Sunday, 30 October 2011

A look back to the "Good Old Days" : Greek external debt edition

I want to take a quick look at Greek external debt and try to discern its dynamics before and after EMU accession. 

I found some data from the Joint External Debt Hub which are not that detailed as far as sectoral breakdown is concerned but hey like they say, make do with what you have. I think the point I want to make gets across anyway. Here's the chart for some external debt aggregates.

source: Joint External Debt Hub

source: Joint External Debt Hub

As you can see Greek external debt growth picked up only after the Euro's introduction. That means that up until then the Greek state financed a proportionaly larger part of its deficit spending in the domestic market (i.e. the Greek banking sector in a large part).

Multiple reasons could be cited for that (the depreciating Drachma, a track record of large fiscal deficits, high inflation etc.).

The fact that, until EMU accession (since external financing was severely limited) fiscal deficits were in a large part financed through the Greek banking sector meant that the public sector crowded out the private sector and created massive distortions. Here's a chart showing the ratio of claims on the general government vs. claims on the other resident sectors (i.e. private sector).

source: Unied Nations, own calculation

Of course this had a catastrophic impact on gross fixed capital formation, which was in total freefall until claims on general government started falling as a % of total and more funds started being channeled to the private sector.

source: AMECO, own calculations

And a further negative side-effect of this was what the following chart shows, the stagnation of real labour productivity for almost two decades and up until EMU accesion - again. Since talk is cheap here's the chart.

source: AMECO
So the fact that the Greek government chose the highly inflationary and all-around detrimental policy of running high fiscal deficits had a series of rather negative consequences on the Greek economy. 

Under certain circumstances all these could become a possibility (or even more than that) again...

P.S. To help you visualize what high fiscal deficits actually means I have plotted the Greek state budget balance's evolution over time.

source: OECD

Sunday, 23 October 2011

IMF programs : two simple metrics in an effort to gauge their chances of success

I’ve been thinking about the adjustment programs put in place by the IMF/EU/whoever. It is self-evident that outcomes have not been uniform across the universe of countries where they were applied.

A good question is what is the differentiating factor among these different cases?

I am (for this post) going to ignore the pace or the actual enactment of reforms, the society’s reaction to them, whether the adjustment comes from the revenues or the expenditures side of the state budget and focus on these respective economies fundamentals.

Besides Greece and Ireland, similar programs have been put in place the past 2-3 years, after the onset of the financial crisis, also in Latvia and Hungary, as well in some other Eastern European countries. Besides Greece and Ireland I want to focus on Latvia and Hungary (it’s still too early to judge the success of Portugal’s program).

As a bit of background, Latvia as well as Hungary enacted the IMF/EU financing/adjustment program in late 2008. Greece embarked on the IMF/EU program on May 2010, while Ireland did so on November 2010. Finally, the IMF/EU program for Portugal was initiated on May 2011.  

My view is that with the use of two simple metrics one could have a good chance of forecasting the relative depth of the recession these programs will bring on, or if you prefer, the amount of time necessary for the programs to bear fruits. To gauge that I’m not going to look at the pace of introduction of structural reforms or anything as important as that, just at the superficial and epidermic metric of GDP growth (after all isn’t that what most people look at?).

The first metric is what percent of GDP private final consumption accounts for. Here are the charts for the five aforementioned countries.

source: AMECO, own calculations

source: AMECO, own calculations

The charts make a few facts apparent. Private final consumption for Greece stands at the staggeringly high 75%, while in Ireland and Hungary it hovers around 50%. The same figure for Portugal and Latvia lies somewhere in the middle of the aforementioned range, at about 65%.

Why is this so important? Well, one of the goals of the programs is the trimming of state budget deficits something that implies cuts in state salaries, while cuts in private sector pay will probably follow as a result of the slump in economic activity.
That can only mean that mean that private final demand will be hit hard and that the internal market will start shrinking. It is only natural that the countries where private final demand accounts for a rather large chunk of GDP will be thrown in a deep recession. 

That means that in order to halt the slide in economic activity these countries need an anchor to hang on to. With the internal market neutralized, this leaves only the external market as a suitor to play that role. The countries that stand a better chance of adjusting fast and less painfully (of course that is a euphemism since in all cases immense amounts of pain is involved) are those that their external sectors are quite large.

Here comes the second important metric then, exports. These are the charts of the said countries external sectors.

source: AMECO, own calculations

source: AMECO, own calculations

According to this metric as well Greece finds itself in the worst position among the selected countries, with its exports accounting for a little more that 20% of GDP. Ireland tops ranks by this metric as well and Hungary follows close behind. Latvia is the middle of the table and Portugal is just a little better than Greece.

Since most people (not all that is) think of GDP growth as an indicator of how the program is faring (and not entirely unjustifiably at that to be honest), I’m going to use that metric too.

Here is the chart for Hungary and Latvia. Look at the depth of the recession in 2009. Just as the two metrics would have forecasted, the one recorded in Latvia was abysmally deeper than the one in Hungary. Also Hungary entered positive growth territory in 2010 while Latvia stopped just short of that (of course I have to remark that the program for Hungary was concluded in October 2010).

source: Eurostat

Now look at the chart for Greece and Ireland. Even while Ireland entered its respective program later than Greece it already managed to slip out of recession (that particular fact is usually judged by GDP growth relative to the previous period and not to the same period of the previous year, but Ireland is out of recession even according to that metric).

source: Eurostat

For countries that score low on these two metrics then probably a lot of pain is in order (always in my humble opinion and I could very easily be wrong here). Their structural problems are too grave and a lot of time and patience is needed to fix them. The aforementioned countries fundamentals, as well as the reasons that they had to seek IMF assistance are different. I let you judge whether IMF programs are the way for these countries to adjust and put their economies on track…

P.S. Now that I look at the title is strikes me as a bit arrogant. Well, I don't claim to be able to do that, after all it's always easier to judge things ex-post. Also, I use a rather epidermic measure (as I remarked earlier in the post) of the programs' success. But the truth is that public's patience for this kind of programs tends to be limited so some quick positive results are almost necessary, always in my humble opinion.

P.S.2. The countries that are/were "succesful" in implementing their respective programs rely on external demand to try and lessen the impact of the slump in private final consumption. In the case of a renewed global recession and in case international trade plummets like it did in 2009, then these countries could be in for a beating...

Monday, 17 October 2011

A further distinguishing factor between the Euro Area's periphery and core

Another quick post today. It is about a topic that I have touched upon in the past but back then my focus was on distingusihing between Greece and the Euro Area (EA). Now I want to widen the focus and move on a periphery - Euro Area comparison.

By now you must be wondering what the hell I'm talking about. I want to cast a quick glance on the structure and ulteriorly the structural focus of the public sector in Euro Area countries. As you will see (most) peripheral countries seem to have a slightly different focus when allocating their public sector budgets htan do core EA countries. 

Here is two charts about genral government total expenditure in selected core and peripheral EA countrties.

source: AMECO

source: AMECO

As you can see from the charts, general government total expenditure for the selected core and peripheral EA countries are more or less the same. I want to draw the line to Spain who is way lower than the EA17 average.

You are probably thinking now, what were you talking about in your introduction. Well, here are the two charts concerning compensation of employees of the general government.

source: AMECO

source: AMECO

And here's the weird thing. While total expenditures were more or less the same or even slightly higher for the core, compensation of employees in most of the peripheral countries was higher as a % of GDP than the EA17 average while that for core countries was lower than the EA17 average.

What that means in my humble opinion is that, in core EA countries, more funds are available to be allocated for the actual  provision of public services than in the peripheral countries. Of course I could be terribly wrong here, so if you think so please say so in the comments section. I don't know if public services are of higher quality in core EA countries but certainly more funds are spent for their provision.

I want to be fair here and set Spain appart from the rest of the periphery, the Spaniards seem to run a tight ship.

What about the different structural focus that I was talking about in the post's introduction ? Well you can decide what that is for yourselves, maybe I was confused when writing the intro...

Wednesday, 12 October 2011

What happens to FDI stocks after sovereign debt restructurings ?

Just a really quick post today. I want to take a look at two different cases of debt default/restructuring/whatever. The first is the well-known and widely cited case of Argentina and the second that of Uruguay.

I want to approach the whole issue from a different angle, namely the trajectory of inward FDI (foreign direct investment) in the defaulting country. All the talk about FDI in Greece these days made me curious enough to look it up.

A bit of background first. Argentina defaulted in December 2001, but the process dragged on for several years after that and, unless I’m terribly wrong, the whole issue is not yet fully resolved. That’s why I’m not able to say what the overall haircut applied was. On the other hand Uruguay reprofiled its debt in 2003 without any principal forgiveness involved and the whole exchange was strictly voluntary, while the Argentinean process was much messier (I don't mean to be insulting by using that phrase).

I’m not going to get into more technical details since it would mean straying from the point.

Here’s the chart about inward FDI stocks in the two defaulting/restructuring countries.

source: UNCTAD

The evolution of FDI stocks post-restructuring couldn’t be more different. I’m not going to comment on what is responsible for that, you can reach your own conclusions…

P.S. One more thing. Here is the two countries rank according to the World Bank Ease of Doing Business Index where the lower the ranking the more business friendly the location. If one takes into account that indicator, Argentina is considered to be more business friendly.

source: World Bank