Follow by Email

Saturday, March 18, 2017

"Debt Trap Report" - Debt Restructuring Without Reforms Would Not Help!

"A debt restructuring by itself, without some deep reforms, would not help. In a few years’ time Greece would again be on the razor’s edge. Therefore Greece will have to continue with reforms in crucial sectors such as justice and combating corruption and tax evasion, and by improving state mechanism operation and governance. Only in this way will it ensure that it does not revert to a bankruptcy situation.”

Thus spoke Wolfgang Schäuble! Or so one might think. Instead, it was Panagiotis Liargovas, head of the Greek Parliamentary Budget Office who presented the "Debt Trap Report".

One really doesn't have to be an economist (or a genius, or both) to understand the correctness of this position. A simple look at Greece's external accounts over the last 3-4 decades will do.

The Greek economy has historically been rather dependent on capital inflows from abroad. Until the early 1980s, those capital inflows did not represent a great danger because (a) their overall size was limited by credit risk considerations on the part of investors; (b) there were sizeable capital inflows in the form of investment instead of debt (Marshall Plan, etc.) and (c) remittances by Greeks working abroad formed a major portion of such capital inflows. Also, a reasonable share of those capital inflows went into investment instead of only consumption.

The last 3 decades changed all of that: (a) credit risk considerations on the part of investors (or rather: lenders) declined once Greece joined the EU and virtually disappeared after Greece became a member of the Eurozone, thus leading to a tsunami of capital inflows from abroad; (b) investments ceased to be a major pillar of such capital inflows; and (c) remittances by Greeks working abroad virtually disappeared. Finally, the capital inflows from abroad became almost exclusively debt and they went primarily into consumption instead of investment.

The Greek economy had become a turntable for money: money would flow into the country in the form of debt, it would be recycled within the country to generate unsustainable growth and it would leave the country for imports and capital flight (but the debt stayed on the books). It was like a hot air balloon which would collapse once the hot air supply ceased.

If all of Greece's debt were forgiven but the economy's structure would not change, all that would happen is that the turntable for money would be set in motion again (and the debt would increase again without any sustainable benefit). In order for the turntable for money to become a machinery for domestic wealth generation, more of the necessary capital inflows would have to come in the form of investment and much more of it would have to go into the productive sector of the economy. Young Greeks should not look for jobs in cafés but in producers of tradable goods, instead. And there would have to be job opportunities in that sector.

One doesn't have to make a much greater case than that in order to show that the structure of the Greek economy needs to be reformed before any more foreign debt makes sense.


  1. Such position is not based on a sound argument.

    For starters reforms at this stage are only marginal and they are more acts of political conviction rather than sound economic theory. Secondly reforms pay off over decades; they are not an on or off switch.

    As a result refusing to restructure the debt unless you see the results of meaningful reforms is the equivalent of sentencing Greece to decades of stagnation.

    And as usually those asking for reforms fail to make the connection with real numbers for the Greek economy. They only give a vague theoretical answer of what they have observed in unrelated situations. Yet Greece canot rely on hypothesis at this stage (meaning after it is now the undisputed reform champion of the world since no other country in peace time has reformed to the degree Greece has over the last 8 years). Greece needs certainty and all the eurozone could offer is the uncertain promise that some mickey mouse labor marginal reforms left for last (due to Syriza protective attitude towards the working class) would solve the Greek crisis in 20 years time if there is no other external shock in the world.

    You don't have to have a finance degree to understand the depth of ignorance from the eurozone and the self-serving attitudes of political expediency. German politicians who don't want to solve the Greek problem are only interested in finding excuses to transfer such problem to those who will replace them in the short term. Becuase that's how politician think; they are short term creatures and they absolutely hate it when their successors take credit for strategic thinking. So all they do is a lot of noise to attract attention for the trivial while ignoring the essential.

  2. Part 1

    “But you and we should say what we really think, and aim only at what is possible, for we both alike know that into the discussion of human affairs the question of justice only enters where there is equal power to enforce it, and that the powerful exact what they can, and the weak grant what they must.”

    Thucydides 5.89

    And if one is wondering what’s the above passage of the famous Melian Dialogue (Thuc. 5.84-116) got to do with anything, one only has to recall the vexing comparison between the handling of the German post-WWII debt and the Greek one.

    In our case, there’s been certainly no lack of catechism through the years on how it only stands to reason that debt-restructuring is not necessary and, what’s worse, it’s obviously counter-productive cause past-patterns will be repeated, until our creditors generously deign themselves that the opportune moment has finally arrived, after – and only after – all – as per by the ever-changing not only domestic but also, if not chiefly, international economical, political and historical complexities constantly defined and redefined (ex. sometime, somewhere that matters, elections are coming) – optimal conditions have been finally met, as a result of a decades long series of reforms conceived on the sincere and infallible principle: let us try this and that and, if at first we don’t succeed, let us do it again and – why not? - once more with feeling (own it damn you…) cause after all there is ample time to make it up as we go along…

    But in the case of Nazi Germany’s heirs, the powers that be were relatively quick to do away with such convoluted arguments. Indeed, most of the very same people who can’t cease to repeat their genuine concern about the moral hazard that the restructuring of the Greek debt would represent for the world economy, are very eager to sing a very different tune when it comes (if it comes, since they are equally eager to drop the matter…) to the treatment their dear Heimat enjoyed after they lost what must be the most horrific war the world has suffered, which they themselves had started (to put it very höfflich).

  3. Part 2

    A simple debt restructuring could never have sufficed! Instead, a debt FORGIVENESS was in order post haste (or else… Versailles II!), so that an optimal environment could be foregrounded for the necessary reforms to flourish, as long as those took into account the current conditions of German economical and societal realities and didn’t put any strain on their future perspectives due to excessive demands and irresponsible experimentations. All the while, it was of no less importance not to irrevocably alienate the local populace with humiliating punitive measures such as, amongst many others, removing from national courts any say whatsoever on debt servicing (and entrusting it to… British law) or such as… the new supreme law of the land which is, as the honorable president of the EU-commission recently had us know, the memoranda!

    (That doesn’t mean, by the way, that Germans unconditionally sing the praises of their vanquishers / benefactors Americans; most, in fact, never fail to point out that theirs was the most unique case where what was “right” and “reasonable” coincided with the interests of the party in the position of power; not only that, but any other outcome, i.e. not having yielded to the obvious “reason”, would have brought ruin to Europe once again. In truth, they’re telling only half the story and one of historical relativism crafted to shine a very dim light on Americans’ magnanimity and that despite the glaring contrast with the behavior they themselves exhibited when the position of power was theirs…)

    So, yeah… This why the quoted passage of the Melian Dialogue illustrates perfectly the principle that informs the arguments against the restructuring of Greek debt and puts on its true basis all their rhetoric for what is “reasonable”, “just” and “beneficial”. As for that conclusion of this Greek parliamentary office, I can only say: έκαναν την ανάγκη φιλοτιμία!

    Finally, the Melian Dialogue is such a masterclass on power politics and their accompanying said rhetoric (although translations tend to simplify its nuances and slow down the text, and yet I can’t recommended it highly enough) that not only the small excerpt I singled out but almost all of its salient points are easily applicable to our subject matter; that being said, no modern international state agent would ever dare to express themselves so truthfully and succinctly as those goddamm awful Athenians of Thucydides…

    A bon entendeur, salut !


    1. That doesn’t mean, by the way, that Germans unconditionally sing the praises of their vanquishers / benefactors Americans

      Actually your contribution reminds of Yanis Varoufakis argument. His US the big Hoover tale, sucking in all the world's money coupled with the London Debts Agreement cum Marshall Plan. Considering the Hoover Moratorium that's feels a bit like an odd choice. But: Wasn't it also part of the post WWII politic of Containment? In this context, I would assume Greece has quite a bit of different complains against the US. Thus no, it wasn't only a matter of power, it was also a matter of luck in the larger context. Besides, I always somewhat assumed that the US by the end of 1945 had left the banking crisis far behind. Or admittedly had as nitwit assumed that maybe with the help of the much needed production of larger military complex had managed to get out of the crisis. Odd assumption, maybe, since that is how on the surface Hitler did it.

      Besides from my own limited perspective, ironically enough, we seem to have been lucky that we were represented by Hermann Josef Abs who apparently had his argumentative ducks in a row, among them e.g. the confiscated foreign investment. I distinctively disliked him just as others, see below. That's why I was probably surprised when a cousin, who studied Volkswirtschaft, the economy of a state, or a group of states, in the case of Europe or the Eurozone praised him. Reparations? ... Other forms of confiscation ... recruitment, variety of confiscation in the larger context of Operation Paperclip?

    2. "έκαναν την ανάγκη φιλοτιμία!"
      Necessity is the Mother of Invention, Frank Zappa

      Concerning the Marshall Plan, I was a bit surprised when the German model, KfW, surfaced, or seemed to surface in an economic Syriza plan. ... Why would one copy something established by the former Nazis?

      By now of course it surfaced in a couple of curiosities like having sent a few millions to the Lehmann Brothers before it crashed. And Syriza may not have quite what the founders had in mind.

      More basically, someone else seems to have been involved in the larger context, who I may well have more reason to thank then Abs is Wilhelm Röpke, who was quite involved in the larger context on the German side:

      In a nutshell, I deeply distrust Varoufakis. Apart from the fact that we are the heirs of the Nazis, no problem thus that it alw surfaces, in other words. I am a complete nitwit on matters. But fact is we have a satisfactorily well established social system. Never mind the deep cuts that were introduced by the Social Democrats and the Green Party in that field. There were earlier cuts in pensions, after all the GDR had to be integrated.

      Our system goes back a long way to Bismarck. Unfortunately at one point was forced to leave by the "Kaiser". Maybe WWI wouldn't have happened had he still been around? Greece doesn't seem to have a satisfactorily well established system in the social field. Now lets assume, the debts are completely cut vaguely based on the cuts Germany got for both its WWI and WWII debts, what imbalances would this cause elsewhere? What would be the result? Besides could this somewhat become an invitation to speculators. Let's pick some weak partners in the periphery to pull the Euro-zone apart? In other words, we aren't dealing with the national economy of one state today but a group of states. And this nitwit would like to know, setting new monetory theory aside, what would the chain reaction look like elsewhere. Not least with right wing parties gaining more and more adherents in Germany too. The Alternative for Germany was in fact founded at the time of the Euro crisis. Never mind that by now its more polite members were pushed out by now, with our own variance of neo-right having taken over.

      The Euro a challenge or an opportunity for the larger speculative capital?

      If we leave out social issues not only in Greece but also in larger Europe. Leave out consequences for other members in the Eurozone, national politics in the countries, what about the larger world? Not least the Great War on Terrorism I have been following post 911?

    3. o.k. Bundesnitwit:

      I will make it easy for you. Instead of trying to reconcile national interest which by their own nature are not reconcilable, let's have the eurozone instead collapse and rebuild the EU under some different rules this time based on actual experience as opposed to pure speculation and wishful thinking.

      Let's Greece and Europe get a new deal by saying goodbye to the eurozone.

  4. you are welcome, Lykinos, but am I not sure that I deserve the nomination for Bundesnit. Nitwit is quite enough. Simply nitwit is quite enough.


    1. Hey! I'm Lykinos! Anonymos at March 22, 2017 at 4:31 PM, he is not!

      I try to always sign my posts, even if they're tandrums - especially if they are tandrums!

      But since, believe it or not, i'm a hard working Greek (i've decided to take a page out of our friends the Germans book and not leave an opportunity go to waste without me praising my phenomenal work ethic!) you'll have to wait awhile for another of my enlightening contributions!

      But so that you don't have to hold your breath, i'll give you a sweet pretaste: keeping my country in a perpetual austerity limbo so that the eurozone might stabilise, not only is what's currently happening, but it's also another theory, pseudo-scientific enough, to bring a royal tandrum out of me...

      But i'll keep that for the notion that we should drop the matter so that the German far right might be appeased... After all, what could go wrong with that? It seems that kind of brilliant thinking gains ground all over the Europe that matters: if we adopt their policies, then surely we'll succeed to cut the ground from under the neo-fascist's feet...

      Till then, kind regards
      The REAL Lykinos!

      PS1. My first training is classicist; are you one of our unfortunate (but superior) lot?

      PS2. You have to give it to him: "Bundesniwit" is a hilarious comeback!