Greece's Cross-Border Funds Flows 2006-2015

This article by Bulow/Rogoff explains very well what I have been trying to argue since the inception of this blog, namely: when examining the funds flows into Greece by institutional creditors (ESM, ECB, IMF, individual governments, etc.), one has to look at the ENTIRE ECONOMY and not only at the state.

Greek austerity has been defined as money being made available to the state as a borrower. The bulk of that money had to be used by the state to pay creditors. Still, according to the IMF, from 2010-12, 41 BEUR of the total of 247 BEUR which were lent to the state remained in Greece. Beginning in 2013, Greece registered primary surpluses which meant that the state did no longer have to borrow to finance its operations (only to pay creditors).

Assuming that the Greek state would have needed 82 BEUR to make a smooth transition out of its crisis, having received only half of that amount is truly austerity. But does that also apply to the entire economy? Bulow/Rogoff say 'no', and they show the numbers to prove the point.

From 2006-09, total inflows into Greece amounted to 72 BEUR, in those years notably from private creditors. That amounts to an average of 18 BEUR per year.

From 2010-13, total inflows into Greece amounted to 92 BEUR, now almost exclusively from official creditors. That amounts to an average of 21 BEUR (!) per year, i. e. more than in the previous period!

The situation changed in 2014 when there was a net outflow of 5,5 BEUR. Had the Fith Review been completed, Greece would have received 7,2 BEUR in 2014 and, again, there would have been a positive net balance.

Only in 2015 did the situation turn around and, in the first quarter alone, there were 13,3 BEUR net outflows. The reasons for that are well known.

So if the country of Greece were a family, that family would have done quite well until 2013: 72 BEUR in net inflows from 2010 until todate appear overwhelming. To make a provocative point: Versailles aimed at taking money out of Germany. In the case of Greece, the institutions put money into the country (albeit it not as much as might have been needed).

How do the above numbers square with the huge austerity being suffered by Greece? The answer is: it's not only the state which matters; above all, it's the entire economy which matters. The bulk of the funds inflow did not go to the state but, instead, to the banking sector. The fact that Greece received about 45 BEUR in EU subsidies since 2006 also helped.

Bulow/Rogoff compare Greece to the situation of Latin American countries when they hit balance of payments crises in the 1980s. Those countries needed to return to surpluses in the primary balance and the current account practically overnight. Greece did not. Partially thanks to the official lenders to the state but, much more, thanks to the ECB which continued to fund substantial current account deficits until early 2014 and, ABOVE ALL, phenomenal deposit flight. Bank deposits had reached almost 260 BEUR before the crisis and they are now said to be under 130 BEUR. Whoever the owners of those deposits are, they received Euros which they could only receive thanks to the funding by the ECB. Their Euros, to the extent that they haven't been spent, are now safe. The ECB's Euros are now seriously at risk.