Imperial Hypocrisy and Greek Debt Data

The recent Greek referendum 'No' to its creditors' plans was welcome, even unique in recent history, as a sign of some serious resistance to being crushed by the exigencies of capitalism. Yet, the referendum has changed nothing because the Greek economy remains at the mercy of the creditors, especially its euro-based creditors. It is worth looking back at some points on the history on this, which will shift attention from the intransigence of German politicians like Merkel and Schauble to the double dealing of the French.

The question of writing off some of the obviously unsustainable debts was first raised back in 2010, when Greece's problems first exploded into view as the debt was over 130% of its GDP. Then, a certain Dominique Strauss-Kahn, the hereditary European who was chosen as the head of the IMF, and also a key French politico, was against a debt 'restructuring' (ie write off). No doubt citing fundamental IMF principles and the laws of God, or Mammon, Monsieur DSK was no doubt also mindful of the fact that a large proportion of Greek debt was held by French banks. In March 2010, French banks were holding the biggest pile of dung. Out of €134 billion worth of European bank claims on Greece, French banks had €52 billion, one and a half times as much as Germany.

In 2010, Greece was given further IMF and other loans, amounting to €110 billion. This was not because Greece did not have enough debt already, but because this was a way of paying off liabilities to the European banks, among other things, and making the new debt a liability of the Greek state to official creditors, who would have more power in forcing eventual repayments. One study estimates that:

"Whereas in March 2010 about 40% of total European lending to Greece was via French banks, today only 0.6% is. Governments have filled the breach, but not in proportion to their banks’ exposure in 2010. Rather, it is in proportion to their paid-up capital at the ECB – which in France’s case is only 20%.

"In consequence, France has actually managed to reduce its total Greek exposure – sovereign and bank – by €8 billion, as seen in the main figure above.  In contrast, Italy, which had virtually no exposure to Greece in 2010 now has a massive one: €39 billion.  Total German exposure is up by a similar amount – €35 billion.  Spain has also seen its exposure rocket from nearly nothing in 2009 to €25 billion today.

"In short, France has managed to use the Greek bailout to offload €8 billion in junk debt onto its neighbors and burden them with tens of billions more in debt they could have avoided had Greece simply been allowed to default in 2010.  The upshot is that Italy and Spain are much closer to financial crisis today than they should be."


This was not a full escape for private creditors, since they (including non-Europeans) were also pressured to write off roughly half of their 'assets' - around €100 billion - in a 2012 restructuring of Greek sovereign debts. But in 2012 this had become more manageable, since there had been some economic recovery and also much more intervention by central banks to prop up the financial system.

The sticking point for Greece's creditors remains writing off official debt. Now the IMF, led by Christine Lagarde, another French politico - who once smiled sweetly at Yanis Varoufakis, perhaps expecting the compliance that her position demands - is able to negotiate with a lower exposure of the French banks and the French state. Her aim now is essentially to put the burden of the creditors' setbacks onto eurozone members in general, especially Germany. Previously, the (French) banks, as the main original creditors, would have been in the front line for write offs.

In this context, there is another neat, hypocritical manoeuvre by French president François Hollande, who now wants to act as the supporter of a deal for Greece. France has long positioned itself as the saviour of southern Europe, hoping politically to build up a counterweight to Germany's supporters in any euro-based vote. As long as France can manage to put the economic burden of its political decisions onto some other country, then it will continue to do so.

Tony Norfield, 7 July 2015

PS: The authors of the debt analysis cited above also note that Greece has an unusually large amount of defence spending compared to other NATO countries of more than 2% of GDP. Why Greece needs this, apart from idiotic nationalism believing that Turkey will invade at any moment, is a mystery, but is another dysfunctional feature of the economically unviable Greek state.

Greek Lessons

Here are some points to consider when sorting through the news stories about Greece.

The media coverage is naturally focused on day-to-day events. However, the key point to understand is that, long before the crisis broke in 2010-11, the Greek economy was unviable. It had for many years been dependent on grants from the EU, extensive credits and low interest rates. Before the 2008 worldwide financial implosion, these boosted Greek living standards. Post-2008, there was the reckoning, starting with much higher borrowing costs.

What had characterised Greece both before and after 2008 was a low level of tax revenues compared to state spending, but this was only another way in which its fundamental economic weakness was expressed. Greece had little to offer apart from shipping and tourism. But tourism had become more uncompetitive, while shipping was 'offshore', paying little tax. Along with other weak, usually southern European states, such as Portugal and Spain, but also Italy, Greece had found its competitive position undermined with the rise of cheap labour countries in Asia.

In 2010-11, the EU 'solution' was to lumber the Greek state with more debt so that it could pay off private bank creditors, mainly German and French banks. This was to avoid a reckoning in terms of writing off debts that could not be paid by adding to the debt pile which was now held to be held mainly by the Greek government. The political logic at that point was that the European banking system could not withstand taking more write offs when it was so weak, and the legions of policy-making geniuses had not yet managed to work out anything else.

A debt write off -  effectively 100bn euros or so - was then organised in 2012. Private creditors took a hit in a 'debt swap', being forced to restructure their 'assets' into loans at greatly subsidised interest rates. However, by that time, the Greek economy had collapsed under austerity measures imposed by creditors, so nothing improved and the ratio of debt to GDP continued to soar.

There followed a never-ending story of Greek-EU negotiations and subterfuge. By 2013, Syriza managed to convince itself, or at least had the political platform, that a much better deal was possible, both staying in the euro system and getting an end to austerity policies. After forming a government in January 2015, it did next to nothing to challenge the Greek oligarchs or deliver a reality check to the Greek middle class, its social base, and instead postured against Germany, the main creditor country, and annoyed all of its creditors. But, with their Ukraine policy falling apart, and with their policies in the Middle East and North Africa in a shambles, leading to many thousands of refugees trying to escape to Europe, the creditors had other things on their minds apart from endless meetings with recalcitrant Greek debtors.

So far, the Greek government has not yet defaulted on other official (government/IMF) creditors. But the European Central Bank (ECB) has extended many tens of billions of loans to the Greek government and given Greek banks another almost 100bn in emergency liquidity via the Greek central bank. On Tuesday there is also a Greek government payment due to the IMF, a default on which does not happen for a country that is meant to be one of the insider's club, yet there appear to be no funds to pay it.

The ECB may have today (Sunday) issued the coup de grace that the euro system is not otherwise able to deliver by refusing to increase its liquidity provision to Greek banks. So there will be a banking system closure in Greece on Monday, with no sign of when banks will be able to open again.

There is no legal mechanism for being kicked out of the euro, nor for a member leaving it, as far as I am aware. If anything, a euro member leaving might well threaten its membership of the wider EU. Yet, the ECB can stop doing business with one of its constituent parts, namely the Greek central bank. By stopping further funding of Greek's imploding banking system, the ECB, if it continues, will preside over the collapse of Greece's economy, forcing an exit from the euro system.

There are many economic details in dispute regarding the EU/IMF/ECB conditions to be agreed with Greece, but the creditor position at present is that the debtors have walked away from negotiations, so there is no more to discuss. One interesting angle is the question of taxes. Syriza's offer was to push the burden of adjustment onto corporate taxes rather than spending cuts, given that the latter would be focused on pensions, etc. Apart from any normal, reactionary bias in creditor demands, the inability of the Greek government to collect taxes must have been a factor in rejecting this alternative programme.

What happens in the next few days will signal again how far the 'independent' ECB is independent of the need to abide by its formerly sacrosanct rules in order to keep the euro political-economic system intact. A Greek exit from the euro is believed by many politicians to be less of a problem than it would have been in 2010-11. That is probably true, but it will nevertheless be a serious blow. One aim of Europe's bumbling ruling classes may have been to crush Syriza in order to undermine oppositional movements, such as Podemos in Spain. However, by showing that there is an exit door for euro members, even if it leads a lift shaft, this also shows that other countries may be pushed into it.

More broadly, the destruction of the Greek economy is a sign of what awaits other, previously privileged, countries that cannot make the grade in today's rapacious and imperialist world economy. If there is a lesson in the Syriza episode it is that a middle class-led movement that tries to restore the status quo ante inevitably fails.

Tony Norfield, 28 June 2015

Note: One of the first articles on this blog, 'Origins of the Greek Crisis', 24 June 2011, covered the background to recent events.

Euro Labour Costs

The previous chart is calculated from some recently published Eurostat data on labour costs in the business sector. For several euro member countries, I have compared changes in their average hourly labour costs (wages, salaries, benefits, etc) to the average for the euro area as a whole. Eurostat does not seem to publish absolute levels of these costs, and only gives an index number (2008 = 100 for all countries). It might be that one country's costs have risen faster than the average, but still remain below average, or vice versa. Also, these numbers take no account of productivity developments and just show changes in an employer's hourly cost of hiring a worker. Despite these qualifications, the picture is still striking.

The chart is indexed to 100 at the start of 2001, thus showing the relative change in each country's labour costs compared to the average since then. This is not to argue that 2001 is some kind of equilibrium year when everything was fine, it just makes the longer-term development easier to see than Eurostat's index numbers with 2008 as 100.

Greece also joined the euro in 2001, and it stands out in the chart. From 2001 to 2005, Greek labour costs rose by around 15% more than the average, then, after falling back, rose again into early 2010. Thereafter, relative costs slumped along with the Greek economy. In absolute terms, the level of Greek labour costs jumped from an index number (2008 = 100) of 76.7 in early 2001 to a peak of 113.4 in early 2010. By the end of 2014, the index number had crashed to 84.3. Nominal wage costs in Greece are back to where they were in 2002, and lower still when adjusted for inflation. On the face of it, this should be encouraging for capitalist employers, but there is still barely any sign of economic recovery. Profitable production depends upon more than cheap labour.

Spain stands out too, as the euro member country with the most sustained rise in relative labour costs. From 2001 to 2010 these rose by some 15% more than the euro average. Mass unemployment in Spain has made the gap narrower since then, but, by the end of 2014, Spain's relative costs were still 10% higher than in 2001. In absolute terms, Spain's labour costs have flatlined in the past few years, rather than having fallen drastically, as in Greece. Spain's index number (2008 = 100) rose from 72.3 in 2001 to 110 in 2012, where it has since stayed.

France and Italy's labour costs have risen only a little faster than the average, by less than 5% in the period to end-2014. Germany's labour costs, however, rose less quickly than the average for a decade, and only began to rise a little faster from 2010.

Tony Norfield, 20 April 2015

Body Language: Germany, ECB & Greece

A picture paints a thousand words. Here are two pictures, and not many words, covering two events.

One is of the European Central Bank's Quantitative Easing programme, opposed by Germany, depicting the Italian head of the central bank, Mario Draghi (left), and Germany's finance minister, Wolfgang Schäuble (right). The second is of the new Greek finance minister, Yanis Varoufakis (right) with his German counterpart (left), after not even agreeing to disagree on Greece's proposals for managing its debt burden.
 

 Tony Norfield, 5 February 2015

The Wages of Sinn and the Euro Crisis

Today I went to the launch meeting in the City of London for the latest book from Hans-Werner Sinn, entitled Euro Trap: On Bursting Bubbles, Budgets and Beliefs. Sinn is probably best known as the President of Germany's Ifo Institute, as a well-informed, critical commentator on the European Central Bank and as someone who delivers withering critiques of economic and financial policies in the euro area. I have read some of his papers on the ECB's TARGET payments system - ones that explain the economic disaster of the euro project more clearly than one might expect - and have seen a video of an earlier speech on the euro crisis. So, I was intrigued to attend this meeting. The comments here are from my notes of his presentation. They will lack some detail, although they should nevertheless give the gist of what was said. I have ordered his new book, and will correct any misrepresentations once I have read it.

Professor Sinn's skill is in expressing his views very clearly, and with an abundance of supporting empirical evidence. Those who disagree with him may claim that he has got it wrong, but often they will be addressing a different question and not confronting the essence of what he is saying. This is certainly the impression I have had reading 'expert' spokesmen for the euro elite who criticise Sinn. Radicals, who consider him part of the reactionary establishment arguing for austerity, do not usually attempt to address his views at all.

Sinn's view of the (euro economic) world is straightforward. He admitted that he was initially a supporter of the euro project, with some reservations, and that he did not anticipate how badly it would turn out. He then focused on the facts that cannot be denied: most, if not all, of the crisis-hit euro countries went through a decade or more of falling competitiveness before the global turmoil (for the richer countries) began in 2007-08.

This falling competitiveness was based upon a growth of real incomes, consumer demand and public spending that outran the productive capacity of the individual countries. It was fed by falling interest rates that encouraged borrowing and, for the weaker countries, by a euro system that appeared to make lending to borrowers (Greece, Spain, etc) with much weaker economies have more or less the same risk as lending to those in the richer, stronger euro countries. The 'irrevocable exchange rate' of the euro, and the denial that any individual state would ever exit the system, covered up the gap in the euro project's construction: there was no agreed mechanism for rescuing insolvent states, in particular there was no unified fiscal policy, something that would have to have depended upon a political union of member countries, not simply a monetary union.

So, the euro system had no mechanism for dealing with the economic effects of divergent competitiveness reflected in the mounting levels of external debt (via current account deficits) for weaker countries. What happened instead was that the TARGET payments system for interbank transfers within the system simply led to ever-increasing liabilities of the uncompetitive and ever-increasing assets of the competitive, with the ultimate risk being put on the relevant national central banks. In practice, Germany's central bank has taken on the asset risk that German companies have in Spain, Greece, etc. The German companies get paid, but via a credit issued by the German central bank to its central bank counterparts in Spain, Greece, etc. This means that the German central bank, the Bundesbank, has questionable assets in its lending to the central banks of Spain, Greece, etc, while the Spanish and Greek central banks have liabilities to the Bundesbank offset by questionable assets from securities (and promises) delivered to them by their own domestic banks and companies.

That is bad enough, but things got worse. In recent years, the credit quality of collateral accepted by central banks from private banks in the euro system was reduced, the ECB embarked upon a series of measures to buy government and private sector securities and, in the latest measures, the ECB will also buy junk assets to 'rescue' private banks from their ownership of rubbish. Six crisis countries, claimed Sinn, have received more than €1,300bn of credit in this way, of which more than 80% has come from the ECB.

These points should make one ponder a while.

For all the protests about austerity, the euro system has invented new funds for crisis-struck countries in a way that has clearly transgressed the supposed neoliberal policy regime. Sinn noted that the US Fed, for example, would never have bought Californian state bonds. Instead, he complains, the risks of the economic disaster have been transferred to euro states and, hence, to the (German?) taxpayer.

Radicals will complain that the banks have been bailed out and rescued, while austerity continues. However, the real point is that Europe is an economic disaster area and there has been, so far, great reluctance by governments to force a market reckoning upon the mass of the population. Sinn is more conciliatory on this issue than one might think. He fears that mass unemployment, especially youth unemployment above 25% in several countries, will lead to political turmoil and extremism. He worries that 'productivity' is only rising in some countries because jobs are being shed, not because there is any productive investment. If one were to argue that yes, there has already been enough austerity, he will present statistics to show that there is another 10% to go in Italy, 20% in France and 30-35% in Spain and Greece before competitiveness is restored.

I do not necessarily agree with Sinn's numbers, but his case is clear and a few percentage points here or there make little difference to his main argument: the economics of (euro) capitalism demands austerity. All this, of course, raises bigger questions.

Sinn, despite appearances to the contrary, hopes that the euro system will survive, but he argues that it can only do so if it recognises its fundamental flaws. He proposes a 'temporary' exit of crisis-hit countries, who will then devalue their currencies and later re-enter the euro system, as of right. His solution is quaintly optimistic, but one should recognise that he favours European integration and political stability. The only problem here is that he insists that this must be on sustainable terms if it is to work. Critics of his position often focus upon Germany's benefits from the system, but he correctly notes that Germany itself had a long phase of labour market austerity in the 2000s, which is why the country has become very competitive. Above all, he wants a viable capitalist system, although with European capitalist stability high on his list of priorities.

Questions confronting those who are less concerned with saving the capitalist system, in the euro area, or elsewhere, are as follows. Firstly, it does not make sense to argue against austerity by making this an anti-German argument, as if German workers did not also have their own phase of austerity before. Secondly, an attack on 'austerity' must recognise the privileges of those in the EU/euro area who have benefited from their own countries' domination of international markets, through the control of trade links, patents or owning many of the key monopolistic companies. Fighting austerity at home is hypocritical if it does not recognise the way that the economic system subordinates others.

Thirdly, recognise that Sinn's arguments are the logical consequence of a clear-sighted capitalist perspective, and one that is also ameliorated by a concern for social stability. He has much better arguments about what is needed by capitalism today in Europe than the nonsense of 'alternative policies'. The proponents of the latter know they are dead in the water, but they might still attract some external funding, whether in advocating wind farms or whatever else. Sinn's position is to advance a policy that he recognises is a 'dismal option' - and one that he does not really expect to succeed, still less to make people happy - but he hopes it would be better than the current euro political decision to do nothing and instead to hope something will turn up.

It is unlikely that his policy recommendations will be followed, partly because euro politicians correctly see the barriers to any proposal that highlights what is really going on. Confronting an intractable capitalist crisis is something that the current generation of politicians cannot manage. The crisis has blown their legs off, yet they still dream of strolling down the road as in the good old days. Even if Professor Hans-Werner Sinn were to become the new arbiter of euro policy, that would still leave the system he seeks to sustain in question.

Tony Norfield, 9 October 2014

Law of Value versus Berlusconi, Papandreou

The calculations of European politicians have come unstuck. Political favours, patronage, trusted allies and deals that worked to produce results in the past now do not work at all. The evolution of the crisis says: ‘You have no more money’. That is the simple message that has led to the resignations of Berlusconi, imperious clown of Italy, and Papandreou, dynastic head of Greece.

As previous articles on this blog have shown, things are getting worse.[1] The impact on Europe has hit the headlines most in recent weeks, with the media focus on rising bond yields, reflecting the lack of credibility that governments have in resolving the crisis. Even the European Financial Stability Facility (the more words, the less content) faces rising yields, leading to a situation where, as one market analyst put it, “the vehicle that’s supposed to borrow on behalf of countries that can’t borrow, can’t borrow.”[2] Read that two or more times, and you will get the idea. How the EFSF is meant to leverage its remaining funds to €1000bn in this situation I will leave to the geniuses of financial engineering.

The capitalist solution to the crisis involves a wholesale destruction of conventional living standards, and more besides. There are no solutions that any political party in crisis-stricken countries can propose that will get widespread support, but the destruction will get under way in any case. More Italians may hate Berlusconi now, but his exit will do nothing to resolve Italy’s problems. The resolution implies austerity, and no reduction in Italian bond yields based on his demise will prevent that. The same thing applies to Greece, which seems to have stepped back from the brink of what may have been an even bigger shock to its living standards – leaving the euro – than is now going to happen, minus Papandreou.[3]

The main European imperial powers, Germany and France, have their own reckoning to ponder. Busy trying to maintain the system they built, they have found their own finances under threat, as reflected in the weakened position of the EFSF, Sarkozy’s worries about French banks and Merkel’s troubles in the Bundestag. ‘Merkozy’ can deliberate, but the capitalist market decides. That is what the Law of Value is all about.

Tony Norfield, 8 November 2011

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[1] See ‘It Can Always Get Worse’, 22 September 2011.

[2] See Lex Column, Financial Times, 3 November 2011.

[3] In my view, the costs for Greece of leaving the euro are huge. There are no historical examples of leaving a currency system after having given up the domestic currency and having spent a decade writing commercial contracts in a joint currency. The banking system may collapse within the euro system; it would definitely collapse outside of it.

The Euro Deal

The deal to save the euro that was announced on Thursday night was not yet another sticking tape to hold together a crumbling system. It was a major plaster cast, with additional wheelchair, splints and crutches. The document signed by the euro heads of state does not solve the crisis, but it is a significant political declaration. I would expect it to salvage the system for at least the next year, and to be the starting point for further measures of political consolidation within the euro group of countries.

Here are the key points of the statement, presented with a little elaboration to explain what is going on:

• They will “do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States.” This is a political rebuff to the financial markets that have had reason to speculate on the system being under threat.

• Greece will get further official funds (from the euro countries and the IMF) amounting to  €109bn. Private investors (the banks) are expected to contribute €50bn in the next few years, and a total of €106bn by 2019, in accepting write downs on their assets and lower interest payments over an extended period.

• This deal is “exceptional and unique” and only for Greece, but the lower lending rates of 3.5% for Greece will also apply to Ireland and Portugal, as will the extension of new loans to a 15-30 years maturity.

• In order to help Italy and Spain, and any other member country, official euro funds will be available to be used in a “precautionary programme”. In other words, a country need not be in the emergency ward before getting any help.

• This precautionary programme could involve recapitalising financial institutions and the European Central Bank intervening in secondary markets (ie bond markets) to “avoid contagion”. If this means supporting the prices of troubled countries’ bonds in financial markets, this shows how far European politicians have come from their previous worship of the market!

• To be able to ignore any credit default that the ratings agencies might declare for Greece, or other countries, “reliance on external credit ratings” will be reduced. The agencies have a powerful role, despite their evident failings, as their credit ratings determine whether investors and banks will hold certain bonds. This is a sign both that politics is going to be more decisive, and that the influence of the US-based agencies will diminish.

The euro politicians’ declaration they will do everything to save the system is not really that surprising. A break up of the 17-member euro system would be a catastrophe for them – the end of a project that has been decades in the making - and for their economies, given the huge trade and investment ties between the different states that are based on the foundation of the single currency. The euro system is also a centre of global power that increases the leverage of its main constituent countries, Germany and France. That was not going to be allowed to fail so easily. However, the political leaders can only pretend to be able to count the likely costs. The evolution of the global crisis is out of their hands, and the next week or so will also see a renewed focus on the US and its debt problems that could add to their existing ones.

The latest deal is also surprisingly generous for Greece, and for other countries hit by the crisis. The euro document even said that they would “relaunch the Greek economy” with European funds and recapitalise Greek banks if necessary! This is what a sceptic would call a ‘brave’ declaration, but it is an impressive turnaround from the earlier stance that demanded unrelenting austerity to pay back all the debts. While there will be a “strict implementation” of economic policies in Greece, the costs imposed on the population are likely to be lower. They need to be. After all the measures, the country’s huge government debt of €350bn, around 150% of GDP, is only seen reduced by around €26bn by 2014.

Tony Norfield, 22 July 2011

Origins of the Greek Crisis

Is the Greek debt crisis the fault of predatory banks? It might look that way, given that banks are demanding their money back, Greeks face job cuts and tax rises, and the Greek government now has to pay rates of up to 30% to borrow, if it can borrow any money at all. But an examination of how the crisis began points the finger instead at the euphoria that gripped Greek politicians, businesses and the middle class once the country joined the euro in 2001. Far from euro membership helping the development of Greece’s economy, it has turned into a disaster. Blaming the banks for Greece’s troubles may be popular, but it hides the facts and feeds the delusions of those who think that the only problem with capitalism is finance.

1. Greece’s euro membership

Greece joined the European Union in 1981, and became part of the single European trading market. It began to enjoy strong economic growth, helped by the growing trade relationships with and development aid from the rest of Europe. But there was only limited success in making the poorly developed Greek economy move closer to the European average. The money from European funds – worth several billions of dollars per year - was largely used to plug gaps in the Greek budget that was struggling to meet the costs of pensions and other current expenditures. One study calculates that, up to 1995, 60% of European development funds were not used on infrastructure projects.[1] Although the aid money was better spent after 1995, helping to modernise the transportation network, when Greece joined monetary union in 2001 there was another opportunity to screw things up.

Major European powers decided, just about, that Greece had met the membership rules that focused on economic issues like inflation rates and government spending deficits. These rules were designed to prevent unstable countries from causing trouble for the key players who would have to pick up the bill for the system’s problems, especially Germany.[2]

The benefits to Greece of EMU entry were enormous. Gone was the dodgy Drachma; a tourist currency was now replaced by a big global currency, the euro. This allowed Greece’s borrowing costs to fall sharply, cutting the cost of public sector borrowing and the interest rates paid on business and personal loans.[3] Greece also got a status boost from being a member of the ‘single European currency’, despite its economy still being based mainly on tourism and shipping, with no local industrial output of significance. The Greek sidelines of trade with Balkan countries and being a nice pied-à-terre for some Middle East investment funds could now be presented as some of its advantages for the expanded euro system.

Greece was the ‘far East’ from the point of view of the EMU project, but Greece’s membership appealed to a version of European racism that was delighted to include the ‘home of western civilisation’. More importantly, Greece’s economy was so small that it didn’t seem to matter even if there were to be problems one day. How could a country of 11 million people with an economy that accounted for barely 2% of euro area GDP cause trouble for the big guys? By contrast, at the start of EMU Germany’s economy made up 30% of euro area GDP and France’s was close to 20%.[4]

2. Buying the dream

After EMU entry, Greece thought it had found a cornucopia. From 2001 until 2006-07, it saw progressively lower interest rates, expanding credit and strong economic growth. Greece’s household savings rate fell from 3.2% in 2000, pre-EMU, to minus 3.2% in 2006. People began to spend more than their disposable incomes, and by 2007 the debt-to-income ratio of Greek households had quadrupled to 65%. Regarding external trade, the country’s current account deficit also rose to an astonishing 14-15% of GDP, despite there being only very small inflows of direct investment to finance it.[5] This was one direct result of the big increase of consumer spending. Greece was also making itself uncompetitive, with inflation each year being 1-2% above the euro country average, and there were signs that foreign tourism to Greece was falling back even before the crisis struck.[6]

This was obviously a recipe for trouble, but a worldwide speculative boom after 2001 postponed the day of reckoning. During the boom, borrowers that capital markets had previously thought of as risky ended up paying interest rates on loans not much higher than those paid by the strongest countries. As interest rates fell globally, they fell even more for countries like Greece. In 2000, the year before Greece’s EMU entry, 10-year borrowing rates for the Greek government averaged 6.1% compared to 5.2% for Germany. This was a fairly modest gap by historical standards, because it was already beginning to price in the expected EMU entry. By 2005, the Greek rate was just 3.5% versus the German rate of 3.3%.[7] These lower rates for government debt fed through into cheaper consumer and business loans and borrowing jumped. So, when the speculative bubble finally burst in 2007-08, Greece had huge debts, but then it suddenly found cheap credit impossible to find.

Chart 1: Two-year government yield spread over Germany (basis points) *

Source: IMF World Economic Outlook Update, June 2011

Note: * The vertical axis indicates how many basis points extra the interest rate is for these countries compared to Germany’s government borrowing rate. So 1500 means a rate of 15% on top of Germany’s rate. For example, 18% for Greece compared to 3% for Germany.

After 2008, the gap between the interest rates paid by strong countries and riskier borrowers widened rapidly (see Chart 1 for the picture since 2010, in which Greek yields rose by much more than for Ireland and Portugal, the other EMU countries in trouble). In the face of Greece’s potential default on its debts, two-year yields on government securities rose to as high as 30% last week. Rates only fell back to 27% in the past couple of days – that is 27% per annum - after the latest Greek parliamentary vote that gave creditors some hope of getting repaid.

3. So was it the banks?

It is a travesty of the facts to blame the problems that Greece faces on foreign bankers. It is true that banks encouraged consumption spending with easily available credit, that they bought Greek government bonds to fund the public sector deficit and that they now want the money back. But their lending was matched by a ludicrous amount of borrowing and spending from the broad population in Greece: government, businesses and middle class consumers.

Most of the media discussion concentrates on Greek government debt. However, looking at the debt statistics gives you a different view of the problem. Total debt to foreign banks estimated by the BIS at the end of 2010 amounted to $174bn.[8] Yet the breakdown of this huge debt is roughly into 37% owed by the government, 8% by Greek banks and 55% owed by the non-bank private sector.[9] The biggest proportion is the accumulation of debt from businesses and middle class consumers – those with most access to credit. Nevertheless, there are some good reasons why government debt has become the focus.

The first is that Greece has a history of tax avoidance – by the rich, as elsewhere, and also by most of the middle class and self-employed. It has also allowed public spending to run well ahead of the deficient tax revenues. Not that public spending is especially high by European standards. Except for the past couple of years, Greek state spending has been around 45% of GDP, at the same level or a little below the average rate for the EMU countries. However, government tax revenues are much lower than the EMU average, at around 39-40% of GDP compared to the average of 44-45%.[10] This is because of the lower tax take from both wages and from business taxes than in other EMU countries.[11] This is why Greece has had a persistent and large government deficit. This has driven the rise in Greece’s public debt-to-GDP ratio from close to 100% in 2000 to a massive 150% now.

The big Greek debt number did not prevent it from joining EMU back in 2001. Allowances on this criterion had already been made for Belgium and Italy, core members who joined at the start in 1999, and whose debt ratios were also well above the 60% EMU rule. But Greece would only have been able to join if it could show that its annual public sector deficit was close to the maximum 3% level. It was not, but Greek politicians changed the numbers. They took advantage of derivative financial products to make a portion of the government deficit ‘disappear’ from the view of Europe’s accountants. Financial derivatives were all the rage at the time and trading volumes soared alongside the speculative boom. With the help of Goldman Sachs Inc, esteemed provider of plutocrats to the US Treasury and recipient of fawning coverage in London’s Financial Times, creative accounting with derivatives helped the Greek government’s deficit numbers appear small enough for Greece to qualify for EMU membership.[12]

* Correction, added 11 February 2015:  On further investigation, there is little evidence that Greece used derivatives to hide its debt ahead of its EMU entry on 1 January 2001. Greece certainly did afterwards, with the help of Goldmans, etc, but the EMU entry debt criteria were met before 2001 more probably by regular accounting tricks, not with off-market swaps, etc.

Fixing the government deficit numbers continued after Greece’s membership in 2001. However, by 2009, inconsistencies in the data began to show up. The Greek government had to revise its deficit for 2009 up from 6-8% of GDP to 12.7%, and then to 15.4%, as various accounting tricks unravelled.

Most calculations on Greece’s debts show that there is no plausible way that they can be paid in full from the income earned in the economy. Payment of such huge sums of interest to foreign banks from domestic income would depress the economy, as would big increases in taxation or drastic cuts in public spending. That is why foreign creditors also demand that cash is raised to pay the debts by selling Greece’s state assets. On these plans, all kinds of state-owned infrastructure – roads, ports, utilities, etc - would come under the auctioneer’s hammer for sale at bargain prices to foreign capital.

4. Conclusions

Greece is in trouble because of the huge rise in private and public sector debt, which spiralled after the country’s EMU membership in 2001. Though it may be politically expedient – there are few votes lost in knocking the banks - it makes little sense to blame foreign banks for this crisis, with the possible exception of the banks that helped Greece fiddle the figures and lie about its debts. These lies helped Greece gain access to the cheap loans, but the decision to borrow was taken by Greek ministers, businessmen and middle class consumers. Greek government debts were not a problem and were easily funded while the global economy was in a speculative boom. The financial crisis has now exposed the fictitious nature of this prosperity. Greece has debts it cannot pay, and is subject to interest rates at which it cannot borrow. It faces prolonged austerity and the auction sale of the country’s assets so that foreign governments and banks can get their money back. This is not a problem caused by predatory banks. It is a consequence of the failure to develop in the imperial economy.

Tony Norfield, 24 June 2011

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[1] See A Antonios, ‘EU’s Structural Funds and the Public Investment Programme in Greece: 1985-2005’, p15. http://www.psa.ac.uk/journals/pdf/5/2006/Aggelakis.pdf

[2] This stress on the economic rules for joining EMU was because the political treaties deliberately did not include any provision to leave the single currency, in order to make the new system appear to be more solid. Flying in the face of historical examples of broken monetary unions, European officials always declared that EMU membership was ‘irrevocable’.

[3] See David Marsh, The euro – the politics of the new global currency, Yale University Press, 2009. He notes (p228) that Italy, Spain, Ireland and Greece enjoyed much lower government borrowing costs on entering EMU.

[4] Data are for the year 2002, and taken from ‘European Economic Statistics’, 2010 edition, on the Eurostat website.

[5] Developing economies often have large current account deficits, but these can be the result of imports of capital goods paid for by inflows of foreign direct investment. In such cases, the deficits are a sign of economic development, not weakness. This was not true for Greece.

[6] These data are taken from the ‘EU economic data pocketbook, 3-2010’ and ‘European economic statistics 2010 edition’, published by Eurostat in 2011.

[7] Data taken from Eurostat’s ‘European Economic Statistics 2010 edition’, Table 4.33, p174.

[8] See the BIS Quarterly Review, June 2011, Table 6A, pA28.

[9] This breakdown is for 24 countries only, shown in the BIS Quarterly Review, June 2011, Table 9C, pA84.

[10] See ‘European economic data pocketbook, 3-2010’, Tables 32 and 33.

[11] See ‘European economic statistics 2010 edition’, Table 4.25 and 4.26.

[12] It has been widely reported that major US investment bank, Goldman Sachs, was instrumental in managing a derivatives-focused programme for the Greek government to hide the real state of its public finances from the EU authorities ahead of its membership of the euro in 2001. See for example ‘Goldman Sachs faces Fed inquiry over Greek crisis’, The Guardian, 26 February 2010.