Tuesday, 27 June 2017

Why is Greek tourism stagnating ?

Greek tourism is, at best, stagnating right now. The sector managed not to attract even a slither of the flows that turned away from Turkey during 2016. But what is the reason for the stagnation this past year and a half?

source: Bank of Greece, own calculations


I had written in the past about the subject and for what is worth I still think that the answer to the question posed above lies there. Perhaps the chart below will convince you as well.

source: Bank of Greece, Eurostat, own calculations


The inverse relationship between prices charged by the tourism sector and travel exports is more or less obvious I think, so here we have the reason that travel exports' growth slowed to a halt. Price hikes.

Another factor that one has to take into account here is tax evasion (something the sector is notorious for) but isn't this, indirectly, again due to tax hikes/price hikes? 

This year we keep hearing that things will pick up and that, earnings-wise, the tourist season will be phenomenal. Given that prices charged by the sector, at least for the time being, show no sign of reversing or pausing I am a bit sceptical. Of course in April travel exports grew by about 11% YoY, so let's hope that I'll be proven wrong and that this will indeed be a hell of a season for Greek tourism. (the planned increase in tax inspections from authorities might just make it appear a bit better even if it actually isn't) The country needs it badly in any case. 

Sunday, 11 June 2017

One feature of the current emigration wave out of Greece left unsaid.

The current emigration wave out of Greece is certainly well documented and remarked-upon. It is often compared and constrasted with past emigration waves, mostly with that of the '60s that saw droves of Greeks flocking to western Europe (mostly Germany), the US etc. There is one feature of the current wave though that sets it appart from past ones. Current Greek emigrants don't seem to be sending money back home. 

Quite a lot of countries, mostly EMs, depend on worker remittances to shore up their current account balances. Greece did, in part, during the '60s and '70s. Although, detailed data regarding remittances flowing back into Greece for those decades do not exist, a simple look at secondary income balance shows that this was quite prevalent during the 1960-1970 period (flows from the EU after the country's accession in 1981 are easily distinguishable, since the secondary income balance deteriorated as the economic situation in Greece was improving and emigrants started coming back and exploded upwards in the 80s).

source: AMECO, own calculations

If we look at worker remittances data for the present period we come across a paradox. As the emigration wave out of Greece gained steam, workers' remmitances declined and as of now, haven't picked up.

source: Eurostat

Now, one can spin a ton of different explainers on this (new emigrants are young and don't have families of their own to support back home / due to EU-induced freedom of movement people take their families with them / since a lot of recent emigrants are highly educated their families are mostly well-off hence not in dire need of support / they barely make ends meet in their new home country so there' nothing left to send back home etc.) but in order to draw data-based conclusions  one needs detailed data which I don't have.

It is worth remarking that this is not the case in other countries of Southern Europe, which witnessed similar emigration waves these past few years. Both in Italy and Portugal, worker remittances picked up along with emigration flows.

source: Eurostat

source: Eurostat


Given the dire economic situation in Greece and the relevant historical patterns of emigration, the lack of remittances sent back home from the fresh wave of Greek emigrants seems peculiar but it might be explained by the characteristics of the households sending emigrants abroad as well as the households that the emigrants set up in their destination countries.



Sunday, 4 June 2017

More proof that Greek deflation was not due to anemic demand

These past few years we were showered with superficial analysis by celebrity economists (academic or not) who claimed that the occurrence of deflation in Greece can be blamed on the policies implemented because of the MoU.

This particular line of thinking is something found in economics textbooks and it could have very well been the case in another country where product and services markets functioned properly. But not in Greece. 

I had written another post about this in 2016 but I choose to revisit this now because of the fact that inflation in Greece turned positive again.

As I had claimed back then, inflation peaked almost 4 years after final consumption did so how can someone, in all seriousness, claim that these two incidents were directly connected? Now as far as the deflationary nature of the policies implemented is concerned I beg to differ and say that, on the contrary, some of them (like indirect taxes hikes for example) were clearly inflationary and contributed to the incidence of stagflation (and also to the higher rate of inflation that Greece experienced post-EMU accession) during the early years of the Greek adjustment program. 

Now, to stop blabbing, the reason that deflation left the building is the same that brought it on back in early 2013, a change in import prices. 

source: ELSTAT

As the chart makes rather obvious, both of the times that the inflation rate changed from positive to negative territory (and vice versa) were preceded by analogous changes in import prices. The biggest component of the import price index by far is crude oil, which accounts for 21,3% of the total, so this is the component that mostly drives headline figures. 

So, instead of generic analysis derived from first-year economic textbooks maybe, for a change, we should pay attention to facts and to the special features that make every economy different.

Friday, 12 May 2017

How to bring on Hyperinflation: the Argentine experience as a cautionary tale for Greece

We have lately seen a lot of comparisons between the current Greek depression and various sudden stop episodes in different countries. All those pieces though have missed the case most apt for such a comparison. The Latin American Debt Crisis of the 80s. Out of all the Latin American countries that went through extremely hard times back then, I'll focus on Argentina due to greater data availability. I won't go into comparing the performance of the two economies in this post but I'll focus instead on the occurrence of hyperinflation towards the end of the decade and the causes for that occurrence.

In both cases there was a cluster of sudden stop episodes encapsulating the whole region (in Argentina's case Latin America, in Greece's case the European periphery), making the countries' access to capital markets rather pricey if not outright impossible. 

In Argentina's case, which had what many Grexit-advocates prescribe as a way for Greece to overcome its plight, i.e. the ability to print money at will, the lack of access to capital markets was plugged the usual way. By putting the printing presses to work.

The next chart makes rather obvious that when government revenues dropped, inflation in Argentina spiked something that implies a jump in seignorage. It is worth noting that throughout the 80s inflation dropped below three-digits only once, in 1986 (during the Austral plan), when it stood at ~90%.


source: IMF, inflacionverdadera.com

If we zoom in on the period right before and after the hyperinflation episode, it becomes crystal clear that hyperinflation was preceded by a momentous surge in monetary financing for the government by Banco Central de la Republica Argentina, the country's central bank.


source: BCRA, inflacionverdadera.com

Given that many Grexit proponents envisage that the country can e.g. raise its pension spending by printing money, the Argentine experience becomes rather relevant for Greece as well. Moreover, in case of a messy default and unilateral Grexit wouldn't tax revenues drop significantly? How would government finance the resultant deficit? Money-printing again seems to be the path of least resistance. If we add international trade disruptions and the subsequent shortages in the above mix, a "(much) more money chasing much fewer goods environment" emerges.

Many outsiders dismiss the possibility of hyperinflation in case of a messy Grexit as too far-fetched and unlikely. I, on the other hand, think that takes like this are overly optimistic and tend to ignore how a rather large part of the Greek political systems thinks and acts. I would advise them to take a look at the cluster of hyperinflationary episodes in Latin America during the 80s which came on as a result of the cluster of sudden stop incidents in the region. Suddenly, the possibility of hyperinflation making an appearance  in case of a messy Grexit doesn't seem that low, does it?

Thursday, 9 February 2017

Is Greece's underperformance compared to sudden stop episodes in other EMs really due to the Euro ?

Yesterday a post from Matthew C Klein under the title "Greece has done much worse with the euro than EM basket cases did with their own currencies" was published in FT Alphaville and caused quite a stir. I will try to pen a response piece since I believe that the said post overlooks some pretty essential points that, in a large part, explain the reason why Greece underperformed the EMs mentioned above. (hint: that reason is not each country's currency of choise)

A sudden stop episode is an abrupt halt/slowdown in private capital inflows into an economy that causes an abrupt current account reversal. Hence, I find it peculiar that there was no mention of the magnitute of the current account deficits involved in the episodes used by Mr. Klein in his analysis in order to draw any conclusions.
The magnitude of the pre-crisis imbalances involved defines the adjustment needed to be undertaken so that the economy in question acquires a more sustainable footing and also pinpoints the liquidity that will be taken out of each one of these economies because of the sudden stop.   

In the current post I only look at the respective sudden stop episodes of Argentina, Indonesia and Thailand because the size of the adjustment appears to be larger and as a result more easily comparable to that of Greece. In the charts posted later on in the post I define the pre-crisis year as the one before the current account balance exploded into positive territory. As far as the Asian crisis is concerned, this is not consistent with normal crisis timelines who define the pre-crisis year to be 1996.
First of all, the level of the current account deficit with which Greece came into the crisis makes the ones of the other three countries appear miniscule. 
source: IMF
The difference between the three EMs and Greece is that the sudden stop episode in their cases was really abrupt and within one year their current account balances swung from varying levels of deficit into hefty surpluses. Since Greece's current account deficit was humongous back in the pre-crisis year, if Greece chose to withdraw from the Eurozone, the amount of liquidity withdrawn from the economy would be monumental and so would be the ensuing depression. If Argentina's swing from a ~ 1,3% deficit to an 8% surplus meant a ~11% drop in GDP what would the resultant drop in Greek GDP be if the curent account swung from a 15% deficit to an unknown, but undoubtely large, surplus?  

One further point overlooked in Mr. Klein's post is the countries' fiscal imbalances, which played a really important role in their respective performance.
source: IMF
source: World Bank, own calculations



Here too, Greece's imbalances were huge. It's more than sufficient to say that if one summed up the respective deficits of Argentina, Indonesia and Thailand in the pre-crisis year, the resulting deficit would still be smaller than that of Greece. What's more, Greece's fiscal deficit grew about 50% larger the following year, magnifying further the level of the fiscal adjustment needed as well as the negative drag on the country's GDP.

Moreover, due to the composition of its economy Greece was not as good positioned as the three other EMs to substitute internal growth with external growth. During the 1960 - 2015 period, Greece posted a balanced trade account only once and that was in 2015. Calculating the cumulative trade balances for all four countries for the 1960 - 2015 period makes obvious that, in this respect too, Greece is an outlier. 
source: World Bank, own calculations


If one wants more evidence that an actual currency devaluation didn't induce Greek exports to perform she/he need look no further than the 80s. During that particular decade the Drachma depreciated by about 66%. According to plain vanilla economic arguments, Greek exports should have posted some stellar performance. Reality though was a bit different. Greek exports during the 80s performed worse than they did during the 00s (until 2008 that is, before the Great Trade Collapse) under the "hard" Euro. And this goes some way to show how simplistic arguments that equate currency devaluations with exports' overperformance are.


source: AMECO, own calculations
source: AMECO, own calculations






To wrap this up, I think that all the arguments outlined above prove that Greece was not only an outlier as far as its performance after the sudden stop episode is concerned but also and more importantly, in its fundamentals. Greece's imbalances were significantly larger than those of the other three EMs examined in this post and these imbalances would also take significant more economic pain in order to be ironed out. So even if Greece had reverted back to the Drachma in 2010, the ensuing contraction would still be much larger than that observed in other sudden stop episodes.