Alexander Clapp Spoils Bullishness About Greece

Alexander Clapp's essay on Greece ("The Rot at the Heart of Greece Is Now Clear for Everyone to See"), published in the NYT on August 22, met with a multitude of reactions. Personally, I thought the essay was excellent and fair but I can understand why the reaction from the Greek side would be less than enthusiastic. One exception to that was The Greek Analyst who published a lengthy thread on Twitter. This was remarkable in as much as The Greek Analyst (73,8K followers) has been extremely bullish on Greece of late.

Since I had been in contact with Alexander Clapp a few years ago, I sent him the following mail about his essay.

Dear Alex,

The key statement in your essay, to me, was the following:

"It is, rather, the unsustainable contradiction between the country Mr. Mitsotakis insists on pitching abroad — an unimpeachably democratic state whose respect for the rule of law and liberal bona fides ought to be rewarded with corporate investments and tourism dollars — and the one he actually presides over.“

That question has been bugging me for quite some time now. I belong to those who were initially overwhelmed by Mr. Mitsotakis: his cosmopolitan demeanor; his superbly eloquent English; the way he handles himself; etc. Watching English interviews with him was always a pleasure. And the trick worked with me because I started believing that a new Golden Age was in Greece’s future. A modernized Western nation where people act rationally, honestly and responsibly. I even wrote a couple of articles in my blog about it.

It started with the push-back’s. There is a Greek journalist at DER SPIEGEL (Giorgos Christides) who really seems to detest the current government and whose articles about the push-back’s were accordingly. So I really didn’t take them too seriously (apart from the fact that I have true sympathies for Greece with regard to protecting EU borders). When the EU published its report on FRONTEX, there were proven facts but I still didn’t get overly excited. And then I watched a session of the EU parliament where Mitsotakis was present. A lady (don’t recall from which party) read him the riot act with innumerable facts from the report. I still did not get excited because I expected Mitsotakis to address each fact in his response. Instead, his response was limited to something like „Greece adheres to all laws and international treaties.“ That, I thought, was arrogant.

Then came his visit to the US and his speech before both Houses of Congress. To use that speech for portraying Turkey as an evil empire (even though it is) was not only displaced, in my opinion, but also arrogant. Those issues should be addressed in private discussions but not as a guest of honor before both Houses of Congress. 

And now we have this issue with the wiretapping. I would have expected Mitsotakis to quickly announce the formation of an investigation committee including international experts and even members of the opposition. His actual reaction I found disappointing.

After Greece’s exit from the program in 2018, I wrote a lengthy article summarizing all my experiences of the crisis and concluding that Greece was now truly on the right track and that, therefore, I wouldn’t continue my blog. 

Of late, I have looked at some of the hard facts of Greece (as opposed to the soft PR of Mitsotakis). I have written about Greece’s massive current account deficit and the staggering increase in foreign debt. While I don’t want to spoil the party of a record tourist season, the hard facts are very disappointing. Greece seems to return to being a turntable for money, money entering the country as debt and leaving it as payment for imports and capital flight.

There is one minister, though, who really commands my respect - Kyriakos Pierrakakis. That man seems to be a digital genius. I wish we would have someone like that in Austria!

When I think of all the billions which will flow to Greece out of the EU Recovery Fund, I really get worried. Will that money be wisely spent or will it be wasted (again)?

I hope you are fine and if you get a chance to drop me a line, I would welcome it.

Best regards.

Greece's Gross External Debt hits 565 BEUR! (300% of GDP!)

The Greek financial crisis began when foreigners brought new lending to a halt and began calling in existing loans. That is a process which normally starts rather slowly at the first sight of clouds over the horizon but which rather quickly accelerates as foreign financial agents watch the conduct of their competitors and then start doing what they are doing. The culmination of the process is called "Sudden Stop". That is when no one makes voluntary loans to Greece any longer.

It is fair to say that voluntary foreign lending came to a halt in early 2010 (the first memorandum was signed in May 2010). At that time, Greece's gross external (foreign) debt was around 430 BEUR.

"Gross foreign debt" (not to be confused with "sovereign debt") is the total of all monies which have entered the country as debt (as opposed to foreign investment), regardless of the borrower. At that time, Greece's foreign debt was roughly 50:50 with the government and with the banking sector. A small portion was with individual borrowers such as large Greek corporations. 

By the end of the first quarter of 2022 (March 31), Greece's gross foreign debt stood at 565 BEUR. What? That would represent an increase of 135 BEUR in a period where Greece was most of the time restricted by memoranda with the Troika! Well, the number of 135 BEUR is indeed not correct. The actual number is even higher!

In 2012, foreign creditors gave the Greek government a 'haircut' of 100 BEUR, roughly 60 BEUR of which were foreign debt. Thus, the increase of gross foreign debt between early 2010 and March 31, 2022 was actually 195 BEUR! That's about one year's worth of Greek GDP!

The overall interest expense on the total of 565 BEUR of foreign debt is not known to me. If the weighted interest rate were 1%, the annual interest expense would be 5,65 BEUR. If it were 2%, it would be 11,3 BEUR annually.

Interest expense it accounted for in the country's current account. In order for the country overall to pay 5,65 BEUR in annual interest, the current account needs to have a surplus of 5,65 BEUR. If the interest expense were 11,3 BEUR, the surplus in the current account must be in the same amount. Otherwise, Greece would have to borrow from abroad in order to pay interest due abroad (unless there are cash reserves).

In my previous post, I have outlined that Greece not only does not have a current account surplus but, instead, a massive current account deficit which means that Greece has to borrow abroad not only to pay interest but also to finance the rest of the current account deficit. Well, not quite. Greece currently has substantial cash reserves which can be used for foreign payments. 

Whichever way one analyzes the above, those are staggering figures! A gross foreign debt of 565 BEUR represents close to 300% of the annual GDP. There cannot be many countries in the world which have a higher ratio. 

Also, it is a quite staggering development when an economy aims at bringing down foreign debt after a crisis while in actual fact increases foreign debt by 195 BEUR! It certainly raises the question of what happened to all that money? Was it invested prudently and economically or was ist spent?

If this process continues, it won't be long until Greece hits 600 BEUR in gross foreign debt. Perhaps when that staggering number is published, the eyes of creditors will once again start looking at Greece's financials.