Wednesday, June 17, 2015

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.


  1. I suspect that these issues of currency flows between banks in different euro countries are much less likely to occur where the banks have there own branches evenly spread out over the currency area. The euro system shares features of a system of different currencies with seperate banking systems each with their own central bank. and also a single currency system, but not to the extent of having one central bank and one banking system , one clearing system and one settlement system. Like in the UK. In the UK no one makes a remark in the media if there is a flow from the North to the South or South to North as the big banks have branches across the whole of the currency area and so the cash flows are kept between customers on one balance sheet.

    1. 6-17 PM continued
      and if there is a problem between banks the BoE is there to sort it out. Contary to that, in the Euro system, as portrayed to in kleinlgults post , monetary and banking problems become, problems assosiated with individual countries. so maybe a more accurate reference to he euro is not as a single currency but a shared currency.

    2. The problem is national boundaries and sovereign national jurisdiction within those boundaries. The North of the UK has no boundaries but, above all, no sovereignty. A country can legislate within its borders whatever it wants, for example capital controls, change of currency, etc. There is no such thing as a triple-A borrower in a junk-rated sovereign country. Even if there were a true triple-A borrower in Greece, if Greece were to implement capital controls, the triple-A borrower could not repay his foreign loan. As a result, in banks' rating systems, a borrower can never have a better rating than the country in which he resides.

  2. “I often quote myself. It adds spice to my conversation.”
    ― George Bernard Shaw

    February 9, 2012 at 12:17 PM
    Odious debt
    My comment on this blog

    More than two years later (today)- this came:

    The Solution:
    Greece make an Island
    Declare all debt as odius
    Engage 200 of the best experts in the world for five years - start from a clean slate and get rid of all corruptions - to get Greece not only back in the game - but upgraded, opimized and ahead in the curve.
    After five years national elections again with the old guard terminated.
    All corruption - including the generations of the corrupt politician class - must go away - and sovereign status stated agains the corrupt elitistic project on it´s way to its own selfdestruction - called EU.

    What will happen:
    As the present regime is unstable and really not on a mission - as they in the inner sanctum really are populists - they want to get rid of as much debt as possible, stay in the Eurozone and keep on in the cosy positions.
    Greece might get the least bad deal in a bankrutt and stay in the Eurozone.
    The present politic class would stay, EU would have greece where it wanted - and the people would taggle on. Everybody stay on the boat.

    Eurozone will anyhow crash and burn - EU is on the ropes.
    What greece could have done but will not do - is to make an Island and refute the debt as Odius - and then surf the tide of the times with it´s own currency and lots of local currencys towards the future which is forming right now - and will be completely different from the present order.
    A completely new construction.

    All will come whatever happens in a couple of years, anyway.
    Time waits for noone - and is often innovative - with bad timing - and history rimes...
    Bob Dylan - The Times They Are A Changin' [Watchmen Intro]



    1. To AnonymousJune 17, 2015 at 7:10 PM

      I don't know about making Greece an island, but, since SYRIZA likes always to have...original ideas, they have already called a Committee to examine the greek debt and they found it today, 100% illegal. Mind you, all foreign experts! The key is, who these experts are. They are all handpicked by SYRIZA, for being of the same political alignment, ranging from Belgium to Zambia. Mrs Konstantopoulou, is very happy with the findings. I don't know how exactly they intend to use them, but she sure made her pretty appearance on TV!

      Overjoyed as she was, she sent back to Stournaras the report of the Bank of Greece, because it wasn't to her liking and prohibited it to be distributed to the MPs. She had no such right, but now that we live under SYRIZA regime, these minor details, we can't let ruin the joy of discovering that the debt is all illegal!

      Maybe they will rename the country in SYRIZEllas and repudiate the debt as odious, with the blessing of Dr. Eric Toussaint (head of the Committee). All these scholars have said our debt is illegal. Another expert is Diego Borja, described as the man behind the write off of 70% of Equador's debt.

      I wonder what more is there to say for Merkel at this point! They 'd better agree on Tsipras' plan, before Mrs. Konstantopoulou starts dragging them in courts.

  3. A correction. I did mean an Iceland (the country that said no to it´s bankers and now is ahead of the curve) not an island.

    When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime. The reason why these odious debts cannot attach to the territory of the state is that they do not fulfil one of the conditions determining the lawfulness of State debts, namely that State debts must be incurred, and the proceeds used, for the needs and in the interests of the State. Odious debts, contracted and utilised for purposes which, to the lenders' knowledge, are contrary to the needs and the interests of the nation, are not binding on the nation – when it succeeds in overthrowing the government that contracted them – unless the debt is within the limits of real advantages that these debts might have afforded. The lenders have committed a hostile act against the people, they cannot expect a nation which has freed itself of a despotic regime to assume these odious debts, which are the personal debts of the ruler.[3]
    Wikipedia - Odius debt

    Syriza is populist, unstable with many fractions and old elements - but whatever experts they put in the right positions doesn´t matter when it comes to odius debt, in my opinion.
    The debt as by all means odius which way you cut it.

    It is simply odius because:
    - No real mandate from the people for the loans between the corrupt politicians and the corrupt EU
    - The loans served no interest for the people and still not do.

    To this comes all backdoor dealings but the case is quite clear anyhow.

    Greece is in between the musical chairs and the music will soon stop.
    No good way out as it stands.

    More loans and kick the can is no option really - even if they did get som haircut.
    Default and print the drachma is not in the cards I think - to do an Iceland - is the only way to get back a sovereign healthy economy but it takes skillful politicians with integrity which they don´t have.
    Greece will take the midde of the road solution - default/harcut or some sort of haircut and stay in the Eurozone - and things will get back to a new normal - and the can will still be on that road

    This odius report is nothing more than a bet-signal for the least bad deal - which everybody wants in the end.
    Greece stays in the Eurozone - EU gets Greece where it wants it by a haircut on the debt - all gets back to normal.
    Or, EU makes this government fall and make the deal with the next instead. Maybe a preferred outcome from the EU view.

    Greece needs som serious nationsbuilding and need help with it too.
    My take is - build from the scratch. Root out all corruption at once from the go and start from there.
    Bring in the skillful people and innovative ideas, optimize the country - and make it ahead of the curve according to its circumstances.
    I don´t talk about small reforms and the old way - big groundbreaking corrections - and a totally new layout.
    In 5 - 10 years the global landscape will be totally different. The old order is falling right as we speak - like the Sovjet in its time.
    Those countries who upgrade now into the future will have a lot going for themselves and attract people and capital.
    They would have all the help and money in the world if they themselves would want to to do the job.

    The odious debt will soon be history - and it will certainly be long gone - in the economic collapse that are in the cards for EU but also globally.

    Until then - it is a mexican standoff, I´m afraid - greek style.
    Mexican Standoff (ft. Key & Peele)


  4. All loans to Greece after December 1974 have been given to democratically elected (12 in fact) governments of various parties, not despotic ones. The lenders were therefore in good faith and the loans cannot be odious.
    It'a amazing how shrill and ridiculous some people are willing to behave when they they to convince each other that they are right.