Friday, 26 November 2010


I hinted the other day that Ireland's troubles are not unrelated to our own and that the delayed announcement of the new 'final' Greek deficit figures may have accelerated the Irish distaster. I must admit that at the time it was a vague and slightly naive observation, but with only a little bit of digging I've found it's a little more than that.

Feast your eyes, friends, on the IMF's map of financial interconnections for Greece, included in this paper - they compiled this in an effort to explain why a small country created such a big problem in so short a time. As the Great Satan explains:

An illustration of Greece‘s interconnections in cross-border funding flows reveals why funding strains in Greece in the first half of 2010, despite being by itself small, might have translated into pressures on other Euro Area peripherals. Recall that banking exposures to Greece were relatively small in the context of banks‘ balance sheets; yet, concerns about the strength of balance sheets and the ability of other Euro Area peripheral countries with fiscal and financial vulnerabilities to finance themselves increased as the Greek situation worsened. Using the funds‘ data, Figure 10 presents four clusters (i.e., countries that together form more of a closed system), centered around a set of core connections that are closely linked to Greece: (i) a red cluster of countries with access to funds domiciled in Luxembourg; (ii) a black cluster with access to funds domiciled in the offshore centers of British Virgin Islands, Jersey, Cayman, Guernsey, and the Isle of Man; (iii) a blue cluster with Ireland at the core; and (iv) a green cluster of the U.S. with several key European and other countries. Greece is interconnected with each of the central nodes of these clusters. This close interconnection across other core countries suggests why asset re-allocations and flows might have been large systemically, with potentially significant impact on countries such as Ireland.

[Anyone notice the black cluster carefully enough? Now that is scary stuff.]

This paper is dated 6 October 2010. Since then, our contagious germs have come back to get us - by making it that much more difficult for our banks to raise funds. Which is a problem because as things currently stand, our banks are getting an increasingly high share of their funding from Europe's Central banks and the ECB. As of September, Greek banks were using EUR94.5bn of Central Bank money (see below), compared to EUR213bn of depositors' money.

Tuesday, 23 November 2010


I knew my years of listening to Irish music would come in handy one day. I get to make a bad pun on a bad day.

Nov 21 was the day that Ireland finally stopped battling the waves and took the EU's money, joining Greece in the naughty step of protectorate-dom and plunging into an abyss of political instability. And there is worse news closer to home: turns out Greece won't be getting additional time to pay off our EU/IMF loans as it turns out those nasty Germans don't like the thought of us defaulting on their claims so early in the game.

The bailout of course failed to put anyone at ease regarding the fate of the rest of the European periphery. It did however cheer up big government apologists in Greece and elsewhere, who are already chanting the moral of Ireland's story: that austerity is self-destructive as it couldn't save the IMF's star pupil, that low taxes

They are right almost as much as they are wrong. In Greece and Ireland, banking on a crash course of austerity on the IMF's terms to get our economy growing again and bring our debt down was never going to work because both countries were clearly insolvent. The IMF death list can be seen clearly on the left below:

Technically, the UK should also have followed us into the bottomless pit by now but they have their own currency and central bank which does allow them a bit of leeway - perhaps enough for them to avoid a default but who knows?

With the UK temporarily out of the way the next EU member on the IMF's stochastic death list is Spain. Now the Spaniards will argue until they are blue in the face that they aren't Ireland or Greece but actually they combine the worst of both worlds - sharing as they do both Greece's hideously sclerotic labour market and Ireland's property-obsessed cult of suicide bankers. The only way in which they are unlike the previous two is that Spain is very, very large - so large in fact that the EU bailout fund cannot save it.

On the other hand, Portugal might be next. They are technically much better off than Spain (i.e. ranked lower on the death list) but they might attract more attention as they are a smaller country and because point-scoring politicians in the Portuguese opposition have just hit the market with some scary numbers. Always a bad idea putting numbers to bad news. It makes people reach for their excel sheets and update their models.

What people refuse to understand about the chain of sovereign defaults is that it isn't troubled European countries that are defaulting - it's the whole system. Spain will not be saved because its debt is 'only' 53% of GDP as opposed to Ireland's 65% or Greece's 127%.  The simple truth is that no one believes Europe can grow fast-enough, in a credit-constrained world and without irresponsible levels of government spending, to get itself out of debt. One can spend all day arguing that a jet fighter is faster than a DIY Red Bull Flugtag plane or a seagull, or that one weighs more than the others, but all three must eventually come down because none of them can reach escape velocity.

Until three years ago, the consensus was that European sovereigns could not default, period. Last year, the consensus became that European sovereigns could never really default, except through inflation. Earlier this year, it became 'clear' to us all that the periphery could indeed default. Now markets are waking up to the fact that even larger and 'safer' European sovereigns could default. Portugal is, as per the Death List, more solvent than France and much more solvent than the UK. It's only market participants' superstition and their love of guarantors that is keeping them from betting on the obvious.

Back to the IMF for a second. Given that it compiled the Death List in the first place, surely the Fund (or its staff) know what's going on, even if they can't admit it in review after review of our adjustment mechanism?

Perhaps this paper written by the IMF's own staff is meant to give us a hint.

Sunday, 21 November 2010


From the Manifesto of the Democratic Alliance, Greece's newest political party, in Greek and in English (via Google Translate as I don't have much time). I'm not sold on this and will explain when I have time.

Wordle: DimSum Tag CloudWordle: DimSum tag cloud in English


Greece-watchers will have noted by now that the municipal and prefectural elections in Greece have been and gone, our new deficit figures are out and 17 November, the only day that really matters, has come and gone without incident.

In the run-up to this most crucial of anniversaries I wrote, perhaps too cynically, on FB:

“40% of the nation refuses to vote. The legitimacy of the state is in tatters. Yet somehow I have friends cheering one candidate or another. Why do you bother? Come 17 November Athens will burn and the streets will run with blood. Does it really matter which second rate politician will have to clean up?”

This provoked a good deal of reaction from friends back home.  A.S., a high-flying friend who is busy rebuilding the brand of a major, newly privatised company back home, argues that the basic difference this time around (apart from the superior calibre of the winning candidates in our two major cities) was that Yorgo essentially won an internal battle against the rest of the Socialist party by betting – correctly – that well-respected and untarnished outsiders with grassroots support (a former Ombusman in Athens and a seasoned winemaker and environmentalist in Thessaloniki) could do just as well as any party apparatchik with a deep clientelist operation.

Intuitively, I agree that this is an important point to prove to both major parties, as it immediately reduces the returns on the enormous investment required to build a clientelist network – reducing the advantage held by incumbent politicians vis-à-vis newcomers and reducing incentives to tolerate or foster corruption. Both very very good things on a macro level.

In fact, the end result would be similar even if the winning candidates were truly second-rate and their grassroots support entirely manufactured (for the cynics out there). In the latter case, the signal is that investing in a clientelist operation is not as good a deal as investing in an Astroturf political operation. I’m still happy with that.

One thing, however puzzles me in A.S.’s account. Why now? In previous elections it was generally felt that old-school candidates were the safest pair of hands. Something must be different this time around, which made Yorgo think he could get away with his gambit. I think I’ve got a complementary explanation that is consistent with the above theory on the rise of nominations based on merit but can also explain the sky-high levels of abstention in 2010. It is simply this: the State has no money.

Remember my analysis of the bursting of Greece’s Higher Education bubble? Well I think there are a lot more examples of this sort of thing waiting to come out. One such bubble is the ‘market’ for clientelist network services. These are valuable only because they allow buyers (who pay, in part, with their vote) to influence the distribution of the State’s resources.  With fiscal policy largely out of the Greek government’s hands, resources extremely scarce, and scrutiny tightening, no-one can guarantee that they can deliver these clientelist services anymore. Their networks thus become weaker and less valuable to voters. However, the price of clientelist services is fixed at one vote – which is all anyone gets. This rigidity means that as the value of clientelist network services falls, the ‘market’ can never clear. The variability of abstention statistics is essentially a function of the value of clientelist services.  

One bizarre implication of this theory is that, the more abstention rises, the better the candidates we will end up electing – as the first voters to drop out of the system will not be disaffected voters but subsidy junkies.
Don’t forget, network effects work exponentially so any fall in the value of clientelist networks is big news. If we can deliver this in two successive elections, then we Greeks just might have a chance at sanity.  The problem is that the rising trend in abstention (see graph) is extremely steep and could end up invalidating elections just as the electorate finally begin to get their preferences right. The implication is that Greeks should be encouraging swing voters to show up and vote blank or invalid rather than abstain.

(See here for my national elections data, here for my European elections data. The rest have been cherry-picked from press reports.)

Monday, 15 November 2010


Our budget deficit for 2009 was 15.4% of GDP and Government debt was 127% of GDP, as revealed by Eurostat in its latest release.

Amazingly, although we have no credibility to lose anyway, Eurostat did manage to damage its own credibility by missing its own earlier confidence interval substantially. The ceiling had previously been set at 14.1% for the deficit and 122% for the national debt.

Amazingly, Eurostat was, er, unable to squeeze this work in before the second round of our municipal elections, even though the ballpark figure has been out for more than a month.

Presumably this was meant to foster stability by giving Yorgo (the Threesome's only credible counterparty in Greece) a boost in the polls. Instead the announcement has coincided with Ireland's final fiscal meltdown, for which I'm sure we'll get a lot of polite greeting cards, perhaps featuring leprechauns holding empty pots.

Sounds a bit like the way in which our Government put its foot in it in 2009 by reporting its estimates of the deficit and national debt right ahead of the Dubai Debacle.

The truth hurts, Eurostat, but it hurts less if you tell it all at once. MUPPETS


A convenient myth in our national economic collapse (expressed here but also countless other times) is that somehow our rising debts fuelled consumption of German exports.

This argument has been cleverly adapted by our home-grown economists/apologists from the general discussion on Global Imbalances and is correct only insofar as it states that current account surplusses should not be seen as having moral implications (prudent exporters v. wastrel importers). In every other respect it is incorrect.

Now, sadly, figures on bilateral trade balances within the Eurozone are hard to track down - they are not available on Eurostat or ELSTAT. But we have a second-best option.

For proof, turn if you will to page 7 of this publication. It shows that Greece was Germany's 27th largest export market in 2008, down from 24th in 2000 and indeed down from an unbelievable 19th back in 1990. So it's very unlikely that German export growth relied to any extent on Greek profligacy. Note however the rise in the export markets' rank of the US and China, with which German shares neither currency nor any institutional links. If anything, China is a fellow export-driven economy. Of all the PIIGS, only Spain actually went up the ranks of German export markets during the noughties.

Perhaps more importantly, if one could rewing back to 2001, one would read article after article about how badly joining the Euro was playing out for German exports. It turned out the exchange rate at which Germany joined over-valued its products, making it very hard to shift those BMWs (except to Cypriots, bless them). Ten years on the situation is reversed. Germany and some other countries kept running while Greece and some others thought they'd take it easy once they'd passed the big exam.

So there you are, apologists. Greece is not to Germany what America is to China, although it would be convenient and flattering to think so.

Who will we blame our troubles on now? Well, we could still blame them on the Euro. Our Euro is massively overpriced while the Germans' Euro is massively underpriced (evidence here). In this sense Germany is a bit like China - and although Greece is partly a victim of this implicit subsidy, we were given nearly a decade to reverse it by improving competitiveness. Instead, we pegged our wages to those of the Germans (just like they told us not to) and stifled regulatory reform.

UPDATE: A table of Germany's 2009 exports by partner, showing turnover and trade balances, can be found here.

2nd UPDATE: A further discussion of Greece's trade links can be found here

Saturday, 13 November 2010


So, apparently our latest GDP estimates are in and they look predictably crap.

The 4.5% y-o-y fall in real terms was apparently close to everyone's expectations, except for those of one rather important player - the IMF, who projected a 4% fall up until its review in September. My naive estimate back in August was that we would see GDP fall by 4.6% to 6% y.o.y. by the end of 2010 and so it seems set to be.

UPDATE: An astute reader here in the City has brought two mistakes to my attention. First, there is a major discontinuity in the quarterly data from 2009 to 2010 - the data are not comparable, strictly speaking. So readers must take my analysis (and those of Eurostat and the Greek Government) with a pinch of salt. 

Second, my -6% figure is totally bonkers unless the anarchists do manage to burn Athens to the ground this November. -4.6% sounds a lot more plausible as it implies a quarterly fall of 1.2%, which is the rate at which GDP fell in Q3 2010. This may still be an overly pessimistic view, as even this downturn has to bottom out somewhere. That said, I suspect that unless we've applied some of our usual political 'stimulus' in the run-up to the elections  (at the expense however of revenue targets) then the combination of uncertainty regarding the electoral outcome, plus the effect of civil unrest in November will deliver very close to -4.5% by the end of this year, at least some revisions down the line when the GDP estimates have hardened a little.

Many thanks to reader NoC for these clarifications - saved me from getting caught out by less sympathetic readers.

Finally, we would both add that readers must be very careful as the revisions between the Q2 2010 and Q3 2010 releases are vast. Generally their effect is to start the decline in GDP much earlier, which affects the yoy figures. It is my belief that these are not aimed at addressing the discontinuity ELSTAT have highlighted - that, when it comes, will be a one-off, big-ticket revision. Cynics might call this manipulation but actually it is very likely to have been made in good faith.

Unsurprisingly, the IMF's target of 11.2% unemployment is also not on track to be met. In fact, the latest estimates were 11.8% for Q2 and even 11.7% in Q1 2010. Not that forecasting unemployment means anything in Greece since our labour market is unable to match labour to vacancies.

In addition to the fact that we still can't bring tax revenues in, the IMF may wish to note that another, far more important source of taxation is failing: inflation. The GDP deflator is now growing at 2.4% y-o-y, against an IMF estimate of 3.5%. This is despite CPI inflation estimated at 5.2% against an end-of-year target of 4.2%. My national accounts voodoo handbook tells me that this means that rising commodity prices and continued distortions in the market have kept input prices, profits and rents rising fast even as demand kept value added inflation subdued. This is the worst of both worlds - consumers are being taxed via inflation but the state is only able to use a small amount of this 'tax' to 'pay' down debt.

Isn't it time the IMF saw this for what it is? It's a death spiral.

Friday, 12 November 2010


This post is copied from Jeff Harding's post on The Daily Capitalist. I have matched Jeff's pledge and would urge you to do the same. At best, my guy loses and we help feed some hungry people over in NY. At worst, Paul MUPPET Krugman gets his ass handed to him in a symbolic defeat of Keynesian MUPPET running dogs the world over AND we help feed some hungry people over in NY. I'm happy either way.


I Dare Paul Krugman To Debate Austrian Theory

How much would it be worth to you to see arch-Keynesian Paul Krugman debate a top-notch Austrian theory economist on business cycle theory?
Krugman has prattled for years about Austrian theory being a flawed dead-end of economics. My guess he has never read anything by Mises, Hayek, or Rothbard, the greatest scholars of the Austrian School. He doesn’t understand it in any way; I have read his critiques and they are uninformed.
Robert Murphy, one of the bright young lights of Austrian theory economics, has challenged Krugman to a debate. Now let me say others have tried to draw Krugman out, but he won’t do it. Murphy, who got his Ph.D at NYU, has made an offer of debate that Krugman will be hard pressed to refuse. Here’s the challenge:
When Krugman agrees to debate Murphy at the Mises Institute, $100,000 will be donated to the Fresh Food Program of FoodBankNYC.org, a non-profit dedicated to feeding the hungry of NYC .
Murphy is soliciting donations for the debate through The Point, a web site that hosts campaigns. Launched only 4 days ago, they already have raised $22,000 $28,000 $32,000 57,165. I just pledged $100. If Krugman doesn’t accept the challenge, I will not be charged. If he does, I get a charitable donation deduction to the Food Bank of NYC.
Click the banner below to donate. Please join me. This will be money very well spent.


UPDATE: Murphy has put up this video of himself prepping for the Krugman debate:

Can you imagine a Keynesian High Priest taking himself this seriously?

Tuesday, 9 November 2010


I'm currently attending a very interesting event on Microfinance held by the European Commission. You can access the programme and other material here.

What is even more interesting is that it's absolutely crawling with my fellow Greeks. Although some will be Eurocrats based in Brussels, most travel in groups of two or three and keep referring to 'our guys' in a very familiar manner. Many have that usual mixture of timidity and intensity in their faces - the mark of a person used to delivering fawning praise and then wallowing in impotent rage.

No doubt my compatriots are on a fishing expedition for even more yummy subsidies that we can continue to feed our clientelist regional investment structures despite being insolvent. I suspect they are particularly keen to hear more abour JESSICA.

For the last time Europe. Stop bailing us in!!!

UPDATE: It's actually JEREMIE they're into - this person, employed by our Department for Economics and Competitiveness and Maritime Affairs, (now Regional Development and Competitiveness) piped up in a Q&A section, and even managed to make an unintended 'racial' remark, thanking an Indian panellist for the 'spicy' note she added to the proceedings. Actually the panellist had been recounting how she managed to escape a life of domestic violence and overcome implicit and explicit racism in order to become a successful entrepreneur.

It's like watching Borat.

However, the manner of the question was not as bad as the content; my compatriot appeared exasperated at the discussion on microfinance and its supposed potential benefits to employment and growth in Europe. 'I want to talk about the elephant in the room. What are we talking about?' she demanded, 'We're talking about access to finance! About getting finance to people that NEED it, not about employment or growth.'

And that, my friends, is Greece in a nutshell. No point discussing how such a scheme might self-finance by reducing benefits payments or increasing tax revenues for member states [ed. personally I am sceptical of that anyway]. The point it that some people NEED money and must HAVE it! Give us our subsidies and shut up already.

Thursday, 4 November 2010


UPDATE: For more perspective on Greece's debt trajectory, and a more up to date graph as well, please consider this and this post.

Remember this epic graph of Greek debt / GDP which I found on one of our 'orange blogs' some time ago?

Well I think I've got an even better one. Better for two reasons - first, it goes back to 1884, with a few gaps here and there. Second, you can download the figures and read up on the methodology. The data come from a new public debt database compiled by the IMF, and presented in this paper.

The following graph is taken directly from the database, which covers an amazing 174 countries. You can download the data yourselves here.

Admire its beauty dear readers. Also, admire how much of the blame the first two Socialist Governments under our current Prime Minister's father deserve for our current fiscal woes.

Wednesday, 3 November 2010


Not too long ago, I wrote a comment on a Linked In thread that went a little like this:

"As power is transferred from the Greek government and parliament to the EU institutions, the crosshair for our "known-unknowns" will move from Athens to Brussels, Strasbourg and Frankfurt. And then it's really going to hit the fan. 
What happens when it's not our Minister of the Interior but an EU Commissioner that gets their office bombed? What happens when the older generation of our urban guerillas finally decide to shack up with their posh yuppie girlfriends in Brussels and start firebombing Belgian coppers? What happens if our demonstrators occupy the Berlaymont instead of the Acropolis, or if the mayor of Strasbourg should wake up to the entire town spray painted with "No job, no church, nothing to do man! - Let's sh*t on the grave of Schuman!"?" 
A mere four months have passed since then, and the latest news is that some of our bright young things have sent out bomb parcels to the offices of Angela Merkel, Silvio Berlusconi and Nicolas Sarkozy. All outbound packages are now queued for inspection. Bizarrely they have also targeted the embassies of Bulgaria, Germany, Chile, Mexico, Russia and Switzerland.

I have some reservations regarding the suspects that have been apprehended so far. I will update when I know more.