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

1 comment:

  1. How can one be so ideologically blinded as to blame the regime in the "old days" for the absence of external-debt financing, when it is precisely that external-debt that bankrupted Greece as a member of the Eurozone (how could it be otherwise since the euro is practically a foreign currency that Greece cannot print) is beyond me.

    And no, the sad state of the Greek private sector cannot be blamed on the supposed "crowding out" due to the (irrelevant) high government deficits. These deficits provided plenty of capital for the Greek private-sector to finance itself and it's investments, just not in the form of debt. It was a blessing in disguise.

    The poor investment decisions of the Greek private sector were seen in action during the stock-market boom-and-bust of the late 90's, and of course during the exponential increase of private-debt in the 00's. Where did the money go? Not in productive investments. But the author prefers this regime to that of the old days (which he ironically labels "good"), even if in the old days Greece never experienced such high current-account deficits and import surges as it did during the euro years.