Greek myths and legends

Ricardo Hausmann argues that Greek spending was "out of control" during the years prior to the Eurozone crisis - which as far as Greece is concerned actually started in 2009 with its first debt crisis, not in 2012 when the whole bloc nearly collapsed. He says:
"Greece piled up an enormous fiscal and external debt in boom times, until markets said “enough" in 2009."
Since the world was in recession in 2000-1 because of the dot.com crash, we have to assume that by "boom times" he means 2002-6 (since the financial crisis in Europe started with the failure of IKB in July 2007). So is he correct?

Here is Greece's debt/gdp from 1981 to the present day:

Nowhere in this chart is anything indicating a vast increase in debt/gdp from 2002-6. The vast increases in debt/gdp occurred prior to 1993 and from 2009 onwards. Greece's debt/gdp was high but stable from 1993 to 2009. Sixteen years of stable debt/gdp does not suggest a profligate government piling up an enormous debt due to out-of-control spending. It does suggest a government that was unable or unwilling to cut its debt/gdp in the boom times, but Greece is hardly alone in that.

Ok, so Hausmann is wrong about the external debt/gdp. Greece's high debt/gdp did not come about during the 2002-7 boom. It dates from the recessionary 1980s.

What about its external debt? Now there was indeed a huge increase during the boom times:


Which was of course because of this:


Yes, that is a large and growing trade deficit. The last time Greece's current account was in balance was in 1995. Hausmann does have a point about Greece's competitiveness. But the damage was done in the years from 1995 to 2001. During the boom years 2002-6 it appears that Greece's current account deficit was actually shrinking. So again, Hausmann is incorrect. Greece's trade deficit pre-dates the boom years.

What about its fiscal deficit? After all, it does appear to have been servicing its debt without increasing it. Here's Greece's government budget to GDP:



Well, this is odd. Greece's debt/gdp was stable until 2009 even though it was running a sizeable budget deficit throughout that period. These figures are of course all ratios, so we need to look at what was happening to GDP during that time. Here's Greece's annual growth rate:


That's really a rather healthy growth rate. No wonder Greece's debt/gdp was stable despite its budget deficit. And no wonder no-one saw the crisis coming. Why would anyone think an average annual growth rate of about 4% for over a decade was unsustainable?

Hausmann's claim that Greece built up unsustainable fiscal and external debts "during the boom times" is clearly wrong. The fiscal debt built up during the 1980s, and the external debt built up during the 1990s. Both were fed by recession. Profligacy there may well have been - but it was a long time ago. And there was no doubt a missed opportunity to reduce the debt burden. But should Greece really be blamed for failing to take advantage of an opportunity that just about every other government in the Western world missed?

Hausmann is also guilty of a cardinal statistical error. He says that "By 2007, Greece was spending more than 14% of GDP in excess of what it was producing, the largest such gap in Europe". Indeed it was. But as the current account to gdp chart above shows, that 14% trade deficit did not gradually build up during the boom years, as Hausmann implies. Greece's current account deficit actually started to decline in 2005, having improved from 2001-4:

>
The mirror image of this is of course the increasing inflows of capital from 2005 onwards:

Any analysis of Greece's external position that looks only at the current account deficit and ignores the growing capital account surplus is telling only half the story. Hausmann chooses his data to suit his argument that Greece's problems are all due to its profligate government spending and lack of investment, He ignores the (substantial) role of capital OUTFLOWS from other countries in the Eurozone, notably but not exclusively Germany. And he ignores the fact that the period 2005-7 was characterised by dangerous buildup of credit bubbles throughout the Western world. I've written elsewhere about the Eurodollar ("US-in-Europe") leveraging flow system that burst catastrophically in 2007-8. There was an equivalent Euro leveraging flow system circulating between the core and periphery Eurozone countries. This is what we are looking at in the chart above.

Capital has to go somewhere, and it has to be used for something: and that something is not necessarily productive. In Spain and Ireland, capital outflows from core countries blew up real estate bubbles. In Greece, they fuelled a consumption boom and enabled the government to maintain a high budget deficit. Is Greece's use of those capital flows any more dysfunctional than Spain or Ireland's?
And why was capital flowing to that extent at all? Why was it not funding commercial businesses in its countries of origin? Germany hardly has a stellar investment record either. The truth is that NO-ONE used that capital for investment. No-one at all.

Why are we not blaming this on the banks whose highly-leveraged, unproductive lending caused this collapse? We have been quick to blame banks for the "US-in-Europe" crisis. But we have blamed sovereigns, not banks, for the equivalent "core-in-periphery" crisis. Yet the cause is the same, and as this chart shows, even the timing is the same.

And yet....Greece does have a competitiveness problem. In this Hausman is correct. But the question we should be asking is why Greece's competitiveness declined so much in the 1990s, why it started to improve in the 2000s prior to the development of the "core-in-periphery" leveraging flow system, and what can be done now to restore it. Greece's public finances are a red herring.

FOOTNOTE. Hausmann is also wrong about Greece's goods exports. Its principal exports are oil and pharmaceuticals. But we should also question his underlying assumption that plant and machinery exports are "good" and exports of basic consumption products "bad" (or unwanted, which is the same thing). Food products are exported all over the world: the fact that Germany does not import much says more about Germany than it does about Greece.  If Greece can't compete in food exports then either its prices are too high or its quality too low. Both of those would respond to investment designed to improve efficiency of production.

Comments

  1. The Greeks are planning to unite with Russia to take the Straits after Odessa, that is why they canonized Abbot Paisius who "prophesied" this. That is why we neutralized Greece during the Crimean and Cold wars. Athos has been a soviet spy base for two centuries and we must use bunker buster nukes to destroy it.

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  2. The Greeks are planning to unite with Russia to take the Straits after Odessa, that is why they canonized Abbot Paisius who "prophesied" this. That is why we neutralized Greece during the Crimean and Cold wars. Athos has been a soviet spy base for two centuries and we must use bunker buster nukes to destroy it.

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  3. 1 of 2
    I am not sure that you and Hausmann are on the same page. By and large I agree with Hausmann's analysis and I can't really disagree with yours, which is why I question the page. I think one important point is that one has to look at debt also in nominal flows and not only as "% of something like GDP".

    From 2001-10, the Euro-party years for Greece, 283 BEUR foreign debt (net) flowed into Greece. Foreign debt stood at 404 BEUR at Y/E 2010 which means that 70% of that foreign debt had entered the country since 2001. If you add to that about 50 BEUR in EU-subsidies during this time, you have a situation where, on average, 30-35 BEUR foreign capital flowed into the Greek economy annually since 2001. The impact of such a capital inflow on an economy the size of Greece's is clear: the water level rises throughout the economy and everything which swims on the water (asset prices, wages, salaries, pensions, etc.) rises with it. Thus, Greece had good GDP growth during this period (which made the "% of" figures look quite good) but it was a totally foreign debt-financed GDP growth mostly in services. As regards the real Greek economy, I think many companies even went out of business because they could no longer compete.

    Of the 283 BEUR net foreign debt inflow, 199 BEUR went straight back abroad in the form of the current account deficit. To spend 199 BEUR more abroad than what one earns abroad during only 10 years is something which one doesn't see so often these days! I guess "living beyond one's means" would be an understatement to describe this. Greek exports amounted to 146 BEUR during this period which seems like a nice large number. But when you compare it to the 446 BEUR (!) in imports during the period, you begin to wonder who at Eurostat was paying attention to Greek developments.

    I don't have the numbers at hand but I do know that the increase in nominal public spending, particularly after 2006, was phenomenal regardless whether you look at public sector employees, their incomes, their benefits or whatever.

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    1. Greek debt is de facto 100% foreign. Euro zone membership means exactly this

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  4. 2 of 2
    Many people argue that due to the rescue financing, Greece was suffocated with debt only to pay off banks. Well that's a real myth. The bank bail-out's had absolutely nothing to do with Greece's debt level. The money of official lenders entered the country so that the country could pay off private lenders with it. From Greece's standpoint, it was nothing but a change of obligors. Not the Greeks, the tax payers of the donor countries are the ones who should scream foul play about what the EU had done. As regards Greece's sovereign debt, it had stood at 301 BEUR at Y/E 2009 and is presently around 320 BEUR. Not really a giant leap (the great increases were the bank recaps and the primary deficits, offset by the PSI).

    To sort of 'excuse' Greece by saying everybody else did the same thing is a misrepresentation, in my opinion. I think you may have to look as far as Cuba to find a country where exports covered less than 35% of imports and where one lived so much above one's means for 10 years (c/a deficit).

    Another myth (I have also referrred to it as 'soap') is this thing about Greece's debt sustainability. When maturites move into the direction of eternity and interest rates into the direction of zero, debt assumes the character of equity. It's difficult to get accurate numbers but the numbers I calculated would indicate that Greece, in 2014, spent just below 10% of tax revenues on debt service. That's a very 'sustainable' percentage by all comparisons. Personally, I think if Varoufakis & Co. only started negotiating like adult businessmen, Greece could get that percentage to 5% (or even less). And it could get the maturities extended to 50 years+ and probably a multi-year interest moratorium. In short, Greece could really convert much if not most of its debt into equity.

    The only difference between a one-time haircut and "extend-and-pretend" is that in the former case, the tax payers get hit all at once whereas in the latter, the damage can be spread over 50 years+. After a few years, the tax payers have forgotten about it. The losses are already there, they just haven't hit the books yet. If Greece gets the benefit of converting much of its debt into equity, it should allow its creditors to take their losses in the way they prefer to take them.

    Last thought: assume all of Greece's debt exceeding the 60% Maastricht level were forgiven with the only proviso that the remaining 60% (roughly 110 BEUR) would have to carry market rates. For 2014, the Greek state budget reported interest expense of 5,7 BEUR (before ECB rebates and interest income). Depending on what 'market rate' you chose, Greece could quickly end up paying more interest on 60% debt than it is presently paying on 180% debt.

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    1. Why do you treat the period 2001-2010 as a homogenous uniform period, when it includes the largest European credit boom and bust since 1931? My analysis showed that serious deterioration in Greece's CA and fiscal deficits started in 2004 - which just happens to coincide with the peak of the refinancing boom in the US (the start of Fed monetary tightening) and the Hartz reforms in Germany. Michael Pettis finds a similar 2004 tipping point for Spain. It simply is not as straightforward as you and Hausmann think, and it is completely unreasonable to pretend that the 2004-9 European credit boom and bust had no effect on the periphery counties.

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    2. Sorry, I should have explained. I put the numbers together 3-4 years ago when I tried to figure out the impact of the Euro-entry on Greece's cross-border capital flows. Thus, it is the first 10 years of the Euro-party, coinciding with the end of the party.

      In the case of Greece, the question of what is a homogeneous period should not only be seen from the outside, or not at all, but rather from the inside of Greece. One tends to forget these days that the Euro was viewed by Greeks as their savior from uncontrollable profligate ways. Only with the straightjacket called Euro did the Greeks think they could get their fiscal house in order because they could no longer print their money and they felt sure that others would 'supervise' them and/or would not be profligate in lending to them.

      Let me make an analogy with Germany/France and Maastricht. The Maastricht rules were taken very seriously until Germany/France violated them. Thereafter the world was different.

      What you see in Greece from Euro-entry until about the Olympics is how both sides tested the new system. It took Greece a while to gain self-confidence that the Euro was not a straightjacket but, instead, a source of cheap money. And it took the lenders some time until they had convinced each other that Greece was the same risk as Germany (and convergence occurred).

      Of course, if there hadn't been a European credit boom, Greece would have had far less capital inflows. No one debates that, I don't think. The Swiss have a long history of getting more capital inflows than they need and yet, they don't go overboard wasting money. My point is: anyone familiar with Greek culture and behavior would have guessed how Greeks would react to the opening of financial floodgates.

      When I lived in Chile/Argentina from 1980-87, I had a first-hand experience of what happens to economies and cultures not unsimilar to Greece when there is a boom of foreign capital flows. And --- what happens when the sudden stop of foreign capital flows occurs.

      To be sure, I try not to be in the blame game. Looking back, I think it is perfectly plausible how Greeks reacted to the breaking of the floodgates. What is not plausible is that the alleged watchdogs of the floodgates (Eurostat, ECB, etc) assumed the role of innocent by-standers when the whole world wondered how a relatively poor country like Greece could stage the greatest Olympics the world had ever seen without getting into some kind of a financial bind.

      Returning to my original point: what happened in Greece during the first 8-10 years of the Euro was a debt-driven "living over one's means" of gigantic proportions. It would be interesting to know if such a trend ever happened elsewhere in a developed country. The capital inflows did not increase Greece's productive capacity. If anything, they reduced it. Greece had become a turn-table for money flows: money flowing into the country as debt and leaving it as current account deficits (and capital transfers). When one talks about the 25% decline of Greece's GDP, one really has to ask what one should compare today's GDP to? To a GDP which was highly inflated due to the capital inflows? I don't have the numbers but I remember reading about them: in several key indicators, Greece today, even after 5 years of brutal austerity, is still above the pre-Euro level. Of course, it is easier to scramble the egg than putting it back together again but even if you could, you would never get it back the same way it was before. The tragedy of the Greek people is that those who now have to put the egg back together are not the same ones as the ones who enjoyed the scrambled eggs.

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    3. > Frances

      Have you seen this 1991 FT article by Tony Thurlwall

      http://media.ft.com/cms/93cf9a44-57ec-11e1-ae89-00144feabdc0.pdf

      (linked form a 2012 FT article by Martin Wolf)

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    4. @ Dinero
      A sensational article! Thank you.

      I think one of the 'tragedies' of the Euro was that one no longer looked at the BoPs of EZ-members thinking that they no longer mattered. I think with the Euro they mattered even more because imbalances were no longer so noticeable and thus dangerous.

      German unification with the DM as the common currency is a superb example. The East required enormous c/a deficits (and capital transfers from the West) to stay alive. And yet: this only worked (if one can argue that it worked...) because they had one adjustment mechanism which the EZ also has but which does not work so well for the EZ: East Germans could hop on a train and travel West for a better life without leaving their country. Greeks have to leave their home country if they want to do that.

      I also think that price and/or exchange rates alone don't solve historical BoP problems. At some point, no one will buy an outdated Greek machine regardless how little it costs.

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    5. @Kleingut
      "The Swiss have a long history of getting more capital inflows than they need and yet, they don't go overboard wasting money. "
      Well, tell that to the SNB shareholders who can forget about getting dividends for a very very long time...

      " It would be interesting to know if such a trend ever happened elsewhere in a developed country"
      Michael Pettis has an nice example here (I put an tiny URL so that you have the thrill of discovery) : http://tinyurl.com/o8j9bye , I am sure you will not expect it could have been THAT country ! Read in particular the paragraph that starts by "Far more interesting to me is the impact of..." and compare to your "As regards the real Greek economy, I think many companies even went out of business because they could no longer compete."

      "Personally, I think if Varoufakis & Co. only started negotiating like adult businessmen, Greece could get that percentage to 5% (or even less). And it could get the maturities extended to 50 years+ and probably a multi-year interest moratorium. In short, Greece could really convert much if not most of its debt into equity."
      That is exactly how he started the discussion. It was even praised by Forbes (http://www.forbes.com/sites/timworstall/2015/02/04/a-sensible-suggestion-from-greece-gdp-bonds/) which is not a propaganda arm of the 3rd International... The problem is that he was the only adult businessman in the room : it takes two to tango

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    6. @ Monneron
      No, Varoufakis DID NOT start the negotiation this way! In fact, I am not even sure that he is negotiating yet because first it was only 'explorations of common ground', then it turned into 'discussions', then discussions turned into 'transformations', etc. Who knows? Maybe he is indeed negotiating by now.

      If you look at Varoufaks' blog, he has been totally consistent 'forever' in his opposition to an 'extend-and-pretend' strategy. Only a straightforward haircut was acceptable to him. Without it, Varoufakis argued over and over again that Greece should default within the Eurozone. As much as I respect Varoufakis for his brilliance as an economist, and I have been in close contact with him for quite a long time, even a blind man could see that he has no business experience and has never been a businessman. Margaret Thatcher might say: "I can do business with Mr. Tsipras but not with Prof. Varoufakis". Not to mention doing a tango with him.

      http://klauskastner.blogspot.co.at/2015/02/varoufakis-greece-must-default-within.html

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  5. "He says that "By 2007, Greece was spending more than 14% of GDP in excess of what it was producing, the largest such gap in Europe". Indeed it was."

    It was not even the biggest current account deficit in Europa. Bulgaria, Iceland and Latvia had much bigger CA deficits in the same period:

    http://www.imf.org/external/pubs/ft/weo/2014/02/weodata/weorept.aspx?pr.x=51&pr.y=16&sy=2002&ey=2010&scsm=1&ssd=1&sort=country&ds=.&br=1&c=918%2C174%2C176%2C941&s=BCA_NGDPD&grp=0&a=

    (It always surprises me how the Bulgarian CA deficit closed so fast without a huge recession like in Latvia.)

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  6. It looks like long run Greek government spending has been enormous compared to GDP for a long time. I found this data.

    Total general Greek government expendeture (%of GDP), rounded. [1]
    1989-1993 49%
    1994-1999 49%
    2000-2004 46% (50%)*
    2005-2009 48% (52%)*

    *revised

    In 2012 it was 59% of gdp.[2]

    But, ratios can be very misleading. One should look at the individual components of the ratios. For example graph Greek government expendature and GDP.

    {If they are graphed on log scale the ratio shows up as the distance between the lines. Log(expendature/GDP)=Log(expendature)-Log(GDP). Remember in school, log A*B = log A +log B and log A/B= log A - log B}

    Of course when one looks at expenditure one should compare to revenue.[3] All these can be graphed together on the same logarithmic scale along with GDP.[4]

    Listening to the Greek people one would be able to get the problems defined {what, when, where, why, and how} and plenty of good opinions on possible solutions.


    1. "The root-causes of the Greek sovereign debt crisis" by Basil Manessiotis
    http://www.bankofgreece.gr/BoGDocuments/The%20root-causes%20of%20the%20greek%20sovereign%20debt%20crisis%2005%2005%202011(3).pdf
    Table 1, p. 4 [1]

    2. http://ec.europa.eu/eurostat/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00023

    3. http://www.statista.com/statistics/275335/government-revenue-and-spending-in-greece/

    4. http://www.google.com.au/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:GRC&hl=en&dl=en

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  7. Correction:
    In 2013 it was 59% of gdp.[2]

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    1. Not at all clear what this has to do with the fact that 1) debt/GDP principally built up prior to 1993 and after 2008 2) competitiveness (evidenced by trade balance) deteriorated significantly from 1993-2000 and from 2005 onwards. Could you explain please? Btw I would expect govt spending as a proportion of GDP to be higher 2005-9 because of the significantly raised fiscal deficit during and after the financial crisis. This was true of all Western counties at that time.

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    2. Part I. Leading explanation.
      Part II. “Could you explain please?” As best I can in my ignorance.

      Part I.

      I was mostly bringing some data to the table. Data, I have been looking at within the last few days. I didn't leave any strong opinion. Just some data. I'm not sure about this stuff and Geeks in Greece have a lot more information and insight to this than me, who is far away.

      Please forgive me, I realized there were multiple opinions talked about in your article and wasn't up to putting in the time due to my foggy view of economics. Economics might be foggy.

      From a problem solving point of view I was wondering what is the the definition of a big problem in Greece. What, why, when, were, and how? A starting point or good definition is, what are the effects? After verifying the definition to be correct, the next step is looking for cause or mechanism. But, I am operating with very limited information, and not sure what to look for.

      I was wondering about inflation due to large government spending. I have experienced currency dilution and purchasing power losses.
      So, I looked up CPI and Real GDP for big changes and a possible starting time and some thing long running. Around 1973 is the start of large inflation.[1] And during that time "real GDP" was flat rather than growing before and after that time. In other words it looks like stagflation.
      I'm mulling over that there might have been a long run government spending problem relative to revenues. And, initially was financed by Drachma dilution. Could that be a problem definition of an existing problem today? If it was a problem did it continue or did it get fixed? Note, mulling one possibility is not really correctly defining the problem!

      Part II.

      Addressing your questions by number, as follows. Please consider that I am not sure of the most important problem definition(s) for Greece. So, I'm just yacking until it is defined.

      1. Yes, exactly debt to GDP has been principally built up prior to 1993. And in previous times there was high drachma dilution rates.

      A. Accumulated deficits can add to debt. Expenses add to deficits. Thus, accumulated expenses can lead to higher debt.
      B. In previous times, sovereign currency dilution could have been used to finance Expenses exceeding revenue instead of debt.
      C. Basil Manessiotis' opines, “The international financial crisis did not cause the sovereign debt crisis in Greece. It revealed and aggravated existing macroeconomic imbalances and structural fiscal problems”, on p. 27.

      2. I have not thought about how it relates to significantly deteriorated trade balance during the periods of 1993~2000 and 2005 onwards. Those turning points might be leading clues for you.

      A. My opinion is that 45% of GDP government expenditure is a lot. And, growing but not falling below it could be systematic. An undesired system, if so.
      B. Most people might be unhappy with such levels. They might consider that they could put it to better use. My opinion is such levels exclude better uses and productive investments.
      C. Maybe GDP is to low.
      D. If GDP falls from 350B to under 250 B and debt stays the same. GDP drops about -30%. But, it would make debt to GDP ratio go up +40% if debt was constant.
      i. Here is how it is calculated. Percent change of the debt to GDP ratio from time 1 to time 2.
      ( D(2)/GDP(2)-D(1)/GDP(1) ) / ( D(1)/GDP(1) ).
      OK, debt at time 2 is the same as Debt at time 1.
      D(2)=D(1)=D.
      The Ds all cancel.
      You get GDP(1)/GDP(2)-1=350/250-1=+0.4 .
      The billions all cancel in the fraction so were left out.


      (I wish my writing style was more concise. )

      1. Reported CPI data graph starts to rise near 1973. And reported inflation is up for a while.
      https://www.quandl.com/c/greece/greece-economy-data
      (I had cpi data from an other source showed CPI increasing near 1973)

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    3. Correction:
      Around 1973 is the start reporting of large inflation.

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  8. Is it one or the the other, sovereigns or the banks?

    Could both be in play at once or related?

    Of course you are sophisticated to mention international European banking.

    You certainly have a point on leverage. Leverage has its problems.

    Yet, I think in most countries leverage has been legally limited. So, why would governments radically reduce leverage requirements all over the world? Have they been profiting from it?

    And, banks who know their history would see the added safety of lower leverage when even if their leverage wasn't regulated.

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  9. Northern banks loaned money to Greece in huge quantities and in an irresponsible manner because they reckoned (quite rightly as it turned out) that in the event of trouble, government or sundry public bodies (e.g. the Troika) would bail them out.

    Under full reserve banking in contrast, banks are funded just by shareholders, and it’s bank shareholders alone that get clobbered when a bank make silly loans, not taxpayers. Moreover, shareholders have a choice as to what is done with their money: if they choose to have their money fund risky loans to Greece, then OK. But if that goes wrong, those shareholders, not taxpayers get hit.

    In short, full reserve banking would have brought about automatically what many are now advocating, namely that the cost of irresponsible lending when it goes wrong should be shared between debtor and creditor.

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  10. Looking at debt to GDP ratios does not tell the whole story. The point with the 2004 to 2009 period is that rising budget deficits funded consumption that led to rising GDP. Thus the debt to GDP ratio appears relatively stable. But this masks the underlying deterioration in the real economy.

    The huge fiscal spending (and related swelling in the ranks of government employees, which you simply ignore) did irreparable damage and led Greece to its eventual collapse. Surely this came on top of the build up of debt in the previous decades, but the essence of Hausmann's claim in relation to the period from 2004 to 2009 is correct. And you are wrong that no one saw the crisis coming. Maybe foreign academics and bloggers did not. But quite a few people living in Greece, including a few politicians, saw it and warned about it.

    As regards the financing of all the reckless spending by core countries banks that is irrelevant from the perspective of us living in Greece. Maybe they did. But the decision to channel all these funds to rampant consumption was our choice and we are living with the consequences. Being an academic looking from afar it is very easy to get all philosophical and blame the core. But is you were on the ground, here in Greece, you would know that the blame lies with us and that our problems are much deeper than the simplistic austerity vs growth, core vs periphery debate.

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    1. Anonymous,

      Evidently you have not bothered to read the whole post. I pointed out the deterioration in both the current account and fiscal deficits from 2004 onwards. I also pointed out - which you ignore - the role of foreign capital inflows in funding both of these. Yes, I did not talk about the expansion of government employment. But as I had highlighted the deteriorating fiscal position, that could be assumed, really.

      Hausmann is wrong on several points of fact. You, like him, ignore the legacy debt that made Greece's fiscal,position far more fragile than that of other countries and therefore less able to absorb the effects of a crisis of the magnitude of that in 2004-9. Note my choice of dates. The financial crisis began with a boom, not a bust. The worsening fiscal and CA deficits during that period were due to the inflows of capital generated by highly-leveraged lending by European banks. If you want to claim that Greece as entirely responsible for the European credit bubble, I can't stop you - and no doubt the countries whose banks have been bailed out by Greek taxpayers will support your stance. But it strikes me as more than slightly grandiose.

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  11. Anonymous of 4 March 2015 at 14:12,

    Are you Greek and have been in Greece for decades?

    If so, you and your fellow Greeks have the significant home court advantage and knowledge! Your people from every experience field are potential experts! It would be rare for outsiders to do better than Greeks. For discovering the main problem definitions. And their causes and solutions.

    The first step is defining the problem or effect. I did not do that correctly above, and not having communicated with lots of Greeks that would a foolish expectation.

    I hesitate to give much advice because I have never been to Greece.

    There are systematic problem solving methods that can be applied to problems. One of those methods discourages blame, especially your average country persons, if the problem is systematic. I could point to how to find people in Greece with such backgrounds, teach some methods, give reference to such methods, or consult. But, implementation has mostly in Greece.

    I might be able to quickly find sources silver for new Drachma coins for Greece. If you know some one who is looking? : ) That was not a suggestion, but an offer of service.

    From Anonymous of 4 March 2015 at 06:05

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  12. Anonymous 6:05 am4 March 2015 at 21:15

    Anonymous of 4 March 2015 at 14:12,

    You are correct in saying, "... does not tell the whole story."

    If your not busy, say dealing with that stuff, should be dealing with it ,or implementing a problem solving proses in Greece with your country people. What is the story?

    Yet, if it is European problem or banking problem or or Europe is part of the problem definition. then maybe the domain expands from only Greece.

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  13. Anonymous 6:05 am4 March 2015 at 21:25

    Also, were are we likely to get info from Greece and Greek people on the story?

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    1. Anonymous 6:05 am4 March 2015 at 23:03

      Correction:
      Also, where are we likely to get info from Greece and Greek people on the story?

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  14. Anonymous 6:05 am4 March 2015 at 22:43

    Some examples of possible problem statements:

    To many of us are out of work. There is little work to be had.
    80% of us can hardly buy any thing and most of us are working hard.
    To get 3 times as many cash paying customers we have to loan them money.
    30% of us almost always have to borrow money for imports.
    Terms of trade are bad.
    Real earnings don't make ends meet.
    Few Tourists.
    When the X country has a "boom" (liquidity loan boom but not net wealth boom) and bust it is not good for our country later.
    Taking loans from foreigners.
    Private debt payments higher than income.
    What should we do? We have so much money were rolling in it?

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  15. Frances, you have a case but you're also missing something obvious: not all GDP growth is sustainable, and sometimes as in Greece during the bubble years the distinction between sustainable and unsustainable is fairly obvious. It's certainly true that European banks were buying all sorts of garbage not only in 2002-2006 but right up to 2008, and that in terms of financial flow dependency analysis the era was a sort of dark age when literacy was lost among the vast majority. Nonetheless all the signs were there of severe financial flow dependency for anybody who really cared enough to take minimal responsibility to look after whether money invested in Greece might be lost. Hausmann is mostly wrong in the ways you point out, but the true story is actually not all that dissimilar from Hausmann's.

    A crucial factor was the eligibility of Greek government bonds as collateral for ECB-backed refinancing. This meant Euro Area banks could raise funds from their respective national central banks to invest in Greek government bonds on the same privileged terms as if they were raising funds to invest in German government bonds.

    But it's certainly true that where Greek debt really began exploding was from 2008. That was because the unsustainable GDP growth melted away and the government ramped up public spending to compensate, until Eurostat cracked down on deficit reporting and the threat of collateral eligibility revocation took Greece out of the market and forced it into a bailout. You're right on most fact points here but your suggestion that nobody could have seen the collapse coming is way off base.

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    Replies
    1. Re-reading Hausmann I feel I need to apologize - to him. He didn't write anything wrong. Frances has merely taken him out of context and attacked him for saying things he didn't say. His statement that Greece "piled up an enormous fiscal and external debt in boom time" is not made wrong by the fact of Greece's rapid GDP growth during that period, which he mentions, and equally important to the stable debt/GDP ratio, relatively high inflation, which he doesn't mention.

      The only mistake I see that Hausmann made was to say that "markets said 'enough' in 2009." That's not what happened. Eurostat began to crack down in 2009-2010. There was still a market for new Greek sovereign issues right into the first half of April 2010, because Greek sovereigns remained ECB-eligible. It's not really possible to sort out which happened first, the realization that Greece was definitely going into a bailout and that would likely eventually bring write-downs, or the rise in market yields of Greek bonds beyond a realistic level. They both happened within one week in mid-April.

      But that's a minor historical detail compared to the wildly wrong suggestion that nobody could have seen Greece's collapse coming. Sure the banks deserve blame, and also the ECB policy of proving funding to banks at one flat rate for investment in any Euro Area sovereign deserves blame. But keep in mind that that the presumption embedded in that policy was that Euro Area sovereigns would be bound by EU fiscal restraints, and that's exactly why the Greek government so actively deceived Eurostat until late 2009.

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    2. Tom.

      I'm sorry, I completely disagree. I have not taken Hausmann out of context. On the contrary, he selected his evidence to suit his case and chose to ignore the legacy debt that meant Greece's fiscal position was ALREADY fragile long before it joined the Euro. He has been, shall we say, "economical with the truth", and actually wrong on some points of fact.

      Regarding your "illusory growth" point: yes, Greece's GDP growth prior to 2008 was illusory. But so was the GDP growth of almost all Western countries, and for the same reasons. To say that Greece should have realised that its GDP growth was an illusion is to expect of Greece a degree of sense that was notably missing from every other government in Europe. Of course, with the benefit of hindsight, it is easy to see that Greece was inevitably going to collapse. But the big myth of the boom years was that the good times would never end.

      I did not say no-one "could have seen" the crisis coming. Of course they could. I said they DID NOT SEE it coming. There is no-one so blind as those who do not wish to see.

      Regarding Eurostat: Eurostat stopped enforcing fiscal restraints in 2004/5 due to lobbying by France and Germany, both of which were persistently violating the Maastricht treaty limits. This in my view was a major contributor to the debt bubble from 2004 onwards. The SGP fiscal restraints were toast.

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  16. When I was a young man, President Reagan told me facts are stupid things.

    Haussman should have stuck with his prior gig:
    https://www.youtube.com/watch?v=S3VIJjdjbxw

    ReplyDelete
    Replies
    1. When I was a young man, facts told me that Reagan was a stupid thing.

      Delete
  17. Ricardo Hausmann has issued a reply btw about this

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  18. You want to know why Greece is not "competitive" enough? Here is the answer: http://www.ceps.eu/system/files/article/2011/07/Forum.pdf and some additional updated slides here: http://www.levyinstitute.org/conferences/minsky2014/flassbeck_s4.pdf

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    ReplyDelete

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