A New Deal for Greece

It appears that the Greeks have given a bloody nose to the EU, turning in a resounding NO vote in Sunday's referendum. Though exactly what they have rejected is unclear. The ballot paper is, to say the least, complicated. The UK's Telegraph published this translation from Greek Analyst:

And the paper asked, "Does this make sense to you?"

No, frankly, it doesn't. Neither of the documents referred to are current. The EU negotiators withdrew the June 25th offer as soon as the referendum was announced, replacing it with a subtly altered version from the "institutions" and dangling the carrot of debt restructuring if Greeks vote to accept the terms. No doubt they thought that this would force the Greek government to cancel the referendum. They were wrong. But the entire bailout programme expired on June 30th anyway, rendering the June 25th offer obsolete.

So the Greeks have rejected an offer that no longer exists. Perhaps the No vote is best seen as a protest against seemingly unending depression, unemployment and misery. I have considerable sympathy for this, though it will undoubtedly annoy Greece's creditors. .

But there has been a much more interesting development in recent days. The second document referred to on the ballot paper is the fudged debt sustainability analysis that accompanied the June 25th offer. But this too has now been superseded. The day after the announcement, the IMF produced another, more comprehensive debt sustainability analysis. It wasn't published until July 2nd. Allegedly this was because European members of the IMF board objected to its publication prior to the referendum. And having read the IMF's new report, I'm not surprised. The report undermines the EU creditors' entire case.

On first reading, the report is highly critical of the current Greek government:
But significant changes in policies since then—not least, lower primary surpluses and a weak reform effort that will weigh on growth and privatization—are leading to substantial new financing needs. Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable. This conclusion holds whether one examines the stock of debt under the November 2012 framework or switches the focus to debt servicing or gross financing needs. 
But embedded in the text (p.4) is this admission that the programme was ALREADY off track before Syriza came to power:
 The 2014 primary fiscal balance fell short of the program target by 1.5 percent of GDP. 
That is a considerable shortfall. And this was on top of the slippage identified in the previous programme review:
Debt/GDP was projected to fall from 175 percent of GDP at end–2013 to about 128 percent of GDP in 2020 and further to 117 percent of GDP in 2022. These were above the thresholds agreed to in November 2012, of debt coming down to 124 percent of GDP in 2020 and to “substantially below” 110 percent of GDP in 2022. 
In fact these charts from the IMF's report show that the programme had failed to meet targets from the start:

In 2013 the growth target was missed by a mile on the downside and the primary balance was also slightly below target. This programme has NEVER met its targets. Nor did the previous one.

Blaming the present government entirely for the failure to meet programme targets is thus unjustified. True, Greece's economic performance has significantly declined under the present government, mostly due to the uncertainty caused by its attempt to renegotiate the terms of the current programme. But if I were running this programme - and I am, among other things, a qualified and highly experienced project manager - I would have questioned the scope and assumptions long ago. A programme that is unable to meet any of its targets right from the start is not fit for purpose.

The slippage has principally been blamed on the Greeks not implementing the agreed reforms. There is some truth in this. But inadequate reforms do not fully explain Greece's terrible growth performance. Nor do they explain the deflation shown in the right-hand chart. Both of these are actually symptomatic of a severe demand squeeze caused by sharply falling real incomes. Or, if you like, by monetary tightness caused by very high real interest rates and no monetary offset from the ECB. It amounts to the same thing. The continuing fall in GDP makes the debt burden bigger, while deflation makes it more difficult to pay off. Yanis Varoufakis says Greece is in "debt deflation". These charts prove that he is right.

And as Irving Fisher reminds us, austerity is not the right medicine for a debt deflation. On the contrary, it makes matters worse.

Written at the height of the US Great Depression, Fisher's short paper "The Debt Deflation Theory of Great Depressions" describes how a debt crisis - be it sovereign or private - becomes an economic disaster. Fisher says that it is the combination of high debt with deflation that is particularly toxic. By itself, deflation need not be a problem at all, and a debt crisis may be quickly resolved. But when over-indebtedness is combined with deflation, a toxic spiral develops. Fisher describes it thus: "The more the debtors pay, the more they owe". And he explains how devastating the effects can be:

What we have seen in Greece in recent years is a fine example of this. Greece's economy has experienced a collapse on a similar scale to that in the US in 1929-32:

 And in Greece today, as in the US's Great Depression, debt deflation is accompanied by bankruptcies, unemployment and starvation.

The 2012 programme makes no attempt to restore the Greek economy. Rather, it is narrowly focused on achieving debt sustainability. To achieve this, it envisaged Greece running primary surpluses of over 4% of GDP for many years from 2016 onwards and achieving the highest TFP growth in the Euro area. This, for an economy as deeply depressed as Greece, is economically illiterate. It was never remotely achievable and I think the worse of both the IMF and the previous Greek government for agreeing to such targets.

Unsurprisingly, the first objective of the present Greek government was to get the primary surplus targets reduced. And it succeeded in this aim, But crucially, it did not manage to persuade the creditors to consider further debt relief. For this the IMF must bear much of the blame. Had it supported the Greek government in its efforts to bring debt sustainability to the negotiating table, we might not now be in this dreadful situation.

The IMF has now now admitted that watering down the primary surplus targets makes the debt unsustainable:
 In particular, if primary surpluses or growth were lowered as per the new policy package—primary surpluses of 3.5 percent of GDP, real GDP growth of 1½ percent in steady state, and more realistic privatization proceeds of about €½ billion annually—debt servicing would rise and debt/GDP would plateau at very high levels (see Figure 4i). For still lower primary surpluses or growth, debt servicing and debt/GDP rises unsustainably. The debt dynamics are unsustainable because as mentioned above, over time, costly market financing is replacing highly subsidized official sector financing, and the primary surpluses are insufficient to offset the difference. 
As FT Alphaville's Joseph Cotterill puts it, this means that the private sector really doesn't want the Greek debt it unloaded on to the public sector back any time soon. Or indeed ever.

But even these new policy targets are unrealistic. For a sovereign to run a substantial primary surplus AND achieve positive growth, either the external sector or the private sector must be in deficit. This implies that either Greece must also run a substantial trade surplus or Greek households and businesses must take on debt. The second of these is highly unlikely: real incomes for Greek households are falling sharply, Greek businesses are understandably unwilling to borrow to invest and Greek banks have high and rising proportions of non-performing loans on their balance sheets. Greece must therefore run a substantial trade surplus to have any chance at all of meeting these targets. Frankly, given Greece's long-standing competitiveness problem, the damage to Greece's already weak supply side in recent years, and the fact that it is locked into the Euro at far too high a real exchange rate, the chances of this are very low.

The IMF concedes that these targets are unachievable in practice. And this is where the fun starts. The IMF's Q&A on alternative scenarios is revealing. First, on growth:
What if growth were lower—closer to the historical pattern of about 1 percent per year? .....Real GDP growth of about 1 percent would still require strong assumptions about labor market dynamics and structural reforms that yield TFP growth at the average of euro area countries. In such a scenario, Greece’s debt would remain above 100 percent of GDP for the next three decades. Doubling the maturity and grace on existing EU loans and offering similar concessional terms on new borrowing, as specified above, would be vital to preserve gross financing needs within a safe range—the average GFN during 2015-2045 would be 11¼ percent of GDP.
Crikey. So even real GDP growth of 1% per annum is a tall order. And it wouldn't make much of a dent in Greece's debt/gdp anyway.

Now, about that primary surplus:
What if primary surplus targets could not exceed 3 percent of GDP over the medium term? In that case, the provision of concessional financing for a prolonged period (10 years) would keep the GFN stable and below the 15-percent threshold over the next three decades. The decline in the debt-to-GDP ratio, nevertheless, would be very gradual. 
So unless Eurozone creditors agree to a huge extension of existing maturities and concessions on interest payments, debt would still be unsustainable even with a persistent primary surplus of 3% of GDP for decades. And if primary surpluses were much lower than this, then in addition to concessions and rescheduling there would have to be actual losses for Eurozone governments who made the mistake of bailing Greece out in 2010:
However, lowering the primary surplus target even further in this lower growth environment would imply unsustainable debt dynamics. If the medium-term primary surplus target were to be reduced to 2½ percent of GDP, say because this is all that the Greek authorities could credibly commit to, then the debt-to-GDP trajectory would be unsustainable even with the 10-year concessional financing assumed in the previous scenario. Gross financing needs and debt-to-GDP would surge owing to the need to pay for the fiscal relaxation of 1 percent of GDP per year with new borrowing at market terms. Thus, any substantial deviation from the package of reforms under consideration—in the form of lower primary surpluses and weaker reforms—would require substantially more financing and debt relief..... 
In such a case, a haircut would be needed, along with extended concessional financing with fixed interest rates locked at current levels. A lower medium-term primary surplus of 2½ percent of GDP and lower real GDP growth of 1 percent per year would require not only concessional financing with fixed interest rates through 2020 to cover gaps as well as doubling of grace and maturities on existing debt but also a significant haircut of debt, for instance, full write-off of the stock outstanding in the GLF facility (€53.1 billion) or any other similar operation. The debt-to-GDP ratio would decline immediately, but “flattens” afterwards amid low economic growth and reduced primary surpluses. The stock and flow treatment, nevertheless, are able to bring the GFN-to-GDP trajectory back to safe ranges for the next three decades.  
To make matters worse, the IMF suggests that as Greece's debt is nearly all held by the official sector, there is no systemic risk and hence no reason for the IMF to involve itself any further in a programme which has no chance whatsoever of returning Greece's debt/GDP to a sustainable level.

The message from the IMF to the EU negotiators is clear: "We've had enough of this. Restructure this debt NOW or we are out."

The result of the Greek referendum gives democratic legitimacy to the Greek government's demands for debt restructuring and relaxation of programme targets. But in reality, the Greek government had already won, thanks to the IMF belatedly applying its own rules. In the end, debt that can't be paid won't be, and attempts to make it payable through harsh austerity only make matters worse. If Greece's creditors don't restructure the debt and refocus the programme on restoring growth, they face large losses in the not too distant future. Indeed, given the damage done to the Greek economy by the bank closure and capital controls, that future may be closer than they think.

In their own interests, Greece's official creditors must now construct a New Deal for Greece.

Related reading:

How we would have restructured Greece's debt - FT Alphaville


  1. Anonymous said...

    What will the get if they finance a New Deal for Greece? And how credible is Greece, a defaultor, if it promises something?

    1. It seems it has been credible enough for a long time for them, since they credited it...

  2. It seems it has been credible enough for a long time for them, since they credited it...

  3. I don't think this referendum is an inflection point. Even though that would be nice.

    Have not events proved that the Euro is a set of hard-pegged currencies individual to each country, with no real systematic risks shared between countries? Why would the Eurozone finance ministers change their positions now?

  4. "The result of the Greek referendum gives democratic legitimacy to the Greek government's demands for debt restructuring and relaxation of programme targets"

    Not really. For that to happen the Greek government would need to win over the populations and leaderships of the other 18 Eurozone countries. In fact Greece have basically done the opposite and hardened opinions against them. So there is absolutely no democratic legitimacy now for any more help for Greece! Strange how the pro-Greek nationalist/anti-austerity side can only see one half of the democratic legitimacy argument!

    1. Throughout the eurozone crisis, the major problem has always been political, rather than economic management. Indeed, the whole eurozone project was defective from the outset owing to European polticians and their arrogance.

      This problem continues, with the Germans as the primary problem in Europe. Their dogmatic and moralistic nonsense will destroy not only Greece but the entire European Union. Of course, this continues their rather consistent track record in politics. They should never have been allowed any voice in the construction of Europe.

    2. This "blame the Germans" narrative is getting rather tiresome. Greece was not forced into the Eurozone nor was is forced to borrow unsustainable amount of money at low interest rates. The primary agent in Greece's problems is Greece.

      Now there is an argument that Germany *should* ideally be more generous to Greece, if the Eurozone is to work effectively. However instead the argument that gets made is that Germans must give to Greece because anything else show that the EU "a German neo-liberal dictatorship" out to destroy "Greek democracy".

      ... This is simply silly xenophobic nonsense and does nothing to help the situation in Greece! Worse it assumes that "Greek democracy" can dictate to the rest of the EU (where there are every increasing majorities who would quite happily stop funding Greece) - which frankly offensive.

    3. No, the Germans have become tiresome. What nonsense you are talking, when you say "Greece was not forced into the eurozone". This flies in the face of clear facts, that presumably you are totally ignorant of. Go and read the EU Treaties -- which state that the euro is the currency of the EU and every member state is committed to it. Go and read the detailed accounts of how the Germans got involved with Greek bankers, politicians and economists -- rewarding them for dragging Greece into the euro without a referendum, any public debate, or any sustainability analysis of the implications. The head of the Greek central bank was rewarded with deputy governorship of the ECB; then, after retirement, the Eurogroup (ie Germany) placed him as unelected Greek prime minister to force the Greeks down the German route.

      Your arrogant nonsense, and denial of the facts, is the problem. The same applies to the issue of debt restructuring -- something absolutely essential for the greek economy to reform and recover, and Germany refuses to discuss.

      No, Germany is at the heart of the eurozone misguided project, is the only country that has benefited from it, and remains in control of it for its own interests. Germany will also be responsible (despite the suicidal lemmings of other right wing pro-austerity governments) for the collapse of the European Union.

      Denying the facts, and accusing others of "xenophobic nonsense" is no doubt the sort of response that Herr Hitler had, to criticism of his Greater Germany. The fact is that Germany is once again out of control. Will we have to go through another world war to keep you in order?

    4. No Greece didn't have to join the Euro. There is an obligation on them to join when they "met the criteria". However they could have negotiated an opt out like the UK and Denmark. Equally they (like Sweden) have determined they didn't yet "met the criteria". Indeed had Greece been a bit more honest (and the EU a bit less foolhardy) then Greece would have never joined and this problem would have never come about.

      As a side not its interesting to look at Greece's GDP per capita.

      As you can see for most of the 90s Greece was statically around $12,000 per capita. It then rose astronomically after the Euro entrance. So arguably what Greece is about to lose is what it never really had in the first place. Indeed it only got to its position because it was briefly (and incorrectly) tied to German economy.

      If you want to blame the Germans then you probably should blame them for allowing Greece to enjoy illusionary growth and trying to help keep Greece in a currency union when it economic fundamentals really don't support it..... I appreciate this is little consolation of somebody who has lost a lot via austerity but the tough reality is Greece seems to need some type of readjustment.

    5. The Germans have profited marvellously from the expansion of the Euro. With an undervalued currency, which the rest of the eurozone have no way of devaluing out of, they have sold shedloads of exports to the poorer countries - and were quite happy to invest the surplus in "risk-free" bonds.

      And as Frances and the IMF point out, there is no German taxpayer that is paying out if the debt overhang is not paid - "Greece's debt is nearly all held by the official sector". The risk-free bonds have turned out, in reality, to be exactly that. So they have won in all respects.

      Yet, despite that, we will see now that they will exploit the crisis further. By ignoring the result of the referendum and leaving the Greeks to cook for a while - in the hope that they will concede. And to what effect? It can't be said often enough - the debts will never be repaid. So they are willing to sacrifice the Greek economy over nothing.

    6. If, as per the previous comment, the Greek economy was essentially a giant ponzi scheme funded by government borrowing (made artificially low before 2008 by membership of Eurozone) then frankly there isn't much of an economy to rescue! Indeed the official stats on the Greek trade position indicates much of an industrial base to get excited about: -

      I understand the Keynesian argument for not cutting in a recession but frankly it would seem that at some point there needs to be some painful adjustment for Greece.... and I'm not convinced by the fairness nor the political feasibility of waiting and waiting for the right time to reform Greece .... and getting the rest of the Eurozone to keep paying for their deficits!

    7. You don't think that 25% fall in GDP, 27% unemployment and 50% youth unemployment is a painful adjustment? How high would unemployment have to be for it to be "painful", then?

      Greece has made considerable reform effort already. Much more is needed, and the problem is that the "low hanging fruit" have mostly been plucked.The need now is for radical institutional reform - legal system, judiciary, tax collection and so on - which is really hard to do in a badly damaged economy with no inward investment and no creditworthiness.

    8. I would add that building an industrial base from almost nothing is also all but impossible without investment.

    9. ... which rather leads back to the second point. Why should the rest of the Eurozone pay for developing a Greek industrial base (by cancelling all its debts - which essentially amounts to a fiscal transfer). If the argument is about "getting growth" then surely there is a argument that money could just as easily be spent developing industries and encouraging growth in other EU countries (e.g. the Baltics to Romania which are all currently poorer than Greece - in terms of GDP per capita).

      What have Syriza done to convince the rest of the EU that an investment in Greece would be sensible anyway. As far as I can tell Syriza have been sending out some rather bellicose socialist and nationalist messages indicating that they are at best lukewarm about reforms. The fear is that any debt forgiveness would be forgotten (and the country would return back to its cronyist old ways). If Syriza were successful then others with nationalist or hard left agendas in the EU would surely copy them and the whole organisation would fall apart pretty quickly (serving no good for anybody - that is if you think - as I do - that the EU is broadly a good thing).

      Frankly I think its got to the point where Greece doesn't back down then it has to leave the Euro (for the sake of the whole of the EU). Sadly I don't share your optimism about a "Euro-free" Greece. I fear that the benefits of cheaper labour (from devaluation of the new Drachma) will more than be offset by an unstable currency, political instability and emigration (of the brightest and best)

    10. @gastro george
      Very silly comment (and the use of a racist example is deeply ironic given the level of anti-German racism coming from elements of the left at the moment). However let work with your dumb analogy for a moment (although I'll rephrase it as "troubled teenagers" for my own sanity).

      For your analogy with Greece and the EU ,,,, and troubled teenagers and the government to work: -
      - The troubled teenagers would somehow have to exist outside the framework of government control (e.g. the government have no powers of arrest over them)
      - would have to be very expensive for the government in terms of the bills they run up.

      I strongly suspect most government would struggle to deal with such people. I suspect a government would either seek the power of arrest, make the teenagers pay themselves or exclude them from the country!

      So going back to Greece which is it: loss of sovereignty, austerity or exclusion from the EU/Eurozone....

    11. Doubly ironic considering the amount of anti-Greek racism ...

      "I suspect a government would either seek the power of arrest, make the teenagers pay themselves or exclude them from the country!"

      You see I think that this reply is an excellent demonstration of the current problem. One would think that, if you wanted to exist in an inclusive society, that you would be willing to invest in the futures of all of your population. Yet this is your recipe for both Greece and black kids. Jail them, make them pay or kick them out.

    12. Firstly I agree that there is anti-Greek racism. I hope that we can agree that crass generalisations about groups of people of any background are not helpful!

      Secondly you seem to have (deliberately?) misread my last post. Obviously I support an inclusive society. Obviously I think a government should invest in all its citizens. However governments also need to have the ability to apply sanctions (primarily as a deterrent to those who many on the cusp of a life of crime). Its why we have jails and a police force!

      The implication of your post is that it should be all carrot and no stick. This simply isn't feasible when dealing with citizens of countries or unions of nations. There is an argument that perhaps more "carrot" should have been applied to Greece before "wielding the stick" but that's not the same as the argument you have presented.

      Indeed going back to the original post you commented on, if you think more "carrot" should have been applied to Greece then how would you justify this spending to poorer (and less nationalistic) countries in the EU.

    13. Well I'm glad that we are rowing back from extreme positions - which are usually less than useful - I'll hope to do the same here.

      My point would be that Greece is only being offered all stick and no carrot. Of course there have to be structural adjustments within Greece - and Syriza was elected to do just that - to break with the old clientelism of Pasok and ND. But these take time and investment. And therefore Greece needs relief from austerity and some form of Marshall plan in order to take steps towards recovery. The outcome of the big stick can only be negative - the further immiserisation of the Greek population - and to what end? Debts that the IMF confess will never be repaid. Punishment in this case is counter-productive - unless you like the idea of punishment.

      Regarding the other poorer nations - well they should be getting more help as well. We keep hearing about the "success" of austerity - but Spain has 50+% youth unemployment, Latvia suffered a huge outflow of its young intelligentsia - these "successes" exist largely in the minds of "serious people" only.

      The point being that there is a design flaw in the eurozone. You can't have a currency union without fiscal transfers. Otherwise we are all just waiting for the next poorer nation to be the next victim of a structural problem.

    14. I don't think there is the political will across the EU for the type of fiscal transfers that would be necessary. So sadly I think the euro project going to be restricted to countries prepared to tie there economies to the German economy (and suffer the consequences fiscal austerity and internal devaluation when in recession).

      For Greece this is going to be a disaster either case such as the size of the debts. Indeed I still think that being tied to essentially a German currency and avoiding hyper-inflation is probably the lesser of two evils (if politically feasible).

  5. Wonderful great post. I am very lucky to read your post. Thanks for your wonderful post here.

  6. On point, but impossible to reconcile with Schulz (Greeks need new currency), Schäuble (no new bailout unless Tsipras goes), Gabriel (they burned last bridges), D-boom, Merkel .

    But don't ever change!

    couple of links, others left as an exercise


  7. This comment has been removed by the author.

  8. Does that mean that Ireland, Portugal, Spain and Italy get New Deals too? Or do countries that refuse to deal with the uncompetitive nature of their economies, and refuse to make their citizens pay their taxes get such a benefit?

    1. Things getting better in Greece do not harm you.

    2. They do if you are a eurozone taxpayer who will have to shoulder the ECB's losses. Why should an Irish taxpayer have to pay extra tax, so the Greeks can get a deal that Ireland wasn't given?

    3. Central Banks are currency issuers. Suffering losses in the currency they issue is meaningless to them, and handling unpaid debt need not involve transfers to ECB, as paperwork suffices. I expect we will soon witness that.

      I won't claim the original Irish or Greek deals made sense for either, but I will suggest that any Irish envy towards Greece is deeply misplaced.

  9. Francis or others,

    1. How does one prevent getting involved in a bank holiday or capital controls?
    2. What are good methods to liberating ones assets during a bank holiday or capital controls?

  10. "The message from the IMF to the EU negotiators is clear: "We've had enough of this. Restructure this debt NOW or we are out.""

    The other parties to the deal could legitimately say: "Good luck with your demands, IMF. You are actually in it, with Euro 30bn, so you cannot get out! You might as well behave like an adult in the room"

    New Deal - well that is what the restarted negotiations are about today again.

    How do we get Germany to accept a debt write down which does not look like one, and a further thid bail-out package, which the Bundestag has to sanction?

    Very tricky - but not impossible.

    Part of the answer should be to move the debt back to Greece, and have the Greek banks advance the money to the Greek government. Please see my proposal, it would not involve a third bail-out, it would not require sanction by the Bundestag.


  11. Frances, you have commited a mistake in
    "But even these new policy targets are unrealistic. For a sovereign to run a substantial primary surplus AND achieve positive growth, either the external sector or the private sector must be in deficit. This implies that either Greece must also run a substantial trade surplus or Greek households and businesses must take on debt. The second of these is highly unlikely: real incomes for Greek households are falling sharply, Greek businesses are understandably unwilling to borrow to invest and Greek banks have high and rising proportions of non-performing loans on their balance sheets. Greece must therefore run a substantial trade surplus to have any chance at all of meeting these targets. Frankly, given Greece's long-standing competitiveness problem, the damage to Greece's already weak supply side in recent years, and the fact that it is locked into the Euro at far too high a real exchange rate, the chances of this are very low."
    The arithmetic of accountable identity is always done, independently of exchange rate, competitiveness, etc... Spain reach a BoP surplus because of the fall of intranet demand, which is just what Greece can get.

    1. Miguel,

      I have made no mistake. The accounting identity is as I describe.

      The factors you mention - exchange rate and competitiveness - are both influences on the external sector. This is currently in deficit and in my view is likely to remain so. Raising competitiveness is more than just a question of labour market reforms to cut ULCs: it also requires investment, something Greece sorely lacks and is not going to get while the sovereign is at risk of default and the banks at risk of insolvency. And the exchange rate dynamics are not positive for Greek exports. The Euro is far too high for it even with recent falls. Worth remembering that one of its principal export destinations is Russia, and the rouble has fallen far more than the Euro.

      Spain's balance of payments surplus was indeed due to demand fall not supply rise. I don't regard that as positive anyway, but in an economy which imports as many essentials as Greece does it's not going to happen.

    2. Sorry, there is a mistake. You use identity and after you elude it. Along your argument, a fiscal surplus determines a external surplus and/or a private deficit. Little after, you said that neither the first nor the second is probable (for economic reasons). Contradictory, isn't?

    3. No mistake.

      1) Assuming GDP remains constant, if fiscal surplus is sustained then private sector deficit and/or external sector surplus must rise

      2) But there are growth targets too, so for fiscal surplus to be sustained private sector deficit and/or external surplus must rise CONSIDERABLY

      3) If the private sector is unwilling/unable to take on debt, then as long as the external surplus is increasing the fiscal surplus may be maintained without GDP contraction

      4) Similarly, if the external sector fails to go further into surplus but private sector is willing & able to take on debt, the fiscal surplus may be maintained without GDP contraction

      5) But if the private sector is unwilling/unable to take on debt and the external sector does not go further into surplus (or remains in deficit), then the fiscal surplus can only be maintained at the price of GDP contraction.

      6) In practice, if the private sector will not borrow and the external sector remains in deficit, neither the fiscal surplus nor GDP growth can be maintained. So we would continue to have missed targets.

      I did not want to dwell on the sectoral balances arithmetic in this post. I have written about it many times before.

    4. "But if the private sector is unwilling/unable to take on debt and the external sector does not go further into surplus (or remains in deficit), then the fiscal surplus can only be maintained at the price of GDP contraction."
      Yes, exactly. So, GDP contraction make possible external surplus. I repeat: this is just the reason of the Spain' surplus: the contraction of GDP. What's new?

    5. Greece has both fiscal surplus AND growth targets, and the IMF's analysis shows that if either target is missed debt becomes unsustainable. Therefore GDP contraction does not solve the problem.

      I would remind you that Greece has already suffered a 25% contraction of GDP. How far do you think it should fall?

  12. More here http://www.miguelnavascues.com/2015/07/grecia-al-microscopio-metedura-de-pata.html. I would say also that you have a terrible "penchant" for these neocomunist that are crushing democracy in Greece.
    Keynes said that institutional framework is not irrelevant when we are talking about economy.

    1. I struggle to understand how holding a referendum is "crushing democracy". Sounds to me like your prejudices talking here.

    2. Hitler won Governmemt democratically. Democracy is not just to vote.

    3. Er, no he didn't: https://en.wikipedia.org/wiki/Reichstag_fire

    4. Yes he did. After he crush the law. Your sources are wrong. But in any case, Syriza is a communist party allied with a nazi one. Ce n'est pas une blague

    5. http://www.biography.com/people/adolf-hitler-9340144#rise-to-power

    6. The Great Depression in Germany provided a political opportunity for Hitler. Germans were ambivalent to the parliamentary republic and increasingly open to extremist options. In 1932, Hitler ran against Paul von Hindenburg for the presidency. Hitler came in second in both rounds of the election, garnering more than 35 percent of the vote in the final election. The election established Hitler as a strong force in German politics. Hindenburg reluctantly agreed to appoint Hitler as chancellor in order to promote political balance.

      Hitler used his position as chancellor to form a de facto legal dictatorship. The Reichstag Fire Decree, announced after a suspicious fire at the Reichstag, suspended basic rights and allowed detention without trial. Hitler also engineered the passage of the Enabling Act, which gave his cabinet full legislative powers for a period of four years and allowed deviations from the constitution.

  13. New Deal for Greece:

    Anybody looking for the deal of continued austerity (to placate the Germans) plus debt relief (to help the Greeks) should look at that proposal:



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