For a pdf version of the paper, containing the relevant figures, please click here.
What follows is an outline of the
Greek sovereign debt crisis from a perspective that is certainly not mainstream
- at least not in the sense of what every major political, economic, and media
outlet loves to hate nowadays. For my interpretation as to how the crisis came
about will be neither structural nor cultural. Of course, national economies do
grow or decline because of social and economic substructures, political
institutions, and cultural traits. Yet, these refer to long-term processes whereas
serious sovereign debt crises usually evolve over relatively short (often too
short) periods of time. Sovereign bankruptcies, much like those of large
private companies, occur because three unfortunately too human factors are allowed
to carry the day in the highest echelons of strategic decision-making. These
are irresponsible greed, incompetence, and irrationality (a term which many a
time is meant more as an euphemism for stupidity).
In this sense, the case of Greece
qualifies as a prototypical example. Starting at the beginning of the last
decade, the country underwent a series of regime-changing events that altered some
of its most fundamental socio-economic relations. Yet, our political, economic,
business, and public-opinion-making elites, carried away by the euphoria of an
illusion, were unwilling and unable to discern what was really happening and,
more importantly, to foresee its entire spectrum of medium- and long-term
consequences.
Figure 1: The evolution of the stock of public debt (percentage
of GDP). Source: IMF.
The most monumental such event was obviously
our admission into the Eurozone, the first act of which entailed nothing but a
change in the denomination of economic value. At the time, this was viewed as a
straightforward, one-off, currency exchange with no repercussions for the real
economy other than a jump in the real price of some commodities. Such price
jumps are bound to occur as suppliers, being called upon to set prices in a new
currency, may see a great opportunity for instantaneous profits. The required
method is so simple and the underlying incentive so irresistible that the
authorities were compelled to essentially regulate prices by dictating their
translation into Euros at the official exchange rate each country was using to abandon
its national currency.
The decision was taken in Brussels as
the problem was expected to afflict every single member of the Euro zone. The enforcement
mechanism, however, was to be implemented nationally and meant to be
short-lived. Its aim was to contain what was regarded as a simple discontinuity
in the time series of prices during the transition period until the forces of
market competition converge to Euro-denominated price equilibria. In fact, from
the outset and throughout the Euro zone, the focus of the monetary authorities has
been uniquely (and one could argue, especially in the light of recent events,
obsessively) upon controlling inflation, the rate of change in absolute prices.
Yet, as any economist should tell
you, it is the relative prices that matter the most. For they determine the
relative profitability of the various economic activities and, thus, the
allocation of resources amongst the various sectors of the economy. And
precisely because it necessitates a re-allocation of economic resources, a
dramatic change in relative prices, even if a unique discontinuity in an
otherwise smooth time series, can have grave consequences for the structural
character of an economy. This is bound to happen, moreover, when suppliers get
to set prices in a new currency as the extent to which they can profit from doing
so differs greatly between the non-tradable and tradable sectors, the latter
being subject to competition in world prices.
Regarding the Greek economy, in
particular, the introduction of the common currency brought about changes in
relative prices which had much more significant and wide-ranging effects than
in other Euro zone members. The discrepancy with what typically took place
elsewhere was due to the very low nominal value of the Euro/drachma exchange
rate, the existing trading patterns and relative comparative advantages between
Greece and the rest of the Euro zone, and the concurrent introduction of other
policies (originating from Athens as well as Brussels). The effects were to be
manifested in a dramatic structural re-balancing to the advantage of
non-tradables (especially banking, health care, construction, and real estate),
the detriment of tradables (in particular, the erosion of competitiveness in
tourism and agriculture), and the favor of imports. [1] They resulted in a three-dimensional
macro-economic adjustment with devastating effects on the country's current
account.
Figure 2: The current account and (general) budget
deficits (percentage of GDP). Source: IMF.
Figure 3: Changes in the index of house prices.
Economic resources such as capital tend
to flow towards the direction in which profit is easiest and quickest to be
made. Hence, the changes in relative prices marked the set of economic
activities Greek businessmen would view as most attractive. As a result, they switched
their emphasis from manufacturing and exports (in which they had never been
particularly keen anyway) onto banking, health care, advertizing, consultancy, construction,
real estate, and imports (especially of luxury goods which allow for higher
profit margins). And, as I will argue in what follows, their efforts were
supported strongly and continuously by governmental initiatives (favorable
policies, direct or indirect subsidies, even money handouts). Indeed, the
sectors in question are precisely those that drove the Greek economy onto the unsustainable
growth path of the last decade. They are also those that now suffer the most
from excess supply, generated by too many (and, consequently, on average too
small) producers.
Of course, being able to increase
one's profitability by charging higher prices presupposes the availability of
adequate demand, willingness and ability on the part of consumers to buy one's
product. The Greeks’ willingness to consume commodities like housing,
automobiles, electronics, or imported pharmaceuticals ought to be given and not
at all surprising. Their consumption had been stifled for generations via
interest rates high enough to prohibit the functioning of mortgage markets (and
necessitate that home-ownership required the savings of a lifetime) or via
import duties as high as 50% in some products (e.g. automobiles and
electronics). The Greeks’ ability to buy, on the other hand, was supported by two
different sources of real consumer wealth, which ended up operating in timely succession.
Initially, the pillars of household
consumption were the savings the middle class had accumulated throughout the
80's, as the fiscal expansion Andreas Papandreou's governments pursued at the
time (primarily via generous real increases in wages and more modest ones in
pensions and benefits) met the then very high real interest rates. However, this
type of aggregate private consumption generator would soon disappear in the
aftermath of the Athens stock market crash of 2000, the second critical event in
our saga.
The preceding bubble (1998-2000) has
been the subject of many a political speech or article in the public press. And
quite characteristically for our public arena, the ensuing debate has been as much
unintelligent as uninformed. As usual, the leading actors have preferred to
focus single-mindedly upon uncovering the latent political scandal given that the
first and second axioms of the typical Greek public debate are that a scandal
of some sort ought to (i) be sine qva non
for, and (ii) consume entirely the analysis of every major event. Yet, both the
size as well as timing of the bubble render it rather ordinary within the
contours of the world financial history - especially with respect to a very small
economy about to encounter a macroeconomic shock as unprecedented in size and strongly
positive as joining the Euro zone was viewed at the time.
In fact, a stock market bubble acting
as the harbinger of a small economy’s promotion from developing to emerging has
been so commonly observed that what should be regarded as scandalous is not the
event per se but the spectacular failure of the Greek financial authorities at
the time (the Ministry of Economy and Finance, the Bank of Greece, and the
Capital Market Commission) to monitor its evolution and anticipate its socio-economic
consequences, two of which were of particular importance for our story.
On the one hand, there was dramatic dispersion
of ownership in firms that were essential players in key sectors of the economy.
Their principal shareholders rushed to take advantage of the soaring valuations,
which were compounded by the absence of any taxes on capital gains.[2] On the other hand, there
was mass participation from all but the lowest strata of the wealth and income
distributions. It stemmed from an ill-conceived association between the state
of the stock market and that of the real economy was initially allowed and
later deliberately promoted to take over the psyche of the public.[3]
Either property had significant
long-term effects on the real economy. The former resulted in the impediment or
delay of consolidations amongst and structural changes by strategic firms, which
were necessary before and have become imperative during the crisis. The latter
altered fundamentally the map of household savings, making its distribution
significantly more skewed and its basis substantially smaller as the rather
widespread savings of the middle class became the gains of whoever was able to
time the market - mostly institutional players with quite a few of them based
abroad.
Even though the crash of 2000 eroded
most of its savings, the Greek middle class was nevertheless able to maintain
its purchasing power due to an unprecedented reduction in the most important
perhaps of prices, the rental cost of money. In anticipation of its
participation in the Euro zone and following its almost complete liberalization
of capital flows, the country saw a substantial fall in its risk premium
(Figures 4-5). In fact, it was precisely during the year 2000 that this reward
from sharing its currency risk with much larger and more productive economies
materialized into much lower interest rates at which the Greek banks could
borrow and subsequently lend funds.[4]
Figure 4: Inflation and long-term interest rates (percentages).
Source: IMF and Bank of Greece (respectively).
Now, it does not take genius to guess
what will happen if a middle class without savings, and facing substantially lower
import prices in real terms, suddenly obtains access to cheap money. Irrespectively
of institutional structures or cultural traits, it will borrow its way into
current account deficit. And it is equally straightforward to anticipate that once
a credit boom is set in motion in this way and left unchecked, it would not be
long before it turns into a credit bubble – after all, more often than not
financial markets tend to overdo it in following beliefs themselves have
created. Quite as ought to be expected, therefore, the Greek households went on
a spending spree following the introduction of the Euro and the abolition of
import duties. During the period 2003-2010 (for which I managed to find data), annual
household expenditure in Greece was 70% of GDP, as opposed for instance to 60%
in Italy, the United Kingdom, Germany, France, Spain, and for the OECD average or
50% in Austria, Belgium, Denmark, Sweden, and Ireland.[5] That is, only within the
span of these eight years, Greek households consumed between €168bn and €336bn more
relative to what they would have should their spending patterns had followed
the norm amongst OECD countries. [6]
Of course, strong household
consumption is not necessarily undesirable – more often than not, it is the
main component of aggregate consumption and, thus, a major element of GDP. In
the Greek case, however, the excess household consumption in question seems to
have been diverted almost exclusively on imports. Indeed, the country’s average
current account deficit during the period 2003-2010 exceeded the extraordinary 10%
of GDP.[7] Given the nearly
negligible net foreign direct investment, the required corresponding capital
account surpluses cannot but have had their origins almost exclusively in loans
from abroad.[8]
And to make matters worse, in an
economy cursed with a plethora of small family businesses, aggregate negative
savings and overconsumption gets reflected also in the average firm retaining
too little of its profits. Instead of using it for investment or as insurance
against adverse cash flow shocks, the owner prefers to finance her own private
consumption. This would come back to haunt the Greek economy once the credit
glut turned into drought.
Paradoxically at first sight,
however, household debt in Greece remained extremely low compared to other OECD
countries. Even at the end of 2010 (after two consecutive years of falling GDP),
it did not exceed 65% of GDP, one of the lowest figures amongst the OECD
countries (Figure 5).[9] Yet, this should not be
puzzling at least after some thought. Even though an economy as a whole is
over-borrowing from and over-spending abroad, it does not have to be the case
that either careless act is undertaken by the same sector. And as in our case
the households were doing the latter but clearly not the former, the borrowing
actors cannot but have been the private firms (which would have passed the acquired
funds onto households in the form of higher wages or larger profits) or the
general government (which would have paid out wages, pensions, benefits, and
subsidies).
Figure 5: Total national debt in OECD countries.
Source: Bank for International Settlements.
In fact, a quick comparison of debt
to GDP ratios across OECD members for the year 2010 is quite revealing in
placing the onus squarely on the government. At the year’s end, the total national
debt (which includes the debts of households, firms, and the government) to GDP
was 262% in Greece, again one of the lowest amongst the members of the OECD
(Figure 5). By contrast, the government debt to GDP ratio for Greece was 149,1%
compared to Italy’s 126,1%, Portugal’s 103,6% or 100,2% for Belgium, 95,2% for
France, 82,2% for the U.K., and 67,1% for Spain.[10] Evidently, the government
was over-borrowing and households over-spending, with the handout of the
underlying funds from the former to the latter sector more or less direct, given
that the final consumption expenditure by the Greek government remained (perhaps
surprisingly) under control.[11] Equally important for our
story, though, is the way in which the corresponding governmental budget
deficits came to be. Here, one ought to pay particular attention to three underlying
processes, each having had deteriorating effects on the budget in different but
substantial ways.
The first had to do with the method
via which additional supply of Euros may be created. Contrary to what the
central bank of each member of the Euro zone used to do in the past, the
European Central Bank cannot just print money. Its printing press is legally
constrained to allow itself into action only if the balance sheet of the ECB
can be expanded by the corresponding amount. This requires of course that the
ECB acquires financial assets which in turn, again by legal constraint, it can
do only through transactions with other banks. In other words, within the Euro
zone, it is the banking sector and no longer any government that has the exclusive
rights to money creation. Regarding now the Greek economy, the very fact that
its runaway current account deficits were financed by borrowing from abroad
indicates that its overall position was funded by net increases in the money
supply. And given that this position was initiated almost exclusively by
governmental budget deficits, there cannot but have been a direct link between
budget deficit and money creation.
Put differently, during the period
2000-2009, the evolution of the Greek public finances, even though an obvious
time-bomb weighting to explode, was underwritten explicitly by the banking sector.
The reason was the quest for fat and fast profits, the eternal mother of
financial crises. To get a rough idea of the pertinent amounts, consider that the
Greek government bonds were paying a premium relative to the ECB lending rate which
on average exceeded 2% per annum. Given this, a back of the envelope but I
believe not too inaccurate calculation indicates that investing in these bonds
using funds borrowed by the ECB would have delivered cumulative profits for the
period in excess of €41bn.[12]
And when government debt can be
funded this profitably, it should not come as a surprise that Say’s law came to
apply: supply of credit does create its own demand. Contrary to what the
banking lobby has tried hard to make policy-makers and the public accept, the
Greek debt crisis of the last decade has been as much the making of bankers as
that of the Greek governments. For instead of exercising their central role in
the efficient allocation of funds (which, almost by definition, includes the
monitoring of their use), the banks set the autopilot on too easy a route for
the management to show returns and the government to register economic growth.
The readily available credit
permitted significant increases in GDP to materialize via direct additions both
in aggregate demand as well as national income. The former method obtained via ambitious
and over-stretched public works programs. The latter through new or higher subsidies,
more generous schemes of pensions and benefits, salary increases and employment
expansion in the public sector and state-controlled enterprises, but also
direct as well as indirect (by turning a blind eye on tax evasion or pardoning
past tax offenses) alleviations of the tax burden. And, again contrary to what
the public opinion has come to be, it was the income increases that did the
bulk of the work in setting the public finances on the road to disaster. The remaining
two of the three underlying processes I view as most integral in the last
decade’s saga both aimed at raising incomes.
The first was a significant change in
the composition of the tax revenues. Since the end of the 90’s, successive Greek
governments have consciously shifted the tax burden from direct towards indirect
taxation as surcharges on petrol, cigarettes, and alcohol, the VAT, but also
levies on stock and real estate transactions have become more and more
important sources of revenue. As an outcome, this has been motivated mostly by politics
rather than economics. On the one hand, the abruptly expanding middle and upper
classes - the main recipients of the dividends of our recent economic growth -
have successfully pushed for more favorable income tax regimes. Under at least
consent from Brussels, on the other, a globalization wave that has been
characterized more than anything else by immense cross-national capital flows, introduced
intense profit tax competition amongst the countries on the ever expanding periphery
of the EU.
Yet, apart from increasing inequality
due to their regressive nature, indirect taxes provide also a government with
the wrong incentives regarding the desirability of fostering higher
productivity and competitiveness, the two pillars of long-term economic growth.
An increasing reliance upon indirect taxation makes it is cheaper to maintain GDP
growth via raising domestic consumption rather than exports. This is because €1
spent on domestically-sold output generates more tax revenue than €1 brought
home from abroad via exports, with the relation applying even to the
consumption of imports as long as sufficient market value is added inside the
country (and with high-end luxury goods featuring predominantly amongst Greek
imports, the often outrageous importers’ profit margins do correspond to an
awful lot of added market value).[13]
More importantly perhaps, the appeal
of indirect taxation is seductively strong during an economic boom that is taking
place mainly due to money flowing almost freely within a country in which tax
evasion is pervasive. As firms have ready access to cheap credit, taxing cash
flows seems a strictly more preferable method of replenishing the treasury coffers
than the politically as well as technically (especially in an economy with a
plethora of small family businesses) more cumbersome alternative of crusading
against income and profit tax evasion.[14] And as added bonus, the
periodic collection of indirect taxes provides the public treasury with frequent
cash flow whereas the payments from income or profit taxation come typically in
lump sums.
Alas, taxing cash flows will turn
into an act of self-destruction when, as it is bound to sooner or later happen,
the credit bubble bursts and the availability of cash becomes the economy’s most
binding constraint given that, in the absence of the printing press, the money
supply can be augmented only through (the nonexistent) current account
surpluses or (the now prohibitively expensive) collateralized banking
operations. In this sense, the excessive reliance upon indirect taxes entails
important opportunity costs by making it optimal for cash-hungry firms to tax
evade and by exacerbating the procyclicality of government revenues with
respect to macroeconomic shocks. And this is particularly costly when these
shocks (in conjunction with the virtual absence of taxes on wealth, property, or
capital gains) have resulted in the creation of substantial and substantially unequally-distributed
wealth which could have been instead the focus of the taxing effort.
In the Greek case, the vulnerability of
revenue generation to adverse shocks turned out to be the straw to break the
camel’s back given the already critical state of the public finances. This was
in large part due to the last of the three processes I want to underline: the substantial
increases in wages, benefits, and retirement packages that occurred during the
decade under investigation - especially in the public sector and even more so in
state-controlled enterprises. The increases in question were introduced in two
waves, each with its own distinctive political underpinnings. The first begun
shortly before 1999 (essentially, as soon as our accession into the Euro zone
was secured) and continued more or less unabated until 2004. It was motivated
by pressing social demands. Having spent the best part of the 90’s under
successive austerity plans meant to secure our place in the Euro zone, the
Greek society was calling for the promised convergence in living standards towards
the European average.[15] It was something the
political, economic, and public-opinion-setting elites had advertized
extensively as occurring almost by default upon arrival at the Promised Land.
The second wave materialized in the
second part of the last decade. It had to do primarily with what in my view
amounts to certain groups being allowed to capture parts of the state and strip
its assets. This entailed, on the one hand, an intense proliferation of
entities that were funded by the Greek state (often with additional funds from
the European union) and which, under the pretence of more flexibility to
attract high-quality staff, were deliberately kept outside the reach of
whatever official controls the public sector had in place with respect to
hiring and spending. On the other, it was characterized by successive episodes
in which, brazenly pushing the envelope of legitimacy or even legality,
decisions that often required no more than a ministerial or general secretarial
signature raised wages, benefits, and retirement packages for entire groups of
public employees. The magistrates, the members and employees of parliament, the
employees of the Ministry of Finance, of the Piraeus’ Port Authority, as well
as of Olympic Airlines are by now infamous examples.
Of course, the types of political and
institutional shortcomings outlined above had been observed before in the Greek
history, too many times. Even so, the toll on the public finances during the
last decade turned out to be singular to an extent that ought to have been
foreseen. Since 1992, the public debt to GDP ratio had reached levels that
should have constrained any reasonably long-sighted government into avoiding
even orders of magnitude smaller fiscal expansions of such kind. In this
respect, the irresponsibility of Kostas Karamanlis’ governments is appalling
(more on this shortly) but no small blame belongs also to those of Kostas
Simitis.
At the apogee of his political career,
the latter enjoyed such a reputation as trusted force of modernization that his
main political opponent, Mr. Karamanlis, had to invent a (confusing as much as
confused) new term altogether (επανίδρυση) in order to
brand himself also as a reformist. Mr. Simitis’ appeal rested mainly on putting
the public finances in some order by achieving successive structural budget
surpluses. These allowed his governments to embark upon what was identified above
as the first wave of increases in wages, benefits, and retirement packages. They
did so seemingly without straining the country’s ability to honor its public
debt - especially as Greece could now borrow at smaller risk premia and
subsequently pay off old debt which carried much higher coupons.
Alas, this kind of fiscal expansion constituted
a latent but significant addition to the effective stock of public debt. For it
amounted to assuming new obligations towards future retirees since one’s
retirement package is linked directly to one’s remuneration while working. And
as the former is funded throughout but determined solely by the very last years
of one’s working life, the obligation in question was quite a bonus for whoever
was to retire in the near future. And to make matters as bad as they could be, the
near future meant a decade of rapidly falling interest rates (Figure 6) whereas
whoever meant a most populous generation. [16] What came to be known as
the “generation
of the Polytechneion” consisted by our baby boomers: they were many, got to retire
on average way too early and almost without exception too generously. By some
estimates, their own contributions into the social security system do not
suffice to cover more than 40% of their retirement packages so that the public
treasury had to contribute as much as €150bn during the last decade alone. Given
the size of the country, the figure was large enough to turn any pay-as-you-go
system into borrow-as-you-go.
Figure 6: Returns paid by the Bank of Greece to the
pension common fund (percentages). Source: Bank of Greece.
Yet, at least for some time, the
problem could be kept under the carpet as the booming economy allowed seemingly
enough contributions to be made by an ever expanding immigrant labor force, no
matter how poorly-planned and badly-executed its integration. Now, however, as adverse
demographics have joined forces with recession and unemployment, the strain on
the public finances shows in all severity and begs for another event to be
added on the list of critical chapters in our story. Namely, the decision to succumb
to the near universal public outcry against the Yanitsis proposals for the
pension system, and abort what was probably the sole attempt at major reform our
country saw during the last decade.
The next event to mark our public
debt saga was the Olympic games of 2004. Greece being by far the smallest ever
host and the requirements more or less fixed (an immortal axiom of the modern
Games being that hosts buy certain goods and services from certain companies and
people), the Athens Games were in orders of magnitude the most costly relative
to GDP.[17] Yet, like many of our
historically fateful national decisions, it was taken with a lot of enthusiasm or
pathos but without any serious cost-benefit analysis, strategic planning, or
even informed discussion. It is telling in fact that, at the time of our hosting
bid, the cost had been estimated at about €1bn whereas at the end it exceeded €12bn.
Of course, contrary to what many
might have come to believe, the latter figure is not excessively large as the
expenses for hosting the Games in the 21st century go. More
importantly perhaps, a significant part of the overall expenditure corresponded
to desperately-needed infrastructure which, save for large subsidies to the
tourist industry, was for the most part public and, with nearly half of the
country’s population living in Athens, had its benefits distributed widely and
evenly. But the fact remains that, once again, the short-sighted personal, political,
or economic ambitions of its elite meant that the country embarks upon a national
endeavor which should have been known to be prohibitively costly given that the
stock of public debt was already at par with GDP.
The Games notwithstanding, however,
the year 2004 turned out to be historically critical for another reason: Kostas
Karamanlis and his government assumed office, an event which by now everyone should
have come to recognize as a national disaster of epic proportions. His two
consecutive terms resulted in the structural budget plunging into deficit (after
registering a surplus in 2002 and a deficit of €1,2bn in 2003) by the
extraordinary amounts of €11,4bn in 2008 and €24,3bn in 2009. The figures are such
that one might as well assume that Greece has hosted not only the Athens but
also the Karamanlis Games, the latter venue being three times as expensive as
the former. In fact, during the period 2004-2009, the sum of €109,5bn
was added to the stock of public debt. To put things in perspective, this is
more than the entire stock outstanding in 2001 and more than two thirds of that
outstanding just prior to the 2004 elections (and, as if by magic, also matches
exactly the bailout package of 2010).
Figure 7: Outstanding public debt by year of issue
(€billions). Source: Hellenic Ministry of Finance.
These are performance statistics that
speak for themselves. Nevertheless, there were aspects of the legacy Kostas
Karamanlis and his governments left behind which had serious adverse effects not
only on the finances of the Greek state but also on its relations with its
citizens. Recall that one of the foremost elements in Mr. Karamanlis’ 2004
electoral campaign was the call for an almost revolutionary alleviation of the
tax burden, to be realized through substantially lower tax rates for income and
profits and, more importantly, to be justified by nothing less than the principle
that the citizens shouldn’t pay taxes. This was one of the two electoral
promises he did meet, after dismantling the rather successful by Greek
standards system against tax evasion and fraud the previous government had set
up. It was to be replaced by another that was never meant to function,
inaugurating an era in which the state were to watch passively as not only its
tax revenues but also its very ability to tax and function were collapsing at
irreversible rates.
The second electoral commitment
Kostas Karamanlis and his governments tried hard to respect was that on
decadence - opulent aggregate consumption, well beyond the economy’s productive
capacities, to be funded by public debt. For the first time in the country’s
modern history, the only raison d’être of structural budget deficits was the augmentation
of household disposable income, without any underlying strategic consideration
other than short-term electoral gains. This was attempted via unprecedented
increases in public sector employment (especially by local authorities and
state-controlled enterprises), salaries, pensions, and benefits (in particular,
for groups of employees in the public sector and the state-controlled entities who
were already at the higher end of the earnings distribution), decreases in the
tax burden (favoring almost exclusively property and wealth, self-employment,
capital gains, and dividends), and direct subsidies.
Equally importantly, it required
measures that were completely counterproductive in terms of the state building a
reputation for consistency and determination in enforcing the distribution of
responsibilities across its citizens equally and effectively. Even though the
latter is most fundamental given that our extremely short and tumultuous modern
history has left us with a far from complete process of state-building, the
signals that were sent couldn’t have been more wrong. Lest not forget some of the
bigger acts of the Karamanlis period of government. One was to pardon some €150mn
certain hotel owners were liable for in unpaid fines and taxes. Another was the
by now infamous auditing of public finances (απογραφή): a politically-motivated
witch-hunt for embezzlers of public money, which achieved nothing but a huge blow
to the country’s reputation abroad given that its sole deliverables were (i) a
(soon to be reversed) change in the public accounting practices from one
accepted set of rules to another, and (ii) a favorable re-evaluation of the GDP
based on new estimates of output from black economic activities (in particular,
prostitution!!).
Yet another was the subsidization of
farmers in a way that was to be deemed illegal by the European Commission and
to cost the country more than €600mn in subsequent fines. The list includes
also a variety of initiatives falling too short of officially authorizing tax
evasion and money laundering, such as the consecutive (even though each and
every one was supposed to be final) summary approvals of tax declarations (σεισάχθειες) from the
self-employed and small business owners, or the decision to not
control whether funds were obtained in a legal or at least tax-compliant manner
(πόθεν έσχες) as long as they were invested in domestic real
estate or repatriated.[18] And last but not least,
the tendency to respond to crises with attempts to boost household income or
consumption, such as the frantic and almost indiscriminate money handouts in
the aftermath of the natural (turned national due to the incompetence of the
state apparatus) disaster of the great fires in the summer of 2007, or the
abrupt and substantial decrease in the registration tax on luxury automobiles
in 2008.
Figure 8: The disastrous years. Source: Hellenic
Ministry of Finance/ TA NEA.
Sadly enough, the last example above was
the government’s only response to an economic crisis that was about to become the
greatest the country has seen in generations. Oddly enough, this was a most
predictable crisis even in 2008 as the public debt dynamics seemed already a time-bomb
set to explode. The stock of public debt had reached 118% of that year’s GDP
while half of that stock was due to mature within the following six years
(Figure 9). Alas, no one in power took notice. The gods conspired so that
Kostas Karamanlis, in the 2009 early elections, was succeeded by George
Papandreou in a two-part tragedy of incompetence, irresponsibility, and oblivion.
One set the house on fire and run, the other walked casually into the
scene carrying a briefcase stuffed with dynamite.
Figure 9: The maturity profile of Greek Government
Bonds on 29/04/2010.
The story could have been very
different had decisive measures been taken to address the overexposure of the
public sector to (mostly external and almost explicitly private) debt.
Precisely because the latter had benefited mostly the domestic households, over
the period 2000-2009, the economy had accumulated enough wealth, especially in
liquid assets, to be able to undertake the required effort. It had registered moreover
substantial improvements in living standards across the vast majority of the
population, so that this could have been sustained also politically had it been
planned and executed appropriately. And last but not least, our public debt situation
was not directly comparable to that of other countries. For ours accounted also
for the total economy’s pension and social security obligations. By contrast,
in most OECD countries, a large part of the latter is privately funded and,
thus, reflected in the total debt. And in terms of total debt, Greece was in a
relatively sound position (recall Figure 5).
Yet, the new government drove instead
itself and the country into the corner between the promises of fiscal expansion
Mr.Papandreou had made during the electoral campaign and the catastrophic shortcomings
he and Mr. Papakonstantinou would reveal in their respective roles. Neither man
understood the nature of the problem.
And when its extent became obvious, either did the one thing the prime minister
and the minister of finance should not do in the midst of a national crisis:
show ambivalence. On the one hand, they kept on insisting that their totally
unrealistic electoral promises could and would be met. On the other, they were
trying to appease the markets by hinting that they will do whatever necessary,
which happened to be the exact opposite.
Figure 10: Correlations between public statements and
spreads.
Needless to say, at some point they
did realize that the most dangerous deficit the country was running at the time
was that in credibility. But they chose to respond with a very intense public
campaign of claims and predictions, to be refuted by the facts one after the
other almost as soon as they were made (Figure 10). [19] This in turn established
as public knowledge either man’s complete misunderstanding of what it means to
engage in a game of bargaining with your creditors and signaling to the
financial markets (lets not forget the unbelievable "loaded pistol on the
table"). Amid irrationally insisting upon excluding the possibility of
default (the one threat any lender can credibly make and the one contingency
any creditor cannot rule out) and ignoring that the underlying problem had to
do also with structural imbalances due to the very setup of the European common
market and currency area themselves, being left without alternatives was just a
matter of time.
Of course, the typical explanation for
the onset of the Greek debt crisis involves also, at least implicitly, the
explosion of the subprime credit bubble in the United States. The subsequent
propagation of financial shock waves across the Atlantic is supposed to have
forced our private lenders into demanding unsustainably high risk premia if
they were to continue absorbing our insatiate needs for credit. Yet, the data
tells a somewhat different story. Of course, the private sector (banks as well
as investment and pension funds), driven by the arbitrage opportunity we
described earlier (borrowing funds from the ECB in order to lend European
governments at a significant premium), did hold the vast majority of the Greek
public debt. But it didn’t stop from being willing to lend us until well into 2010.
If anything, it seems to have reacted rather late (Figure 11).
Figure 11: The prices of Greek Government Bonds. Source:
Bank of Greece.
This notwithstanding, any sovereign
debt crisis must involve some external factors - after all, no sovereign has
ever managed to go bankrupt without external debt exposure. In our case,
however, what came to really matter was not the external but the exogenous –
more precisely, the imposed would be solution.
The path towards the mess in which we find ourselves today was signposted by
two personal decisions. The first was to include the IMF as an integral
participant in the bailing out operation. This was clearly too monumental for
the EU affairs a decision to have been taken by our then prime minister or even
by the then IMF director. For no small member country could ever be in any
position to negotiate with the IMF without the direct involvement of high-brass
bureaucrats from Brussels. And no high-brass bureaucrat from Brussels would
ever get involved in this kind of negotiation without explicit approval by the
German chancellor, whose country would be called upon to provide the bulk of
the bailout funds.
Hence, allowing the IMF to be involved must have come
down to a decision by Mrs. Merkel. And without doubt, this must have been a
difficult decision. After all, she seems to have an almost ideological aversion
to the very notion of a bailing out, especially when meant to rescue
carelessly-greedy and predominantly-French bankers, along with the lazy,
tax-evading citizens of a Southern country and its hopelessly-incompetent
political leaders. In addition, Germany has had a long tradition of referring
to the will of the ECB when it comes to matters of importance for the Euro
zone. And the latter institution was opposing publically an IMF involvement since,
apart from the obvious loss of face in ceding partial authority to an outsider;
there was also the potential for fundamental conflict of interest. The ECB's
principal goal is always price stability within the Euro zone whereas one of
the main concerns of the IMF is to ensure the repayment of its loans, with
interest. It was the latter goal, however, along with the expertise the IMF was
supposed to carry in the design and management of sovereign bailouts, to be in alignment
with the need for ensuring that the funds the German tax-payer would be called upon
to provide would be repaid, with interest.
The second personal decision that paved the road to
where we stand today had to do with the method via which the IMF involvement and
consequently the contractual agreement itself were accepted by the Greek
government. It is by now more than obvious that the two men in charge, George
Papandreou and George Papakonstantinou, were oblivious (to an extent that
defies logic or even benefit of doubt) to the socio-economic as well as
political consequences. Not only they did not play any substantial role in the
negotiations that led to the first bailout memorandum but failed to grasp even its
core implications. Yet, either adopted the bailout itself as a personal crusade
to redeem the country from all past and present economic, political, and social
ills. This set in motion an irreversible process. On the one hand, the PASOK
members of parliament had learned too well under Mr. Papandreou not to descent
from the official line. On the other, the possibility of even a temporary
freeze in our debt payments was spreading panic throughout the ranks of the
political, business, and media elites, in Greece as well as abroad.
Hence, the country was led to agree upon a bailout
memorandum which many of the members of parliament who approved it did not
agree with, understand, or even read - at least according to the (admittedly
absurd) claims they now make. It entailed a salvation plan whose very inception
suffered from fallacy. Fooled perhaps by the international bond market's
relatively slow pricing response (recall Figure 11), the core diagnosis was not
that of excessive leverage. It described instead a temporary cash flow problem,
stemming from the structural budget deficits which were to be reduced quickly
by cutting expenditures and increasing tax revenues. The method of choice was to
cause “shock and awe” through wide-ranging and deeply-reaching structural
changes, a typical but also typically unsuccessful IMF favorite. For the
central objective was to signal towards the international bond market a confident
commitment in addressing the problem and, more importantly, in guaranteeing the
interests of the current bond holders. Most unfortunately, however, this was
understood as requiring an enormous amount of new short-term debt, an oxymoron
the markets soon came to recognize. After all, net increases in debt and
deficits being more or less equivalent concepts, there is no real benefit in
trying to stop water overflowing from a bucket by opening holes on its side.
Another fallacy in the bailout plan’s composition was
the premise that exorbitant debt may be paid out of economic growth. And even
more of a fallacy was the belief that the required rate of growth can result
from increases in competitiveness due to scorched-earth wage reductions or
so-called structural changes. I am afraid we will have to wait for another life
before registering tangible economic growth due to having more taxis, longer
opening hours for pharmacies, and smaller lawyer or architect fees.[20]
And as my overview has tried to point out, I do believe that the country’s true
socio-economic problems lie elsewhere: in the gross misallocation of resources
towards the non-tradable sector, the over-accumulation of wealth and property
with no reasonable prospects for income generation, the unproductively unfair
distribution of the tax burden, the abused role of the state as the lender of
last resort and of most subordinate debt to the small firms and the
self-employed, the misunderstood nature of market competition in a small
economy with a plethora of family businesses, but also the mistaken idea of
what ought to be the costs and benefits from being the weak member of a common
currency area.
All these combined into a roadmap towards turning a
dramatic but manageable cash flow problem into an unmanageable solvency one. To
make matters worse, the plan was expected to be implemented by a state
apparatus in complete disarray. Its implementation was to be supervised by men
with little if any understanding of the Greek economy but an amazing ability to
be at the same time certain of and absolutely wrong in their calls (Figure 12).
At the end, the only structural measures that were implemented had to do with
taxing property (real estate and other tangibles such as cars, boats, etc.) and
reforming the pension system, whereas some improvement in the structural budget
deficit came from almost uniform wage and pension reductions in the public
sector and cuts in public investment.
Figure 12: Being certain and certainly wrong.
Indeed, government spending fell by 9,1% in 2010 with the biggest
contributors being cuts in government consumption and investment (accounting
for 18,8% of the total), wages (11,6%), and pensions (3,7%). However,
government spending had been so high before that still its level exceeded 49%
of GDP in 2010 - when during the period 1988-2007 for instance it had averaged
about 45%. Given, moreover, that the tax revenue relative to GDP was not much
different in 2010 than in most previous years (Figure 13), there was really no
effective reallocation of GDP in favour of the public finances.
Figure 13: Tax revenues (percentage of GDP).
Source: OECD
Not surprisingly, therefore, we arrived at a more or less amicable default,
the PSI agreement, which seemed surprisingly orderly given that it was, at
least for Commerzbank CEO Martin Blessing, “as voluntary
as a confession during the Spanish Inquisition.” The restructuring
allows for the repayment of €100bn from €207bn the country owes to private creditors,
the remaining €107bn written off. In conjunction with a second bailout that has
foreign taxpayers lending Greece another €130bn, there will be changes not in the
total stock of public debt but (i) in the composition of its pool of creditors,
which now consists primarily of sovereign entities, and (ii) in its maturity profile,
which gets prolonged well into the foreseeable future (Figure 15).[21]
As far as default and restructure of sovereign debt go in the world
financial history, this was unprecedented in size and done obviously to avoid
an alternative with mostly unknown but certainly much worse consequences for
all parties involved.[22] Not
so obvious, however, are the outcomes to which this second bailout would lead.
More specifically, how exactly a country in state of default will be able to repay
a stock of debt that is now higher by more than 10% of its current GDP. Of
course, the immediate debt burden is no longer the same. But the total burden
being now higher, the alleviation means that the bulk of the onerous
obligations have been moved forward, onto my generation and the ones that
follow. And both the current state as well as the prospects of the economy, not
to small part due to the bailout programs themselves, do not leave much room
for hope that it will be able to cope with a long future of debt overhang. The
discounts on the restructured Greek government bonds already imply that the
international bond market thinks it will not (Figure 14).[23]
Figure 14: And the market says... still in default.
Figure 15: The post-restructure maturity profile of the Greek debt (€billions).
Source: Hellenic Ministry of Finance.
At present, not only the economy but the country
itself is in free fall. The “benefits” of memorandum-style austerity have yet
to become apparent, while the economy contracted by 0.2% of GDP in 2008, 3.3%
in 2009, 3.4% in 2010, 6.9% in 2011, and god knows how much in 2012 (the fourth quarter of last year saw a fall of
7.5%). These figures correspond to a cumulative loss of 13,21% in less than four
years while unemployment has risen to 20%, reaching 50% among young people many
of whom have started leaving the country. And what is worse is the absence of anything
on the horizon to suggest things might turn around any time soon.
The second bailout agreement will not improve the
economy as it requires even more reductions on wages and government spending or
the sell-out of public assets, and as before all of the wrong kind. It
continues, moreover, to place the emphasis upon an all or nothing crusade for
Greece to return to the international bond market. This might well be what
makes the foreign taxpayers, who unwillingly have found themselves holding most
of the country's public debt, sleep better at night. But it is a don quixotic
quest: standing at 160% of GDP after restructuring, our public debt situation precludes
more borrowing - even if it were to become possible, it would only make a very
bad situation worse.
It should be noted also that the improvements in the
country's medium-term financial position are neither as large nor as obvious as
it appears at first sight. The government bonds that were subjected to
restructuring included ones that were held by domestic pension and social
security funds. And as the latter will have to be supported financially by the
government for the foreseeable future, this is not really a net reduction in the
public future financial obligations. It represents rather a temporal smoothing,
by transferring some of them onto future generations of tax payers.
In addition, a large part of the second bailout
package has been earmarked for the recapitalization of domestic banks. Given
that the bailout is not aid but loan, this is another wealth transfer from
future generations of tax payers, now to the bank shareholders. Recall,
moreover, that this kind of transfer occurred also under the first bailout
agreement (the estimates for that amount range between €20-40bn) while now gets
enhanced by the provision that the losses of the domestic banks from the debt
restructuring may be counted against their profits for the next 30 years. And even
worse for the future taxpayer, the recapitalization favours the privately-
rather than the state-controlled banks (Figure 16). This only adds to the moral
hazard of minimizing the costs of the banking sector from a debt crisis they
played a pivotal role in creating.
Figure 16: The
recapitalization of Greek banks.
In fact, the central theme of the second bailout memorandum seems to be the
transfer of the bulk of the debt obligations from the current to future
generations of tax payers and retirees. The commitment of the so-called
stability pact for no budget deficits has been advertised as means to avoid
future debt crises. To the extent though that the current crisis will be paid
mostly by future generations, this is but a credit constraint to preclude their
insurance against future adverse shocks. Similarly, the restructuring of the
privately-held debt and the new more favourable terms of repayment for that
held by sovereign entities have been saluted as allowing vital breathing space
for the public finances in the short- to medium-run. But the requirement for
what under the currently abnormally-low valuations amounts to fire-sale of
state assets calls for striping wealth from future generations, unless the
proceeds are to fund investments guaranteed to generate appropriate returns for
the country’s treasury.
These concerns loom even more worrisome once we take into consideration
that the generations currently in or close to retirement do not bequeath the
future ones only with debt overhang. For too long, the Greek society has been
ripping the ephemeral benefits of cheap and predominantly illegal immigrant
labour, having chosen to ignore the economic but also social costs of its
presence as well as underestimate the country’s ability to cope with them in
the long run. The problem has recently surfaced in all its severity as the
deteriorating Greek but also European economic fundamentals restrict either
region’s absorbing capacity. More importantly, the relevant numbers of
immigrants are vast relative to the resident population (especially that of
working age) and press against an already severely overstretched and
underfunded public system of health care, education, and social security
provision.
This is taking place at a time in which, for there to be any hope of
ever getting out of the debt trap, the country’s foremost imperative cannot be
other than improving its public finances. The latter necessitates structural
budget surpluses and, thus, transfers of wealth from the households to the state,
to an extent that would be without precedent in our modern history. Unfortunately,
the country’s most frightening deficit seems to be in
political, intellectual, and cultural leadership: at present, the Greek people
lack inspiration to make sacrifices. Even more unfortunately, this is what our
latest generation of political leaders, and their extensive courts of
consultants/technocrats, leave behind. In their desperate attempts to hide
their mediocrity behind hyperbole about their political opponents’ ethos and
conduct have made it public belief that the country’s socio-economic and
political systems have failed; hence, any effort to save any part is
unjustified.
Paradoxically, however, fundamental parts of these
systems have supported the building of a democratic society in which the
average individual has been given too many rights and too few obligations and enjoyed
radical improvements in living standards, and they have done so in record time.
Many societies have made sacrifices for systems that had benefited them much
less. And all of them had to do so because of systemic failures, brought about
by the shortcomings of individuals in key positions of power. Until the last
quarter of the 20th century, most chapters of our national history were written
by ordinary people making sacrifices, not just economic but even larger than
life, under leaders whose abilities were smaller than their egos.
Even more paradoxically, our political, economic, and
public-opinion-making elites, rather than delineating the time horizon and the
extent of sacrifice, have embarked upon creating false public expectations - that
the worse could be already behind us or that things could be made easier. Consider
for example the recent and very popular calls for alleviating the tax burden. They
advocate lower taxes, particularly on capital-income, on the basis that this
would enhance economic growth - a view that, especially in our case, makes
little sense both in terms of public accounting but also of economics. [24] The general
tax burden in Greece is actually low compared to other countries (recall Figure
13), and way too low given the budget surpluses our debt repayments require.[25] It
is also unfairly and unproductively distributed across the economy (Figure 17),
overemphasizing indirect taxes and overburdening labour with the onus of
sustaining an impossible pension and social security system (Figure 18).
Figure 17: Tax
revenue by sector in 2010 (percentage of total tax revenue). Source: OECD
Figure 18: The
decline in wages and the burden of taxes vs. social security contributions.
Source: OECD/Η ΚΑΘΗΜΕΡΙΝΗ
The political underpinnings of the campaign for less taxation are to be
found in the inability of the lower and middle classes to cope with the current
economic reality after the indiscriminate and almost uniform wage reductions
the fist bailout agreement brought about. Yet, the campaign itself is expressed
in terms of tax changes that will actually increase inequality. Almost
certainly, they are bound to further increase our overreliance upon indirect
taxation. This will hurt even more those who already suffer the most,
especially the swelling ranks of the unemployed. And it will do nothing to
address the other reason for the inability of ordinary Greeks to meet the required
tax obligations. It is telling that the most unpopular of the new taxes, those
on property and real estate, still fail to even approach their counterparts in
other countries. The strong public resentment indicates precisely that the
original tax levels were too close to zero (hence, a small increase appears infinite
in relative terms), the taxable assets are grossly misallocated (given their
actual income, many Greeks would not even think about owning their current
property under most other countries’ tax regimes), and the economy overexposed to
real estate without adequate prospects for income returns.
In
fact, resentment against everything has grown among ordinary Greeks, assuming apolitical
characteristics and political momentum that are dangerous. In the aftermath of
two decades of successive strategic mistakes, the debt crisis has exposed the extent
to which our collective economic resources and socio-political rights and
obligations have been as much misallocated as unproductively and unfairly
distributed. This has come to haunt the Greek society as it gets constantly
called upon to make yet more sacrifices along a road that doesn’t seem to lead
anywhere and under the orders of international creditors. Which naturally compounds the pain, especially
since the primary objective seems to have been that of buying time: for the Euro
zone to weather a much bigger sovereign debt crisis, but also for our current
political, economic, or public-opinion-setting elites to retire and the
privileged amongst our current retirees to die, either in relative peace.
Like
the vast majority of the western world, Greece has lived well above her means
for decades. Unlike most of the western world, however, the corresponding gains
in economic well-being have been more readily identifiable with specific
distorted socio-economic relations, between the state and the society but also within
the latter as well as across generations. Hence, now that the bill has become
due, the agonising but necessary reappraisal of our collective lifestyle and
expectations cannot be achieved without dramatic redistributions of power,
wealth, rights, and obligations. This implies that the challenge is ethical as
much as political, economic, and social. It means also that neither the state nor
the current or future working generations should assume the responsibility by
themselves. For no society can reform its structures and relaunch its economy without
a state strong enough to play central role, while no democratic society can do
so without the consent of its lower and middle classes.
Give all of the above, I am
afraid I will have to conclude on a pessimistic if not alarming note. In the
midst of a regime-changing economic program, which is certain to restructure
the economy yet not unambiguously for the better, the country has been forced
into radically rewriting and reinterpreting its socio-economic contract. The
undertaken abrupt and unjust redistribution of wealth and the attempted reallocation
of economic and, hence, also socio-political rights and obligations would leave
any society between a rock and a hard place. And in our case, it entails an
intra-generational transfer of the bulk of the onerous obligations that has put
my generation, the one that follows, and quite possibly even that of my newborn
son between what may well be too rough a rock and too hard a place.
Theodoros Diasakos, Collegio Carlo Alberto
For the GPPF Nottingham Forum, March 2012
Endnotes
[1] Consider some anecdotal but nevertheless typical examples. In the
immediate aftermath of the transition to the new currency, the prices of many
agricultural products remained the same absolute numbers but were quoted in Euro cents rather than in Drachmas.
Relative to those commodities for which the price conversion remained at the
official Euro/drachma exchange rate, this constituted a 345% price increase.
And this corresponds more likely than not to a lower average bound. For the EU
attempt to assist economic growth in third world countries meant a dramatic decrease
in the duties on agricultural produce imported from the latter to the former.
And this made it in turn even more profitable to import third world
agricultural products in order to sell them in the Greek market as of local
origin, an illegal but commonly observed strategy. One can also think of the
fact that the daily rental for a standard seaside vacation apartment in high
season went from 5000 Drachmas to €60, a 314% increase in price. Observe,
moreover, that more than half of the relative price increases in question is in
real terms since, during the decade 2001-2011, the average price increase due
to inflation was only 140,3%. By contrast, the relative prices of most imports
decreased dramatically. Notice for instance that the price of a BMW 3.16 went
from 7mn Drachmas in 1993 to €35000 in 2011. This is a 72,5% increase in the
price when the average price increase due to inflation in the same period
exceeded 318%. Not surprisingly, there was an explosion in car sales while the
Greek importers’ profits were sustained also by the more or less constant world
car prices during the period in question (Figure 19) and the ever shrinking
duties for car imports.
Figure 19: The evolution
of the US price index for
new cars. Source: US Bureau of Labor Statistics.
[2] An example that comes immediately to mind has to do with consolidations
in the banking sector. Merging two of our three largest banks has been regarded
as desirable if not necessary for the entire last decade but the relevant saga
consisted of several unsuccessful
attempts as the management rather than the shareholders were setting the rules.
Equally, if not even more, telling is the fact that Greece is probably the only
country in which the federation of industrialists is headed by someone who
technically is not one, having cashed in the control as well as a long family
history at the helm of one of our industrial jewels.
[3] Recall the then minister of Finance predicting that the ASE index would
reach 6000. The 2000 elections approaching, it was an obvious attempt
to sustain the stock market rally and, hence, the public euphoria about how
well the economy was supposed to be doing. Not so obvious is the fact that he
did remain in office after having made this kind of prediction.
[4] According to data from the Bank of Greece, that year witnessed the
interest rate for overnight transactions falling from 9,4% (the monthly average
for January 2000) to less than 6,2% (the monthly average for December 2000).
[5] Source: OECD. From amongst the OECD countries, the Greek performance
matches only those of Turkey and the United States (each registering also a
ratio of 70% throughout the period) and partially those of Mexico and Portugal
(each championing the same ratio but for three of the years in consideration in
which it was only 60%).
[6] The implied GDP levels were calculated using data from the OECD. This is
given in current USD and was converted in current Euros using the yearly
average Euro/USD exchange rate. Notice also that these expenditure figures underestimate
the true opportunity costs. Had these amounts been instead invested, the sums
would be compounded with the rate of return.
[7] To put things in perspective, amongst the OECD countries, only Iceland
managed a higher annual average deficit for the period (-14,2%) while only
Portugal and Estonia (with -9,8% and -8,4%, respectively) came close. The next
worse performer was Spain with an average deficit, however, of less than -6,8%.
[8] According to data from the OECD, during the period 2003-2010, annual net foreign
direct investment registered on average an outflow of approximately €189,3mn.
By contrast, average annual net foreign direct investment in stocks exhibited
an inflow of €3,76mn (of which the near total for the period originated in
2007, by far the best year for the ASE).
[9] Source: the Bank for International Settlements.
In fact, amongst the 18 most developed of the OECD members, Greece outranks
only four countries: Germany (63%), Austria (57%), Belgium (56%), and Italy
(53%).
[10] The picture remains similar also for the year 2009 in which the government debt to GDP ratio for Greece was 133,5% compared to 127,1%
for Italy, 100% for Belgium, 93,3% for Portugal, 90,8% for France, 72,4% for
the U.K., and Spain’s 62,9%.
[11] For instance, during
the period 2003-2010, final government consumption expenditure remained
constant at 20% of GDP per annum (according to data from the OECD 2012 key
tables). The same ratio was recorded for the vast majority of the OECD members.
[12] My estimate is based on cumulative returns at the rate of 2% per annum
with the time-profile of the underlying invested amount matching that of the
current Greek government debt stock (see Figure 1 and Endnote 6). I arrived at
the 2% average premium by comparing the weighted (by the outstanding face value
in a given year) average discrepancy between the coupon rates on the Greek
bonds (using data from the Hellenic Ministry of Finance) and the average for
that year fixed rate from the ECB’s main financing operations (when no such
data was available, I used the minimum bid rate form the variable tenders, and
when neither the latter data existed, the marginal lending rate). Of course,
this exercise entailed the additional assumption that the entirety of the debt
was held by private institutions with direct access to the ECB lending
facilities, which of course cannot have been entirely true. Nevertheless,
almost certainly, the vast majority of the debt was held by financial
institutions with adequate access to credit so that a leveraged investment on
the Greek debt could guarantee an equivalent premium. It should be
noted also that at the time of the PSI, the private sector was in possession of
approximately €207bn in Greek government debt. This corresponds to only 68% of the total stock (€304,7) outstanding at
the end of 2009, just before the onset of the crisis and the first bailout. We
may safely assume, however, that the remainder had been held also by the
private sector and passed onto the ECB during the purchases of government bonds
the bank has been undertaking recently as extraordinary measures to counter the
debt crisis.
[13] Two very simple numerical examples suffice to illustrate the point.
Suppose that the sales tax rate is λ whereas direct taxation of profits and
employment income amounts to a tax rate µ on the price domestic suppliers
receive. The tax receipts per €1 the domestic economy spends of domestic output
outweigh those per €1 of export revenue since 
is the same as
. Observe that the left-hand side of the last inequality
(which depicts the difference in tax revenues per €1 of GDP between the two
sources) is increasing in λ and decreasing in µ. Let now θ be the rate at which
value is added domestically per €1 of the final price of imports. The tax
revenues per €1 of import versus export final price differ by
. Once again, this is increasing in λ (as well as θ) and
decreasing in µ. Moreover, it is certainly positive for large enough values of
θ (as θ approaches unity, the difference in this example tends to coincide with
that in the previous one).
is the same as. Observe that the left-hand side of the last inequality
(which depicts the difference in tax revenues per €1 of GDP between the two
sources) is increasing in λ and decreasing in µ. Let now θ be the rate at which
value is added domestically per €1 of the final price of imports. The tax
revenues per €1 of import versus export final price differ by. Once again, this is increasing in λ (as well as θ) and
decreasing in µ. Moreover, it is certainly positive for large enough values of
θ (as θ approaches unity, the difference in this example tends to coincide with
that in the previous one).
[14] Let me remind you
that, at the height of the 199-2000 stock market bubble, some prominent by
Greek standards analysts were advocating essentially the abolition of income
taxation. Their claim was that a relatively small increase in the surcharge on
stock market transactions would generate at the time revenues that would dwarf
those from income taxes.
[15] Throughout the last quarter of the 20th century, Greece
undertook several and severe austerity programs (1974-77, 1985-87, 1990-93, and
1994-2000) in what seems to have been a tradition of excessive structural budget
deficits followed by corrective surpluses. This tradition was abandoned upon
entry in the 21st century and the Euro zone.
[16] Consider an individual who is planning to work foryears and be in retirement for years thereafter. For, let also and be, respectively, the average rates of return on her pension
fund account and growth of her wage or pension during the corresponding
periods. Suppose finally that the average rate of contribution towards her
pension fund out of her wage is κ while her first pension upon retirement will
be given by a portion µ of her final wage. The scheme is sustainable if and only if. Equivalently, if and only if. Obviously, what matters is the rate of return on the
pension fund relative to the rate of wage or pension growth.
[17] In current prices, the recent Games had the following final cost:
Atlanta (1996) $1.8bn, Sydney (2000) $11bn, Athens (2004) $15.6bn, and Beijing
(2008) $43bn. The cost for those to be held in London this year is expected at
$18bn.
[18] The preferential treatment of investment in real estate applied to
construction companies and households purchasing their first home (subject to
very mild constraints on the value of the house).With respect to the
repatriation of funds, the preferential treatment in question was granted in
exchange for the ridiculously low tax of 10%.
[20] In fact, given our
already congested main cities and excessive per capita consumption in cars, car
parts, fuel, health care and pharmaceuticals, any benefits from increasing the
equilibrium consumption of taxi and pharmacy services are more likely than not
to be outweighed by the costs, be them externalities or current account
deteriorations. Similarly, in a country in which the legal system is already
under serious strain and its citizens are famous for taking each other to court
for little reason while too many resources have been allocated in construction
and real estate, the problem is certainly not how to reduce prices and, thus,
increase consumption in these sectors.
[21] More than 75% of our public debt is now held by sovereign entities - the
ECB and the Euro zone (which has 16 other member states), and the IMF (which
has 169 other contributing states) -
while the actual effects of the PSI/second bailout package on the public
finances can be summarized as follows. The new bailout is a loan of €168bn, of
which €130bn is new funds and €38bn what we hadn’t received yet from the €110bn
of the first bailout. The PSI leaves the private sector with a €107bn debt
write off and a remaining €100bn. This is to be settled via new bonds amounting
to €70bn (with maturity between 15 and 30 years and interest rates 2% until
2015, 3% thereafter and until 2020, and 4,3% henceforth) and €30bn in cash. To
the latter figure, one should add € 38bn that has been earmarked for other
immediate debt repayments (replacing short-term debt with longer-term one,
setting money aside for those bond holders who will not participate at the PSI
etc.). It follows, therefore, that there is no net change in the stock of
public debt due to the PSI/second bailout package. Nevertheless, the second
bailout loan comes with a grace period of ten year and interest rate 3,5%,
which is smaller by 200 base points to the one for the first bailout loan. Now,
from the €100bn of the new funds from the second bailout, as much as €50bn will
be allocated for the recapitalization of Greek banks, while another €12bn will
cover payables the Greek government has overdue to private suppliers (VAT
returns, bills etc.). The rest of the loan is meant to cover the interest
payments on the debt and the budget deficits until 2015. Evidently, therefore,
the gains in terms of net present value of the public debt will be realized
predominantly in the short-term. The benefits for the future generations are
because (i) €38bn from the first bailout loan now carry smaller interest rate,
(ii) €100bn of privately-held debt are replaced by funds from the second
bailout (assuming of course that the former had an average interest rate greater
than 3,5% ), and (iii) the remainder of the privately-held debt caries on
average lower interest rates than before (which must the case given than the
actual haircut has been estimated at 53,5% and this exceeds 107/207). It should
be noted, however, that the extent of the gains in (ii)-(iii) above is
restricted by the very fact that the new repayment horizon is longer.
[22] I am referring of course to Greece defaulting on its public debt and
having to negotiate its restructuring without the backing of the ECB, the IMF,
and the EU. The absence of another alternative is obvious given that in 2012
the expenses of the general government are €127,8bn out of which €87,4bn
represent debt payments.
[23] Given that the accepted estimates place the haircut on the original
bonds at 53% of net present value, the prices in the figure ought to be
multiplied by 0,47. They imply, thus, discounts that range between 86,5% and 90%,
depending on the length to maturity.
[24] Let for instance the tax rate
fall from 35% to 25%. Other things being equal, the tax revenue will fall by
34,28% and, in order to be replenished, the corporate profits will have to
increase by 140%. For the tax revenue to be replenished in real terms, this
requires that for ten years profits ought to grow at average rate of 3,5% over
an above the discount rate. For economics analyses of the optimality of high
corporate taxes, see Conesa J.C., S.
Kitao, and D. Krueger (2009) “Taxing Capital? Not a bad idea after all,” American Economic Review as well as T.
Pikety and E. Saez (2012) “A Theory of Optimal
Taxation”, NBER Working Paper or Farhi E., I. Werning, and S. Yeltekin (2012) “Non-linear
Capital Taxation without Commitment,” Review
of Economic Studies.
[25] Notice that the graph for the US economy is rather
deceiving as it accounts only for the federal taxes. For instance, the top
corporate tax rate (including state and local taxes) reaches 39,2% - it is the
highest in the rich world. The US tax rate on capital gains is 15%. This is 150
basis points higher than the Greek one.
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