Wednesday, February 8, 2012

Face the truth, Greeks! ...and foreign creditors as well!

Let me put it so simple that even a high school student will understand:

Greece as a country (not only the government) owes about 500 BN EUR to foreign creditors and every month at least another 2 BN EUR are added to this foreign debt (for import payments and replacement of domestic deposits withdrawals).

THERE IS NO SHORT-TERM WAY TO CHANGE THAT! (so why spend so much time on this question?)

The only way to reduce this foreign debt is to forgive it. What's the point of that? You only upset those who have to forgive it. Let them hold on to 100% of their claims! The claims don't matter to Greece; only the interest expense on the claims does. In exchange for letting your creditors hold on to 100% of their claims, negotiate with them that they lower the interest expense for the next, say, 10 years to a level which Greece can afford without jeopardizing the re-building of her economy. If Greece can afford only 2%, fine. Pay 2% in cash. If creditors want 6% instead, fine. Let them have 6%. But tell them that the difference of 4% will not be paid in cash but, instead, will be capitalized.

Here is a common-sense approach to problem-solving: when in deep financial trouble, don't waste efforts on fixing present/past burdens. You can't fix them, anyway, when in deep financial trouble. Put present/past burdens (the 500 BN EUR) aside and spend your time fixing the future. If you are successful in fixing the future, a fixed future may enable you to also fix at least part of the present/past burdens (probably not all of them).

Common sense does not understand why anyone would question "austerity" for the Greek public sector. I mean, there is all the evidence in the world that the Greek public sector, because of its size and inefficiency, is the root of most Greek problems. And now you want to continue to allocate substantial resources to that behemoth? Starve it to death, instead!

Now, the highschool student will understand that total economic activity is the sum of the activities of the private and public sectors. If the public sector is starved to death, the private sector has to compensate for that.

Not Keynes is the medicine for Greece; anti-Keynes is! Not deficit spending of the public sector is the solution; investment spending of the private sector is!

Anyone who has ever been involved with change management will know that it is virtually impossible to change a social system like the Greek public sector within a foreseeable time span. An existing social system of that size has so many self-protective mechanisms that it will devour all reformers.

If you can't change it, make it superflous or irrelevant!

Take Soviet Communism as an example. The old social system could not be defeated; it could only be made irrelevant/superflous by introducing a new social system (and there are still suspicions today that perhaps part of the old KGB-system has survived with Putin).

So what is the common-sense solution?
By-pass the public sector and throw money, very much money, into investments in the private sector. Require the government to approve all legislation necessary so that such investments in the private sector are made.

Where should that money come from?
Ideally, it would be "Greek money" presently invested in, say, Switzerland. Here the trick would be to find ways how that Greek money comes back to Greece voluntarily. My suggestion: offer it the same security as Switzerland does but much higher returns.

Until the Greek money returns, the necessary money must come from places like the EIB or foreign companies who are prepared to invest in Greece if and when the security/return-equation is attractive. The EU could use its think tanks to devise ways how money (or machinery!) can be sent to the Greek private sector.

The only way for Greece to come out of the present mess half-way healthy is a successful private sector initiative. To make that happen is not only in the interest of Greece (by establishing the necessary economic framework for new investments). It is of equal interest of Greece's creditors and, above all, of the Eurozone and the EU. They all will later be better off for it!


  1. Very interesting approach to the debt, the current methodology is not sustainable and is crippling the Greek economy anyway. You can't reapay debt when the economy is flattened, which ius Greece's current fate.

  2. Thanks for an interesting blog.

    "Greece as a country (not only the government) owes about"
    Odious debt

    Do you have a comment on the Odious debt-doctrin...?
    Is this applicable to Greece?
    Is it desirable?

    Best regards!


    1. I vaguely remember the term odius debt. Debt repudiation is never a good thing because that precedent haunts the repudiators almost forever. Lenin allegedly once said that one of the greatest mistakes of his revolution was to have repudiated the debt of the former Tsarist Russia.

    2. Is there really examples of a negative outcome for the repudiators...? Time goes by and new times comes forward - and things becomes history...
      I think this description is reasonable:

      Odious Debt

      By law, in most countries, individuals do not have to repay money that others fraudulently borrow in their name. Similarly, a corporation is not liable for contracts that the chief executive officer enters without the authority to bind the firm. But international law does not exempt citizens of a dictatorship from repaying a debt incurred by a dictator for personal and nefarious purposes.
      - Brookings

      I see no real negative consequence of having a moral dimension to the relationship. On the contrary. Lenders should ensure that they are within the right margin of the right side of the moral divide. Both borrowers and lenders should have a responsibility. Lenders can then be relatively certain of being able to assert back their loans but some risk must always be included in a loan calculation. The danger lies - as Brookings argue about it - that centralization is - beyond the courts - to regulate the business relationships - like - The United Nations Security Council. This is not good and typical leftist policies (which damaged greece so much). The balance should lie in the relationship itself, common sense, gin the consensus and understanding about it in public - and the courts. As I see it, it may well be applicable to Greece, where corruption seems to be endemic. Loans should not be granted on these terms - and I wonder how the Greeks will react to hard constraints for many years. What force will dominate all this ..?

      The big issue is that the world has no fixed point and balance right now - it's transformation time - and something new must and will be created - an organization with its own internal balance. Probably based on the striving moral man with existential self-realization - and that will hopefylly be the hard currency.
      But that's just my 2 cents ....;)



    3. On odious debt: you have to bear in mind how financial markets work. If there were an international court which ruled that, say, half of Greece’s debt was odious and if that ruling were applicable to every national jurisdiction in the world, even then it might not work. Why?

      Because every country needs at some point something from financial markets and today most countries need something from financial markets all the time --- financing. If financial markets don’t lend Greece money, then Greece is in big trouble. With that leverage, financial markets can always say “we will lend you money provided that…” And one of the “provided that” would be that Greece honors all her past debts.

      Now Greece could argue that there is an international law ruling that the odious debt is no longer debt. What if financial markets say “Maybe it is odious debt, maybe it is not. The point is we will not lend you more money if you don’t honor that debt”. And no one can force financial markets to lend.

      Take Argentina. A little over a decade ago, Argentina considered it wise to repudiate some of her foreign debt. Argentina is a very rich country with surpluses in trade and current accounts so they may have figured that they are not really dependent on financial markets. To this date, Argentina is considered “brand-marked” by financial markets with all the consequences going along with that (for example: the President does not fly in official Argentine planes when travelling abroad for fear that the plane might be impounded in a foreign jurisdiction).

      Is that blackmail by financial markets? If you are an idealist, you could call it that way. If you are a realist, you know that you shouldn’t bite the hand which feeds you.

      Just look at the financial history of Greece since independence. Half of the time Greece was in default and more than once did they want to repudiate foreign debt. But when they needed new financing and when the financiers say “yes, provided that…”, Greece already honored the past debt to keep new money flowing. And not only Greece…

  3. Do your research first and don't base your analysis on lies that the mainstream media broadcasts!
    First of all Greece has one of the smallest public sectors in the EU compared to its population! (

    Also note that Greece is among the three most hardworking nations (hours/week) in the world according to OECD (

    Ofcourse I would have to agree non productive hours!

    So, you have one of the hardest working people, in a rich resourced country with a small public sector! Ofcourse with high levels of corruption... but corruption cannot account for 500 bil. USD.

    Make an analysis on this instead of trying to convince us that by privatizing everything and by doing simple debt management will do the trick!

    You don't even get the real reasons that led Greece to the current situation, how can you provide a solution??

    1. “So, you have one of the hardest working people, in a rich resourced country with a small public sector! Of course with high levels of corruption... but corruption cannot account for 500 bil. USD.”

      When I read this sentence, I wondered why it is that Greece has a problem. What would be your explanation?

      Thanks for the interesting paper on the sizes of public sectors. As always, it depends on which statistics one looks at: the size of the central government or the size of the entire public administrative and productive segments of the economy. According to the OECD, Greece has almost 80 state-owned companies.

      If you only look at direct government spending, it is correct that Greece’s government expenditures are not out of whack, standing at about 50% of GDP (Austria is 53%; France is 56%). This is why I have argued in several articles that overall government spending should not be cut in times of recession but these expenditures must be dramatically restructured so that one doesn’t need to take money from the living in order to pay pensions to the dead.

      The overall public sector, i. e. including state-owned companies, etc., accounts for about 40% of Greece’s GDP. Again, look at the OECD reports. That, of course, is a staggering public sector share of economic activity. If you argue that this sector is very productive, then you would be the first Greek that I hear arguing that way.

      To be perfectly honest with you, I am not sure that I understand what your point is. If you are interested in research and facts, my blog is full of both of them. But, again, what are you arguing? What is it that your research has told you about Greece’s problem?

      The Bank of Greece’s website has excellent statistics. The answers to most of Greece’s problems can be found there. Let me give you examples.

      The gross foreign debt of Greece is presently around 500 BN EUR (Euros, and not USD!). At year-end 2001, it was 121 BN EUR. Can we agree that about 380 BN EUR of net debt must have flowed into Greece from abroad in the last 10 years? (net increase, that is!).

      During this time, Greece’s GDP probably averaged anywhere between 200-250 BN EUR. So we are talking about almost 40 BN EUR entering annually into an economy of this size. That is 15-20% of the entire economy. Now, when you throw that kind of money at anything, you get a boom. If you use that money wisely, you get a Golden Age. If you spend it on consumption, you get a bust as soon as the money flow stops. Do you find this understandable?

      What was that money spent on? By far the largest item is imports, followed by the government’s deficit and then, of course, transfers abroad (capital flight). Details are in the BoG statistics.

      So you can hopefully see that the gasoline driving the Greek standard of living engine has been the inflow of money from abroad. In the last 10 years, this money has come in the form of debt but debt no longer wants to flow to Greece voluntarily. So unless you really want to reduce the Greek standard of living, you have to find new forms of money inflows. You can export more; you can attract more tourism; you can perhaps get Greeks from the diaspora to transfer back their earnings. All of that won’t suffice in the least.

      So I come to foreign investment not for dogmatic reasons but simply for mathematical reasons. It’s either that or a brutal decline in Greece’s standard of living.

    2. Thank you for your interesting and above all astute and perceptive analysis of that lamentably corrupt greek public sector. By far have you delineated the crux of that sordid cesspit called 'dimosio' (the 'public'). This term, however, is but a misnomer, if not tragicomic term, as it bears the onus of responsibility concerning the utter failure of the greek post-war public and self-proclaimed 'welfare' state system. I have had the misfortune to be a long-term taxpayer in that hell's kitchen and I know both as a scientist and as an everyday citizen what it means to be left prey to those dehumanized zombies. The evidence presented to you, by the previous writer , as regards the quantity or volume of workforce in the public sector in comparison to other countries is folly and in terms of argument holds no water. The issue at hand here is neither the number nor the percentage of greeks in the public sector. I agree with you that I do not understand the point this writer is trying to make, and to be honest, I don't care. It's well known cunning foolish rhetoric which , as a citizen of this joint, I'm sick and tired of. Rhetoric, lame excuses and passing the buck to others constitutes an integral, if not an inseparable, part of greek public sector mentality. It's pathetic, dehumanizing and downright humiliating. These clowns have rendered Greece, the once upon a time cradle of Democracy, to a cradle of filth. No, these rats do not represent us all living in this bordello. No, these filthy slime-balls do not and will not ever represent the Greek civilization and the Greek citizens in any way. These degenerate sub-creatures will never make those who uphold dignity and personal integrity to be ashamed of their own existence and culture. And, above all, NO, not all Greeks are like those pieces of floating excrement in the public sector. Greece is destroyed because of those harlots. In order to survive in Greece one has to be either a wench or a pimp. That is the true relationship between the greek goblin greed politicians, the equally wretched clergy and those particular voters who sell their soul for a permanent job. That's the reality in bordello-Greece or Grease. That's the unpalatable, yet, irrefutable truth. In a nutshell, this is post-war greek 'democracy': "Give me your vote and I'll give a and your family a job." The Democracy of Pericles has been reduces to greasy handshakes amongst PIGS. Of-course, there are those so-called 'official examninations' of the public sector which are 'strict, impartial and immune from corruption'. Right! It would be wiser to believe in the tooth-fairy than in that rubbish. Nepotism, corruption and decadence is what remains.

    3. This 21st century monstrosity of greek democracy is degeneracy in its core. That's why all those Greeks who are truly worth it have fled the country never looking back. I thank the day I received the position in Canada, hence, continuing my research there. Corruption, beyond any shadow of a doubt, exists everywhere. However, no civilized community has ever stooped so low. Greek politicians and greek public servants are in the greatest undeniable majority pathetic and corrupt chicken-thieves. Their inflated ego has reached such psychotic levels that they have abused their power in all ways and in all forms. Many a n honest and respectable Greek citizen have endeavored to survive this rotten system since time immemorial. Those of us who are a bit more persistent leave that godforsaken place; others, who are truly hard-working and conscientious, are condemned to remain and suffer the cataclysmic eruption of Krakatoa. On one hand, I feel for those loved ones back home; on the other hand, however, I could no longer live in that purgatory. As for those who support that revolting system-to hell with them. And to hell with all those wretched creatures who destroyed the beauty, integrity and dignity of Greece. To hell with those who made a whore out of that wonderful country. To hell with those who make those honest Greek citizens suffer-and they are suffering a great deal! I refuse to feel enmity for my country and for my wonderful cultural heritage. I owe my academic education to the Classics. There are many wonderful Greeks back home who are erudite, hard-working and conscientious. That laudable part always existed, but it's a severe minority. All in all, my point here is that what should be utterly cauterized is the cancerous cunning-foolish and degenerate greek mentality which has spread, as the most insidious metastasis, in the public sector, the clergy and the parliament. What needs to change are minds and mentalities rather than sectors. Otherwise, just let that barren wasteland left in the wake of those socio-political zombies continue to shoot themselves in the foot. The world would benefit from one less pig.

      Again, thank you for your outspoken and accurate report. Feel free to visit the place and get first-hand experience of that lovely greek public sector. Pay a visit to one of those infamous tax-offices in the city center (or anywhere else, they're pretty much the same..). Do remember to be equip with inexhaustible patience and self-control, however. You'll need it..

    4. Thanks for your input. I know Greece pretty well since I am married to a Greek for almost 40 years and since we now spend about half the year there.

      To me, one of the tragedies is that not all Greeks are the same. If there were all like you describe above, it would be so easy to simply stop sending money to them. But then there are the other Greeks who are simply decent human beings; perhaps a bit simple-minded from time to time; who follow the rule of “hard word and clean living”; who are open-hearted, friendly, honest and deeply in love with their country. I would still like to think that they are still the majority, albeit a very silent majority.

      I found Petros Markaris’ description of Greek society very interesting. Have you read this?

      I think one of the challenges is that Greeks, particularly the decent Greeks, are really blindly in love with their country. As charming as that can be to foreigners, being blindly in love never helps when objective judgments and decisions are required. The objective judgment needed today is that not the Germans nor other powers that be have taken Greeks for a ride. On the contrary, Greeks were taken for a brutal ride by their own compatriots, those whom Markaris calls the Profiteers and Moloch’s.

      I can only marvel when I see how the economic upper class of Greeks has absolutely no inhibitions to take advantage of those who pay the bills. Our younger son works for one of the world’s largest asset managers. In their ultra-high-net-worth-individuals department they have 3 major client groups: Russian oligarchs, Arab sheiks and --- Greeks. But I am not talking about a few mega-rich families. I am talking about the fairly large segment of society who made an economic killing in the last 2-3 decades (3-digt BN EUR figures in private accounts abroad!).

      Our apartment is in a well-to-do area of Thessaloniki. We move in circles where the crisis is known only through media reports. Expensive supermarkets and shopping malls are full of customers. I still see living standards which I do not see in Austria. I could go on.

      There seems to be zero feeling of solidarity within society. Everyone is to himself, his family, maybe his larger family --- and that’s it. “Society” begins outside one’s doors. Within the fence, everything is beautiful but no one cares about garbage accumulating outside it.

      How can that be turned around? I guess nothing short of a national upheaval of the silent majority has a chance. A Greek by the name of Vanessa Landris wrote an article in the NYT “What Greece needs is a new hero”. I think there is a lot of truth to that!

  4. hi, i agree with your article, but i would like to have your opinion about greek new loan treatment ( I think troika asks too much from greece and to be honest i can't see how greece could avoid bankruptcy. The big question for me is should greece try to avoid bankruptcy (it's very difficult during a recession to raise tax inflow and cut incomes at the same time) or be honest to the markets and say i can't pay you now (before greek bonds are based in english law).

    1. I think it’s pretty clear that no one trusts the Greek leadership any longer, neither the troika nor the EU-elites. All the present behavior by these parties must be seen against that background.

      If the present deal (the 130 BN EUR) gets approved, then Greece should theoretically no longer face the risk of default/bankruptcy. The deal was calculated in such a way that, if all projections come true, Greece will not need to borrow from 3rd parties for the next 10 years, so there cannot be an event of default.

      Will all projections come true? Your guess is as good as mine but I would say that there is no way. Going forward, we will see a repeat of the quarterly exercise with Troika examiners and bluffing politicians until the point where one party finally says “We’ve had it!”

      Is the Troika asking too much of Greece? That depends on how you define the question. Of the Greek government, it is definitely not asking too much (not even enough). Instead, I argue in my post that the public sector should be starved to death.

      Of the Greek economy overall, the Troika has been asking too much from the start. You can’t have an austerity program in the public sector in times of recession without having, at the same time, a private sector stimulus program.

      The good old IMF recipe, which often works very well, is: get the state budget in order and implement reforms and the free market forces of the economy will take care of the rest. This supposes, however, that the free market has self-healing forces. I would argue that the Greek economy does not have those self-healing forces. Stimulus money thrown at the private sector will only partially land where it should land and will only partially bring the results that it should bring.

      This is why I believe that the Greek economy needs to be “managed” for some time until free market forces can work for the good of the country again (I am referring to import taxes and capital controls).

      Greece does not need to tell her creditors that she can’t pay. Everyone knows that, anyway. However, Greece must show to her creditors (and above all to voters in the surplus countries) that everything is being done to make money transferred to Greece an investment into Greece’s future instead of throwing good money after bad. To date, it’s been the latter.

    2. At first,thank you very much for your time and your answer, and excuse me if my question was a bit unrelevant with your article. Undoubtedly free market forces are the only chance for greece to 'recover', even if greece goes bankrupt or not. Personally i am very dubious about greek politicians (i supposed you have heard about greek corruption), who have no will to go against greek status quo, have done nothing which has to do with reforms during this 2 years and every 6 months i hear the same promises to eu and imf. It's really very hard to change their 30year behaviour.
      Regarding troika, you could see on their report that they want 2 billion in first year, 3.6 billion in the second year and 9.5 billion euro budget surplus! Now greece has 2 billion euro budget deficit and -7% GDP growth rate,20.9% unemployment. For the next year troika expects -5% GDP growth rate and all salaries will be cut more than 20% and a great percent of public spending will be cut, how could greece find 5 billion euro more in a such enviroment? Only by spending cuts, but these cuts will have a disastrous effect in GDP growth and unemployment. Also economy shrinking and income cuts will affect bank bad debts,and of course loans. It's very early to say how banks will be in 2-3 months but i think that greek banks are full of bad loans. It's very difficult for an economy to recover from depression with austerity measures and spending cuts.