Sunday, 10 July 2011


Apologies for the radio silence, dear readers - it's been a busy week.

Now that I've caught up with my sleep and the in-tray for the day job I feel ready for another post, and predictably it is a new batch of statporn, though I promise you haven't seen this before - not from me anyway.

I have strong but mixed feelings about Debt Clocks - here's one of ours, courtesy of the awkwardly transliterated Xrimanews.gr. In countries where government debt is not the number one issue on the agenda, a good deal of the population tends not to know just how much debt the state has picked up in their name. This is not too dissimilar to what individuals in too much debt do (a more academic treatment here and here) and the behavioural results are similar too. Such tools can give the people a sense of proportion. But while being able to visualise debt in this way tends to make people think, in practice it is not very actionable. By the time a country has a Debt clock built for itself, it is usually in too much debt already.

I was wondering, on the other hand, what kinds of clocks we could build for Greece that would mean something to the Greek people. If we're counting down to anything these days, it is surely D-Day, the day we get to default. And this is not a matter of time but of fiscal dynamics. Converting these into time variables is not straightforward.

As it happens, there are three sets of figures we can use that do sort of suggest timings.


The first is the primary deficit, which counts down the distance left to run until we can secure an orderly default. I should point out that, unlike the Greek ministry of finance and some defaultniks, I'm counting public investment against the primary deficit. The reason is simple: public investment is the most productive part of government spending, as we've discussed here, here and in Greek here. In the event of default, it should be among the last budget items to go.

So how is that primary deficit coming along? Below is a graph of our monthly primary deficits, collated by yours truly from the monthly budget execution bulletins available here. Please note this is the Central Government budget as opposed to the General Government budget, where the data take much longer to produce and are much less reliable. Even with these caveats, I can only go as far back as Jan 2009 and can only follow the data up to May 2011 - but I will update as more data come in.

[Correction: The Y axis on this graph previously read 'surplus'. This was of course wrong. Many thanks to @ggementzis for spotting this. The hollow datapoints are my own naive forecasts, read on for details on how these were calculated.]

The bottom line here is that the 2011 budget isn't really working out. While 2010 was an improvement over 2009 in nearly every month, 2011 hasn't been an outright improvement on 2010 so far - only two out of five months have returned a smaller deficit or larger surplus. If the above graph doesn't really speak to you, maybe this one does: it would suggest austerity as currently pursued depends hugely on political timing and is producing diminishing returns.

Actually, this graph is a little scarier than that, because it's actually very easy to describe the trend involved. It's essentially a negative sine with a linear trend thrown in, or at least that's what it behaves like. Crucially, the trend points upwards.

[UPDATE] My longtime reader Chris Voltaire has pointed out over Twitter that running a regression with 15 observations is risky. He is too kind, of course. It is stupid and pointless. However, my purpose is not really to derive a forecast (even though I do). I only want to show what the trend has been so far and because of the seasonal variation involved I can only do this by deriving a forecast of sorts. Apologies.

If you run these figures forward, the forecast is for a primary deficit of EUR5.893bn, against EUR6.231bn last year. So we're only really on track to shave EUR338m off the primary deficit this year and at this rate it will take us 17 years to be able to default. Not good. It is probably this realisation that underlies our latest batch of austerity measures, which I've seen fellow libertarians criticise quite strongly. I will return with more commentary there. For now I should point out that there's more than one way of delivering a primary surplus, and I'm on the record as saying that taxation isn't a very effective one, for reasons to do with administration and equality.

Chris also points out that the Greek state is looking forward to some extraordinary income from property tax arrears in 2011, which readers would do well to take note of. Now in my days of trying to scrape by on £5 a day in London so I could afford my rent and the occasional drink, I used to have a rule: there is no truly extraordinary income and no extraordinary expenses. Better to assume that every month £100 will get spent that you can't plan for, and £20 will come in that you don't expect. It's a similar case here. The Greek state had extraordinary revenue in 2010 from the 2009 business levy, then more extraordinary revenue with the tax amnesty, and probably more that I can't keep track of. My point is that these 'extraordinary' income drives are driven by cyclical revenue figures rather than vice versa, so in one sense it doesn't really matter what income we're looking forward to.

But this is dodging Chris' argument. The real answer is that I can only keep monitoring the data - when that money comes in, I'll check again to see whether it's shifted the trend. That's all anyone can do really. For instance, just today (11 July) the preliminary figures for June came in - indicating a primary deficit of EUR1.356bn for the month. This in turn is consistent with a EUR7.1bn primary deficit for the year, taking us way off course.

Incidentally, the first graph I've presented here also reveals one more useful thing: that the most fiscally positive months for Greece are January, July and October in that order. This will be important to anyone trying to time a Greek default while we're still still running a primary deficit.


The second way of timing a default is to look at the exposure of European (in particular French and German) banks to Greece, particularly the Greek sovereign and Greek banks. The only reason we are in this state of suspended animation, from a foreigner's point of view, is in order to prevent massive losses to European banks and the associated contagion. If they could magically remove their exposure to Greece overnight, we would be forced to default at once, whether we liked it or not. This begs the question of how far along they are in dumping Greek assets.

I should note at this point that the markets for most Greek assets are currently very illiquid, so banks are very worried about dumping them as they are unlikely to get a good price. Moreover, when they sell banks have to record losses, whereas a rapidly depreciating bond can be held to maturity without showing a loss. All of this makes it difficult for foreign banks to dump Greek bonds.

You can review the latest data on exposures to Greece with commentary from yours truly here. But what is the trend? Well here we have a problem because the Bank of International Settlements (BIS), the source of all such statistics, has only started providing data with a sector x country breakdown in Q4 2010. Further back, we can only look at aggregates, which are much less useful. But let's see what we can find. The graph below outlines the exposure of banks in Europe, France and Germany to Greece (that's total exposure, including the Greek sovereign, Greek banks and the Greek non-bank private sector:

These data suggest that since the Greek crisis began in late 2009, French and German bank exposure is falling at a rate of 2% every month, or about EUR2bn per month. At this rate, it will take 44 months, or until August 2014, for them to reduce their exposure to zero.

Realistically, French and German banks will never manage this, and even if they could or wanted to, they don't need to wait that long, as they only need to cut their exposure enough so that they can remain capitalised when we default. Also recall that this is total exposure to the country, and although it makes sense to dump Greek banks alongside Greek bonds, it probably doesn't make sense to dump all Greek assets altogether.

But this is the general direction of travel.The query in question can be replicated by trying this link.

More to come, as I've still got data to crunch. For now the verdict is that we're more likely to be pushed than to jump unless we can come up with a real show-stopper. Somehow I doubt we will.


There is of course a third clock ticking away. Every quarter I watch the labour market statistics for clues of rising stress. My favourite index is of course the share of the unemployed that turned down job offers in the last quarter; the rationale is that once the fat has gone out of the land and people are forced to take whatever crappy job comes along or drop out of the labour force altogether the result is very angry people in the workplace or on the streets. Regular readers should not need any reminder but the graph as of Q1 2011 is as follows:

A naive extrapolation suggests that we will run out of unemployed people turning down  job offers by Q4 2013. This suggests to me that the apeshit scenario is approaching us faster even than the being pushed scenario. Everyone buckle up.

1 comment:

  1. All of these projections will of course prove totally wrong in case the Greek economy starts showing some (even tiny) growth. With Greeks suddenly discovering exports (I saw some retsina the other day at Tesco's) and the perception growing that greece will be "cheap for holidays" this year, some growth morcels might be in the horizon.



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