Switzerland. But this is what happened!

    Greece is not a bottomless pit. She is a pit with 3 big holes: budget deficit, current account deficit and capital flight. The former has been addressed so far quite impressively ( Nothing has been done regarding the other two.

    Now one could say that free market forces will take care of that. I am a convinced free marketer but there are times when free market forces no longer work prudently. If I were a Greek, I would definitely transfer my deposits to a foreign bank to protect against the risk of Euro-exit and I would definitely buy cheaper imports than more expensive domestic products. Can't blame the individual for protecting his individual interests. So you have to adapt the system - at least temporarily - so that systemic interests are not in conflict with individual interests.

  4. I haven't seen or did found any article, research or statistical data or evidence that confirm:

    1.If this specific term of "external debt" has a very clear interpretation (eg in Greece) and implies or correlated with a tranfer of money as sigificant as you mention.
    Yes there was a financing for the deficit but this was not so obvious when Greece had positive development rates.
    This not explain the increase in external debt but the fact that GDP was decreased significantly.
    Question, if we say Greece will start grow from the Q3-Q4 2012 and show off a real primary deficit, this number (not as a % as you say) will change or not?
    External debt is totally doubtful as resource, as a size and as statistical analysis tool.
    Take into consideration the fact that Greece is under extream recession more than 10-11% of GDP the last 2 years

    2.Budget deficit was more than 36b in 2009, primary deficit 24b. At 2011 is 21.7b and primary deficit around 5.5b.
    All these happen in an labor intensive economy with poor use of technology and innovation procedures, without any significant industry (like Ireland, Italy) and mainly extremelly influenced by the drastic changes in salaries as a part of an internal devaluation(sic)
    3 About current acount deficit. During the period 1980-2000 with drachma Greece (fluctuated to us dollar 50-300 drachmas)have less exports compared to the period 2002-2009!
    For those who persistently say that we should exit euro!
    The main reason why for this imbalance is first the reforms unfortunately haven't made during many last years (but will made now) and only related with no cost at all for any government to implement, so never have we forced to analyse our real competitiveness possibilities (from 2009-2011 as seen in salaries adjustment, we gain 1/3 of lost competitiveness) of last 10 years.
    Second the lack of a mechanism to observe the tortuous prices of goods, services, professions and corporations fees.
    This might be the greatest contribution from Troika because it is related with the all structure and dissfunctional Greek model towards a hard recession.
    I would recommend you to tranfer deposits to Greece and invest in GR stocks!
    Greece will start improving significantly GDP rates from at least q4 2012 and those who tranfer deposits i hope to be forced to pay taxes.

    1. I need to clarify one most important thing which has not been addressed at all in the handling of the Greek crisis of the last 2 years, namely:

      When countries have external payment problems, the only thing which matters is the country’s external debt. Not the total sovereign debt; not the foreign portion of the sovereign debt; but, instead, the foreign debt of the entire country (i. e. the foreign debt of the state, of the banking sector and of the other sectors). Why is that?

      If all of Greece’s sovereign debt were held domestically by Greeks (which would have been possible because there were enough domestic savings to hold all the sovereign debt), then you can rest assured that there would be absolutely no excitement between Paris-Brussels-Frankfurt-Berlin today. Instead, those EU-politicians would wish Greece good luck to solve their own domestic problems. Japan is more or less in this situation.

      Check the website of the Bank of Greece which shows really very good statistics on foreign debt and all external accounts.

      At Q3/2011, the foreign debt was: government 280 BEUR; banking sector 208 BEUR; other sectors 22 BEUR. All in all about 510 BEUR.

      You have to make the mental salto and imagine that Greece still had the Drachma but that the Drachma were fixed to the Euro 1:1.

      If Greece still had the Drachma, then those 510 BEUR would be the foreign currency debt of the country. That foreign currency debt increased in 2011 by 21 BEUR out of the normal operations of the country: foreign currency receipts from exports, tourism, transportation, etc. fell short of foreign currency payments for imports by 21 BEUR. Add to that the loss of bank deposits and you come to the increase of 50 BEUR in foreign debt for 2011.

      Again, imagine Greece still had the Drachma and the foreign currency debt increased by 100 BEUR in the last 2 years. You would ask yourself what happened to those 100 BEUR? Well, they are again in foreign bank accounts. In the foreign accounts of exporters to Greece and of Greek nationals who hold foreign bank accounts in Switzerland, etc. Foreign currency could not have been used in Greece when the local currency was the Drachma (I correct myself: yes, Greeks could have withdrawn foreign currency to keep it under matrasses).

      What was clear before the Euro (i. e. that there was a local currency and foreign currencies) has been mingled through the Euro: there is now seemingly only one currency whereas in actual fact there are two types of that one and the same currency: the Euros which are in Greece and the Euros which Greece needs to borrow offshore in order to pay domestic bills.

      Continued below.

    2. To your question: Greece is likely to have a primary surplus in 2012. But with present interest rates, the Greek budget is getting killed with interest payments. Still, it doesn’t really matter for what I am trying to say.

      Even if all of the debt of the Greek state were forgiven (i. e. no interest payments in the budget; the primary balance would be the ultimate balance), Greece would still need around 20 BEUR in new loans from offshore to finance the current account deficit.

      Let me take you to the extreme hypothetical example: all of Greece’s foreign debt of 510 BEUR is forgiven, i. e. there are no longer interest payments which have to be made offshore. Then Greece would still require new foreign funding of at least 10 BEUR annually to finance the current account deficit (pay for imports).

      Am I making myself clear? Foreign money (the deposits of other countries’ savers) enter the country as debt and leave the country as payment for imports and capital flight. Before the Euro, this couldn’t happen in such extreme ways before foreigners just didn’t lend Greece unlimited money. That’s why Greece had very high import tariffs in those days (like on cars). With the Euro, Greece has an unlimited credit card with the ECB and that is what is causing the problem.

      You don’t need to convince me that Greece has made an enormous effort on the budget side. I have written about that.

      The sad thing is: it is almost irrelevant what Greece does on the budget side as long as nothing constructive happens in the economy. The German state is pretty much bankrupt (bankruptcy being defined as having to borrow money in order to pay interest) but it is backed by an economy which is presently very successful. The bankrupt Greek state is backed by an economy which no longer functions.

      That’s why all efforts would have to go towards getting the Greek economy to function again. To become an economy which generates value instead of being a turn-table for money which enters as debt and leaves as payment for the import of consumption products and capital flight. My description of what the Greek economy has become is: a zombie-economy where people sell each other Souvlaki at inflated prices and pay for that with money borrowed offshore. That has got to stop! My own proposal would be this:

      You recommend that I should invest my money in Greece. You don’t mean that, do you?

      Only a fool would today transfer his money to Greece for investment. The Greeks transfer their money out of Greece. And, in simple terms, this is the death verdict for the Greek economy. No economy can survive if its liquidity is transferred offshore all the time.

      I can’t blame any Greek for transferring his money to banks abroad to protect against the risk of a Euro-exit. He would be foolish not to do this. I can’t blame any Greek for buying cheaper imports instead of more expensive local production. He would be foolish not to do that.

      So here is the answer: the government has to create an economic framework where what seems foolish today starts appearing as smart. Where Greeks (and others) start saying that they are smart to invest their money in Greece instead of Switzerland. That Greeks buy Greek products instead of imports. Actually, it’s quite simple. One only has to do it!

    3. I need to clarify also some things. Why GR economy does not work?
      You say external debt is strongly related with countries having external payment problems. So currency inputs for imports by 21 b € plus the loss from banks deposits here we have 50 b € in foreign new debt. Correct?
      The theoretical founding of what you are saying is acceptable but you have flows in mechanics. Your view is well founded but it does not explain the dynamics in the most crucial matter, this of the BANKS -lol-

      1. Governments seek money from banks in order to adjust their obligations. Greek banks for 2 years are unable to perform independently for very known reasons. The financing which is a maintenance and MRO, LTRO, liquidity is for recycling its balance sheets and maintain almost unchanged.
      But is like being in a gypsum.
      As you know better than me the nature of banking is associated with maturation. Example, deposits of customers can be readily available for commitment but also the banks lend to businesses and households and are committed for many years. The result is that banks often face significant liquidity risks. In case of Greece not for liquidity reasons but for sovereign reasons.
      The GR banks during this crisis lost more than 60 b € in deposits. The ratio L/D for every euro in most was around 0.9-1.2 which is from the best ratios in most western countries.
      But here comes the dynamics of unchanged maintenance which in some cases make things more difficult.
      We witnessed a massive rescheduling in loans with cost for banks, a great increase in NPL but also the inability to finance companies, new business schemes and i m talking even for export based companies.
      The banks policy was: we try to restructure loans in order to make many customers able to pay but to new loans, we say a big NO.
      Because if they contract new loans more to those eg of 2010 the CAR would be in huge deterioration. So less loans than 2010 a not so substantially worst CAR for 2011 even after losses with PSI 21%!
      The problem here? By reducing corporations funding especially those many thousands small family led companies with many issues and questions about their competitiveness and their ability to export we made them problematic.
      The most important for my point of view is that a reduction in loans at 10% practically has a huge impact in GDP and reduce it at least 3-4%. Even loans as working capital given very carefully.
      So the increase in dept partly endured by the weakness to re-finance positively Greek companies as the funding from banks was scarce and business opportunities limited in a very hostile as far as taxes new environment.
      In a country -6% GDP huge taxation and bureaucracy with gasoline-diesel prices around 1,7E and VAT 23% with small companies and a few industries what can you do to altered that?

      Is to begin financing from banks.
      We can have easily succeed primary deficit in 2012 if banks start financing properly the economy in much better terms after being recapitalized and with much more simple taxation and rules for doing business imposed by the government.
      The money was leaving because the business environment is hostile as far as taxation, markets, professions, public sectors functioning etc. If we manage to simplify many specific issues the climate will change rapidly. The worst for money is to stand still! Or trapped !


    4. 2. Greece always had large current account deficit, this improved significantly in past 2 years but not as much as wanted. This is not going to change even in 5 years or even in drachma unless we helped to develop a new model based on better function and cooperation in education-business practices.
      We should ask foreign corps what they want so as to build factories from all countries with multi national industries.
      The point is (for me) to produce primary surplus and to control prices and real costs. Economy is working without fuel and the increase in exports was around 10% for 2011. The current account deficit also improved. If we have had some practical people plus a determined leader in charge (mr Papademos is not let to work) we would definitively be the first to return to the markets even before Ireland, Portugal even if these countries are in much better condition as far as debt, productivity and competitiveness + exports.

      3.An example we have Elliniko land (1500 acres) which its present value is about 5 b € because of its exceptional position. It has the potential to become a new Monte Carlo especially if you alter the taxation rules for foreigners in order to buy a residence. (This is in Greek)

      The uses can be numerous. In many many areas Greece is undeveloped compared to many countries of our region and full of useless and unwanted barriers.

      This is a simple but big example, I am still recommend you to invest because if one comes and make the start then everyone comes, this is human nature! Don't forget that!
      The point is to find the first!

  5. Regarding point 2: you got it!!! I have made the point over and over again that there are only 3 solutions for Greece's external balance: foreign investment, foreign investment and, again, foreign investment:

    As you say, Greece's current account deficit is a structural one and will continue. A current account deficit it not bad per se. It all depends what it is used for. If only used for consumption and all financed with debt, disaster is waiting to happen (see past 10 years). If a reasonable portion of it is used for investment and financed with equity, things will be fine.

    I think we both agree that, given the above, Greece will need funding from abroad for years to come (perhaps forever). It would be illusionary to think that all of that funding will come in the form of voluntary bank debt (for some time none of it will come in that form). So some of it MUST come in the form or equity, i. e. foreign investment. And foreign investment not only brings money but also know-how.

    There may indeed be the one of the other good investment opportunity now but that would be a lucky shot or an insider’s tip. Overall, Greece is far from being an attractive place for structured investments (Nr. 100 on the World Bank’s “Doing Business 2012 Report”). This is why I have made the point over and over again that one of Greece’s top priorities should be to create business frameworks which make it attractive for foreign investors to come. My working title for that is “Free Trade Zones”. You find much info on that in the first section of by blog inventory (“Future strategies for Greece”).

    On your first point: yes, I agree. But banks are banks and the behavior of banks hasn’t changed all that much over the decades and won’t going forward, either.