Monday, March 16, 2020

Corona And The Greek Economy

Corona is a health drama which is already turning into an economic drama as well. Countries will have to spend billions in order to protect their economies from meltdown. Austria, for example, has just approved a 4 BEUR package to support the economy, roughly 1% of GDP. The government has called this "a first step" with the indication that further packages will have to follow. This could well reach the dimension of 5% of GDP or more.

There is no alternative so such spending. There is a seemingly endless number of businesses, large or small, even entire industry sectors, which have lost their economic base: expenses keep accruing while revenues have disappeared. Liquidity crises would speedily lead to insolvencies.

That is not necessarily a threatening scenario because Austria, due to its credit standing, will have no problem raising 5% of GDP in new debt, probably at interest rates close to zero.

But what about a country like Greece? Will Greece be able to raise the new debt which it requires in order to prevent an economic meltdown?

There is one comforting factor. Greece has allegedly built up very significant cash reserves. Some say up to 30 BEUR. If new debt cannot be raised, those cash reserves will have to be used. The only problem is: those cash reserves were meant to be a financial cushion to assure future debt service, not to be spent on the economy. If they are spent on the economy now and if the economy still shrinks, there will be no further cushion for debt service.

ADDENDUM per March 18, 2020
The above-mentioned 4 BEUR package was announced by the Austrian government on March 14 and described as "a first step". Today, only 4 days later, a "second step" was announced: the 4 BEUR was increased to 38 (!) BEUR! We are now talking about roughly 10% of GDP. Since the original budget had called for a slight surplus, we are now talking about a budget deficit of 10% of GDP.

Extrapolating this on to the Greek situation, a 10% package would amount to about 20 BEUR. That would be an enormous challenge for Greece's finances. Extrapolating it on to the USA, it would amount to a package of about 2 trillion USD (as of this writing, the US are discussing a package of 850 BUSD).

Wednesday, March 11, 2020

EUROLEAKS - By Yanis Varoufakis

"On March 14, for the first time, European citizens will be able to take a front seat in the meetings where their future is decided: DiEM25’s #EuroLeaks will take YOU inside the Eurogroup that has no standing in law, but where the most far-reaching decisions about all our lives are made."

Thus spoke Yanis Vafoufakis. Presumably he refers to the meetings of the Eurogroup which he secretly recorded and whose transcripts he will publish on March 14.

EUROLEAKS: Letting light in to how crucial decisions are made (or not) in the EU.