Monday, March 5, 2012

Take a look at Greece's foreign debt!

First of all, when a country hits external payment problems, the figure which matters is the "gross external debt". It is NOT the total sovereign debt of the country because, theoretically, the entire sovereign debt could be held by Greeks domestically (most of Japan's sovereign debt is held domestically).

If Greece's sovereign debt were held entirely domestically, there would hardly be any excitement today between Paris, Brussels, Frankfurt and Berlin!

The gross external debt represents the amount of other countries' savings which would be lost if Greece were to fall into the Aegean. That is the number which Paris/Brussels/Frankfurt/Berlin are worried about.

Before the crisis began, at Q3/2009, Greece's gross external debt amounted to 413 BN EUR.  Please note that 229 BN EUR were with the Central Government (=sovereign debt) whereas another 184 BN EUR were in other sectors (mostly banks).

Of the 229 BN EUR of Central Government debt, 206 BN EUR were in the form of bonds. Total sovereign bonds of Greece were said to be around 350 BN EUR at the time. If this is correct, only 59% of sovereign bonds (206 BN EUR out of 350 BN EUR) was held offshore.

The official figures of the Bank of Greece would suggest that the gross external debt declined from 413 to 405 BN EUR in the 2 years following Q3/2009. That is incorrect! In the period after Q3/2009, Greece valued that portion of foreign debt denominated in tradeable securities (sovereign bonds) at "market". Since Greek bond prices tanked due to the crisis, the valuation on the part of the Bank of Greece was reduced accordingly.

In the publication of the Bank of Greece, sovereign bonds held be foreign creditors would have declined from 206 BN EUR to 101 BN EUR between Q3/2009 and Q3/2011. In actual fact, that was simply a decline in market value.

The Bank of Greece does not reveal the nominal amount of sovereign bonds held offshore. In the table below, the column "2011 Q3 adj" assumes that these bonds remained at the same level as 2 years earlier (in actual fact they may have increased).


2009 Q3 2011 Q3 2011 Q3 adj.

I.General Government 229.073 175.680 280.668

  Short-term 9.350 1.987 1.987
  Long-term 219.723 173.693 278.681
      Bonds and notes 206.182 101.194 206.182
      Loans 13.541 72.499 72.499

II.Monetary Authorities 38.654 100.754 100.754

  Short-term 38.654 100.754 100.754
  Long-term 0 0 0

III.Other Monetary Financial
115.321 107.989 107.989

  Short-term 76.238 88.137 88.137
  Long-term 39.083 19.852 19.852

IV.Other sectors 26.060 15.495 15.495

V.Direct Investment 4.161 5.120 5.120

GROSS EXTERNAL DEBT 413.269 405.038 510.026

What does all of this mean?

First, it means that - should Greece fall into the Aegean - savers of other countries would overnight be out of 510 BN EUR (indirectly via the banks where they hold their savings).

Secondly, it means that these 510 BN EUR are the "floor". There is no point in performing intellectual acrobatics with rescue packages, Eurobonds, etc. Greece will not be able to reduce those 510 BN EUR for a long time to come (except for that amount which is being forgiven in the form of a haircut).

Instead, the 510 BN EUR will increase every year by at least 20 BN EUR. That is the minimum current account deficit of Greece.

Actually, the 510 BN EUR will increase by much more than the 20 BN EUR annually. To the extent that Greeks continue to withdraw deposits from banks, the foreign debt of the banking sector will increase because the deposit withdrawal is financed with new foreign debt (ECB).

The table above shows that - between Q3/2009 and Q3/2011 - gross external debt increased by almost 100 BN EUR. Without using a calculator, one can conclude that this represents an annual increase in foreign debt of about 50 BN EUR.

If Greece needs anywhere between 20-50 BN EUR annually in new funding from abroad for the next several years, the very valid question is: where is that going to come from?

It is not going to come from EU rescue packages. EU-politicians may be able to convince their voters for yet a third Greek rescue package but they won't be able to convince them of an additional annual rescue package in the order of 20-50 BN EUR for years to come.

Banks are unlikely to make new loans to Greece voluntarily.

That reduces Greece's options dramatically. The only viable options are new foreign investment and EU-grants. If Greece cannot cover the hole through these 2 instruments, the current account deficit will have to be eradicated forcefully which means a drastic curtailing of imports.

Today's living standard of Greece is imported. If imports are curtailed drastically, the living standard will sink drastically.

Isn't it about time to start thinking what measures Greece could take in order to maintain the living standard? At least more or less?

One doesn't have to be an economic Einstein to recognize the first few priority steps: increase exports; curtail imports (and substitute them with new domestic production); focus on tourism revenues; attract foreign investment; focus on getting EU-grants into place.

And do that in a hurry! There ain't much time left!


  1. Socialist oligarch dynasties drove their Trojan Horse to Brussels and now resort to preSocratic sophistry to talk their way out. How can Greece grow is simple business software costs fivefold due to kleptocratic taxation?

  2. This might help?

    2009 Q3 2011 Q3

    1DIRECT INVESTMENT -9,448 13,356
    2PORTOFOLIO INVESTMENT -43,772 -143,434
    2.1 Assets 103,715 72,148
    2.2 Liabilities 247,149 115,920
    3. FINANCIAL DERIVATIVES 1,250 2,019
    3.1 Assets 1,250 2,019
    3.2 Liabilities 0,000 0,000
    4. OTHER INVESTMENTS -59,806 -177,783
    4.1 Assets 125,399 112,907
    4.2 Liabilities 185,205 290,690
    5. RESERVE ASSETS 3,492 5,406
    TOTAL NET I.I.P. -207,946-200,744

    There is a tranfer from PORTOFOLIO INVESTMENT to OTHER INVESTMENTS, to

    4.2.1. Monetary authorities Loans/currency and deposits

    Its an "accounting view".

    My sense (not at all possibly acceptable as rational) as i said when promoting Elliniko, (don't forget!) is that the external debt is not clear to comperative evaluation.

    An example might be Iceland althought much different (export based economy,extremelly better quality numbers in competitiveness and many other, own currence, few people )etc TOTAL NET I.I.P. is too poor.

    Therefore some "assets" of 2009 definetely valued more than those of 2011 because market prices were different.
    However we have witnessed that using well known mechanisms some of those assets were "supported" in a specific value when let say bought, but nowadays its value adjusted to the current value.
    So the continuing deterioration forced to under value also the supported input given.
    Not so mathematically!

    However if Gr GDP lets say at the end of 2012
    return to mild expansion and a large amount of deposits gradually come back will that hidden view of external debt improved a bit?

  3. Thanks for the input. I am sure that an outsider cannot fully understand what really stands behind all these numbers and perhaps some of the numbers are not even correct. But I have to say this: the BoG's presentation of the numbers is really very impressive! (compared to some other EU-countries).

    Regarding your last point: no one has exact numbers but my feeling is that if all offshore deposits of Greece were to return to the country, then Greece would not need very much funding from abroad. During my time in Latin America, the yardstick was that offshore deposits are at least as high as the foreign portion of the sovereign debt. That would make it upwards of 200 BN EUR in the case of Greece.

    If Greece managed to have only 10% of that amount come back for investment, there would be quite a stimulus. That's why I have argued from the beginning that Greece should make a new Investment Law aimed exactly at those offshore savings. The owners of those deposits want security and return. For the security of, say, Switzerland, they are happy with a return of near zero. The returns in Greece would be much higher but the security is not available. That's why I think Greece should request the EU to guarantee the political risk of such new foreign investments. That wouldn't cost the EU but a signature and it would generate a lot more than sending money to Greece so that Greece can send it back to the banks.

  4. BoG's ??? Bank of Ghana? lol
    Bank of Greece have made sifnificant effords to supply credible statistics with G Provopoulos as a president, but you see there is not continuity like any other european country.
    Some of previous presidents of BOG were not only incapable but also irresponsible.

  5. Herr Klastner writes - "Today's living standard of Greece is imported. If imports are curtailed drastically, the living standard will sink drastically.
    Isn't it about time to start thinking what measures Greece could take in order to maintain the living standard? At least more or less?"

    Herr Klastner, this seems to be another recurrent theme. That, like the Euro, the recent standard of living enjoyed by Greeks should be protected as though it were a Holy Cow ambling through a Delhi vegetable market.

    The second commenter raised the example of Iceland. They let their banks fail, they've charged some of the executives with financial crimes that carry prison sentences. It seems to me that Icelanders suffered just as much as the Greeks. Many have mortgages that far exceed the value of their properties, many lost money they had in their banks and many lost their jobs. But they're rebuilding their shattered economy. And they're doing this without Troika bailouts funded by the largesse of current, future and unborn Austrian, Finn, Dutch and German taxpayers.

    Taking a long term perspective it might be better for the Greeks if they stood on their own two feet, rather than expecting foreigners like Merkel and Legarde to visit world capitals holding out the Greek begging bowl.

    Also you continually "point the finger at Switzerland". Yet Mr Venizelos tells us that more of the money is flying to London, than to Zurich. The UK press tells us that Greek wealth is a significant factor in the property boom in Kensington, St James etc. And we all know that many of the Greek shipping magnates have been ensconced in London for decades, with good reason perhaps given London's importance in the shipping industry. But let’s not pretend that it’s the Swiss who are the sole beneficiaries of Greek wealth, there’s just as much and maybe more in London and its offshore enclaves (more later)

    Non-EU member Switzerland has frozen the assets of Lavrentis Lavrentiadis at the request of the Prosecutors of EU member Greece. I believe Lithuania has made a similar request of fellow EU member UK&NI regarding the assets of the people behind the failed Snoras Bank. I'm not aware that the UK&NI have complied with that request. I find it interesting that on a similar matter a non-EU member should be more cooperative with an EU-member than they are with one another.

    So my question is why is it that you only mention your neighbour Switzerland as providing a safe haven for Greek wealth? It seems to me that London and its somewhat opaque offshore terrortories [sic] – Jersey, Isle of Man and Gibraltar – provide a similar safe haven. And they’ve been at it since the middle of the 19th century, I think one of Disraeli’s favourite arms dealers was a Greek !!

    1. When I use the expression ", say, Switzerland...", my intent is to use Switzerland as a synonym for all countries where Greeks hold their cash and other assets. It's just simpler to mention only one country instead of a whole list of them. You are obviously right that Switzerland is by far not the only country hoarding Greek assets; perhaps not even the most important one.

      Our younger son works for one of the large Swiss asset managers. He tells me that the very wealthy Greeks are already making back-up plans to move their assets out of Switzerland. Just in case Switzerland/Greece come up with a similar treaty like the one with Germany. Singapore is apparently the prime alternative being considered.

      If you interprete my articles as championing the idea that someone other than Greeks has an obligation to keep the Greek living standard where it is, then I am definitely not writing clearly.

      My whole point is that Greeks have to start helping themselves. Throughout her near-200 year history, Greece has always had foreign sponsors because of her geopolitical importance. Be that Americans who were afraid of Communists or be that the EU which is afraid of economic inequalities within in, be that whoever. At the same time, Greeks have always been experts at soliciting help from abroad. One of the cutest arguments I read only recently: since the world uses so many Greek words, the world should pay a license fee every time they use a Greek word. Then Greece's finances would be in great shape.

      My point is that help for Greece is justified (and recommendable) when it is clearly "help for self-help".

      There is no question that the Greek living standard will decline over the next years, regardless how much money the Troika ships there. If Greeks don't help themselves at all, their living standard (and emigration!) will become reminiscent of the 1950s. I guess everyone understands that except for fundamentalist Greeks. Greece can do a lot on her own to make sure that the decline in living standard is moderate. Since they don't seem to know how to do that, I think the EU should show them but the Greeks themselves have to do it. What needs to be done? Transition from foreign-sourcing of consumption products to more domestic-sourcing: "consume within your means!"

      I guess it is due to the "myth of Greece" that the world's papers are full of stories about Greeks suffering whereas one reads little about Icelanders, the citizens of the Baltic states, Spaniards, Portugiese, etc. How Greeks have turnd their own problems into problems of the world is quite impressive. That's quite a competitive skill! Other countries advertise what great places to do business they are in order to attract foreign investments. Greece advertises on CNN that "the Gods could have chosen any place and they chose Greece". And the conclusion is, of course, that if Greece was first choice for the Gods, it better be first choice for providers of foreign capital.

      In my blog inventory, there is a section "critique of Greece's handling the crisis". There you would find most of my arguments why Greeks have to start getting their act together.

  6. @ Canutely King

    I mention Iceland only for external debt and only this.
    About competitiveness, quality procedures, exports, education quality, Iceland is way ahead from Greece.
    The other that you mention both about Gods and fees for every Greek word is to make you laugh!
    Haven't you? lol

  7. If the Anglosphere had to pay royalties on every foreign sourced word then they'd be both speechless and broke. And many might regard that as no bad thing!

    Re Switzerland, I hold you (Klaus Klastner) in higher regard than other commentators; most (all ?) of whom also "point the finger at Switzerland". I'll grant that you use "Switzerland" as a synonym, but if I were Swiss then I might be writing angry comments here, as we see published in eKathimerini. Perhaps "London & Zurich" would be a more accurate.

    I can confirm there's already a steady outflow of funds from Switzerland to SNG & HK. Is it Greek money? I wouldn't ask, she wouldn't tell ;) She also says it’s not only from Switzerland, it’s from most of Europe including London - the notable exception being Scandinavia.

    Greece's 'success' at pleading poverty may be working in the "Court of Public Opinion", but I don't think it’s working in the "Court of Investor Opinion".

    A Chinese private investor wanted to build a tourist resort in Iceland - why not Greece - who'd want to go to Greece - certainly not the Chinese - but they might like to play golf on a glacier. :lol: Because of red tape, lack of a property registry, Greek family feuds etc COSCO finds it hard to get land close to Pireaus for a logistics centre. Meanwhile Trieste at the other end of the Adriatic is attracting investors to do something similar; it's also much closer to the heart of Europe.

    Ireland's agricultural sector is 'booming' with younger people moving back to family farms and adopting modern production and marketing practices. They're also selling products outside the EU, apparently Nigerians quite like Irish powered milk! I'm sure the Irish are at least as good as the Greeks when it comes to milking the CAP cow. As far as I tell at a distance, Greece's agricultural sector is moribund.

    Herr Klastner wrote "Throughout her near-200 year history, Greece has always had foreign sponsors." IMO Greece has depended on foreigners since the Romans conquered it militarily 2,200 years ago. Hence the trait that the world owes them living appears to be hardwired into the cultural DNA.

    But maybe not, the Greeks (generally 'poor') who migrated to settler countries like the US and Australia between 1940 and 1980 were industrious and successful. They started new businesses; became property tycoons; built vibrant cultural communities; developed strong links into national institutions. Their children & grandchildren are often high achievers, not unlike those of many Asian migrants. Sons and daughters of Greek fruit shop owners become engineers, doctors, lawyers, journalists - even bankers ;) In darker moments I wonder if all the 'good hard working Greeks' left the country decades ago, leaving behind a 'pampered' elite, a bunch of crooks and those too lazy and/or without the wit to better their own and their children's lives.

    By this time tomorrow the ISDA will have published the next instalment of the Greek CDS soap opera. My money is on it being a bomb (of the Broadway kind) and hopefully a nail in the coffin of the Banking Casino Royale.

  8. About your last question : "Isn't it about time to start thinking what measures Greece could take in order to maintain the living standard? At least more or less?"

    What's your take on the basic income proposal ?

  9. I wasn't really thinking of measures like basic income. My point is not what Greeks could be "given" to maintain a standard of living. Instead, my point was/is what Greeks could "do" to maintain it. One of the things they could do is to produce more of the goods which they consume domestically instead of importing them. That way, they need to borrow less for the payment of imports and they stimulate domestic economic activity.