Professor Morici’s Commentary on Greece’s Debt Problems

A great commentary for the simple reason that it is clear and spelled out completely. One of the best perhaps lines is that “Politicians are like children in a candy story," he says. "They don't worry about the cavities they will receive or the money their parents will have to pay filling those cavities. They just want their candy now."

Two More Videos of Vasileios Markezinis

Βασίλειος Μαρκεζίνης: «Μία Νέα Εξωτερική Πολιτική για την Ελλάδα».

Ο κ. Βασίλης Μαρκεζίνης στις “Ανιχνεύσεις"

Vasileios Markezinis: The Greek Crisis

An important Greek academic and thinker talks about the Greek crisis. He has given a lot of lectures and interviews about economic and political issues that are related to Greece.

Β. Μαρκεζίνης: Η Ελλάδα της κρίσης: Το παρόν και το μέλλον.

Martin Jacques: Understanding China

Important Economists Talk About Greece

Typical Scientific Peer Review

A typical outcome of a referee report.

Video On Greece’s Economic Hardships

Disclaimer: A video is posted to start us thinking about issues, not because the views of the speakers are (necessarily) adopted by me.

Trillion Dollar Bet

This is a very educational documentary about the development of finance as a science – especially what has to do with derivatives pricing – and a very famous application of it, the creation of the LTCM fund and what brought it down. Events that were repeated after 10 years in 2008. The documentary is in Youtube in 5 pieces.

Part 1, Part 2, Part 3, Part 4, Part 5.

The transcript of the movie can be found here.

Change Of View: Greek Economists Find Haircut of 50% Optimal

Leading Greek economists who – rightly so – argued in favor of reform measures back in August 2010, now suggest that a haircut of 50% and restructuring on the remaining debt is the optimal way for the Greek government to go (see here). This is a clear sign on how much unhappy the same academics have been about the way the government has implemented these reforms. The reforms have had no result so far, and this is because no reforms have been implemented. They, therefore realize that we are now are in a much worse point, and our solution now is to cut 50% of the debt and to restructure the rest of it!

At the same time, in Greece, the government and the public do not even want to hear about (just) restructuring. Another example of the many denials of the Greek society of the inevitable? We’ll see. At least now, they will not be able to claim that all the Cassandras  who are coming up with doom scenarios are foreign individuals with private interests in the default of Greece. They should – lets hope they will not find other conspiracy theories – be able to accept that the poor Greek – I emphasize this – academics have no other interest than that of the Greek recovering. Do the politicians have the same interests? This is the question.

Views on Greece’s Reforms

Bellow is a piece of the FT article “Greece: Hard to hold the line”

….

Mr Papaconstantinou, the finance minister, argues against underestimating “the willingness of the government to push forward”, pointing out that it still enjoys broad public support. But behind the scenes, Greek business leaders and eurozone policymakers worry that he is not in control of events. “Nobody is managing the government,” says one business executive. “The troika sets constraints and ministers try to get around the constraints. It is 100 per cent a leadership issue.” Another jokes: “The best thing that could happen would be to put the administration of Greece in the hands of Brussels or Berlin.”

There are some bright spots. The Greek tourist industry expects a good season, with the country benefiting from unrest in north Africa and the Middle East. Goods exports, largely of agricultural products, have staged a recovery although they still account for less than 8 per cent of GDP.

Evidence is scant, however, of an economic turnround that would turn international sentiment in Greece’s favour. For every example of progress, there is at least one tale of setbacks.

An early step forward was the opening up of the road freight industry – in the face of protests by militant truckers, who blocked roads and suspended food and fuel deliveries. But the government yielded to the pharmacists’ lobby, which has kept its guaranteed 35 per cent profit margin on prescription drugs. In tourism, cruise tour operators hoped for deregulation measures that would encourage holidays starting and ending in Greek ports, thus boosting local hotel and restaurant revenues. Instead, they have faced increased bureaucracy – including a requirement that they sign annual contracts with the state on the frequency and duration of calls at Greek ports – an obstacle not faced elsewhere in the Mediterranean. “Greece is losing income and the law needs to be amended,” says Michael Nomikos, Greek representative of Royal Caribbean International, the world’s second largest cruise operator.

Athens has failed noticeably to liberalise its energy sector – adding to costs faced by industry and leaving one of Europe’s sunniest countries behind in solar technology. Investors complain that gaps remain in a new framework investment law. “The only way out is to encourage private investment, foreign direct investment and export-oriented growth,” says Nikolaos Karamouzis, deputy chief executive of EFG Eurobank.

. . .

The risk is of a vicious circle. Until economic uncertainty over Greece’s future abates, there is little incentive for the investment needed to boost long-term growth. Dangers are rising rapidly.

The longer Greece is unable to tap global financial markets, the more the country’s banks will have to rein back their domestic lending – adding to a credit crunch that is already crippling the economy. “We are the victims of a state that has lost international credibility,” says Mr Karamouzis. Greek banks are dependent on the ECB for liquidity – currently borrowing about €90bn in short-term loans. But the ECB wants to exert maximum leverage on Athens to speed up reforms and could cut its liquidity lifelines if not satisfied.

Athens had hoped to return to financial markets next year, when according to current plans it will need to raise €25bn-€30bn. With yields on its two-year bonds recently at record highs of 25 per cent, that timetable is almost certainly unsustainable. But a fresh bail-out would be hard to stomach especially for taxpayers in fiscally prudent northern European countries such as Germany and Finland.

Unsurprisingly, financial markets have started to believe a debt restructuring is inevitable. It is a scenario that the IMF and European authorities remain determined to resist. The ECB has warned of possible apocalyptic consequences on the country’s banking system and beyond. Jürgen Stark, an ECB executive board member, has said the 2008 collapse of Lehman Brothers on Wall Street could be put “in the shade” by a Greek default. Last month the finance ministry asked Athens prosecutors to investigate rumours of a restructuring – a move that strengthened the impression of a government under siege.

…

When – or if – Athens says public finances are back under control, will anyone believe it?

The country’s crisis erupted in late 2009 after the newly elected Socialist government of George Papandreou revealed the public sector deficit that year would be three times higher than previously forecast. But Athens was already a serial statistical offender. Based on revised budget deficit data, Greece would not have met the criterion of 3 per cent of gross domestic product set for membership of the eurozone, which it joined in 2001.

Since August last year Andreas Georgiou, head of the Hellenic Statistical Authority, has been in charge of sorting out the mess. For 21 years, he worked at the International Monetary Fund in Washington. His return to Greece meant a hefty salary cut but he “wanted to provide help at a difficult time for Greece”, he says in a rare interview.

One solution – throwing money at the problem – was not an option. With public spending being slashed, Mr Georgiou faced a hiring freeze. His staff, based mostly in an office block in a rundown suburb of Athens with views of concrete roadways rather than the Aegean, have faced pay cuts.

Instead, Mr Georgiou has focused staff on areas such as statistics on government finances. Backed by experts from other European Union countries, another priority has been to change Greek-style informal working practices. Mr Georgiou has strengthened, for instance, the crucial process of validating data – going back to original sources to check their reliability and cross-checking with other information. “All these things are new, they did not exist before,” he says.

However, he says, “the most fundamental change that moved everything forward” was the granting of his unit’s independence – bringing the country into line with standard European practice. Previously, it was a secretariat within the finance ministry.

“Of course, there has been pressure ... but my approach has been to continue to do my work according to the rules. My aim is to keep our work independent and produce credible data according to the appropriate standards.” Greece, he adds, “cannot afford any grey areas”.

His efforts have already brought results. In October last year, Eurostat, the European Union’s statistical office, dropped its warnings about the reliability of Greek data on public sector finances.

“For anyone to say there will never be any revisions would be very suspect,” Mr Georgiou says. “But I expect that any future revisions to our data will be within the normal margins you would see in other European countries.”

Greece’s Deficit At 10.5%, Wider Than Expected

From the WSJ:

Greece's budget deficit in 2010 was 10.5% of gross domestic product, significantly higher than forecast by either the Greek government or European Union authorities, the EU's official statistics agency, Eurostat, said.

The new deficit figure will add further pressure on Greece to cut its deficit this year to meet targets set under a rescue program overseen by the EU and the International Monetary Fund. The European Commission, the EU's executive arm, said in February that it expected Greece's deficit to be 9.6% of GDP in 2010 and 7.6% by the end of this year.

Eurostat also revised Greece's 2008 budget deficit to 9.8% of GDP from 9.4%. Greece's total government debt was 142.8% of GDP at the end of 2010, the highest level in the EU, the agency said.

Read the whole article here.

A Must-See Interview: Ex Minister Of Economy Alekos Papadopoulos On Greece’s Dire Outlook

The video, bellow, also includes an interview of the German Economist Hans-Werner Sinn on the Greece's situation.

Γνώμες: Τι Γίνεται Στην Ελλάδα;

“Inside Job” Documentary

The Stock Rally

Evidence that the stock rally is losing steam. Time for the big institutions to unwind their positions. When small investors pick up, we reach the last phase of an up market. This though could take a lot of time, depending on how many small investors are willing to come in.

New Reserve Currency In The Making (?)

After the World Bank made the case for a new reserve currency, more than a month ago, these voices were repeated from the IMF’s managing director Dominique Strauss-Kahn who on February 10, 2011, also called for a new world currency, because he is worried about volatility in the foreign exchange markets – see here . The same thoughts were again repeated by Mr. Strauss-Kahn on February 26, 2011 (see here). He envisions an asset the could be similar but distinct from the IMF’s SDRs. He said that having other alternatives to the dollar “would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country.” Countries that have called for an alternative to the dollar as a reserve currency include Russia and China, and other European countries have voiced concerns about the role of dollar, like France’s president, Sarkozy.

Enhancing the role of alternative to dollar currency assets is not a new discussion but it goes back to the creation of the SDRs as a substitute of the dollar-gold exchange rate in 1969. The current discussion though has been active the last few years, especially after the global debt crisis and the monetary policies of key player countries which arguably cause debasing of global currencies, bring new inflation fears and volatility in the currency markets. In an attempt to stabilize currency markets the IMF issued new international money worth of $250 billion, in 2009 (see here).

All these bring us to renewed concerns about the difficulty to maintain reserve currency status for the dollar by Prof. Michael Kuczynski from Cambridge University, as it is expressed in his comment in FT today, and also on the G20 meeting in Paris where IMF’s Strauss-Khan wants the Renminbi in SDR.

What Are Special Drawing Rights (SDRs)?

“The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204 billion (equivalent to about $308 billion, converted using the rate of August 31, 2010).”

Here is the official factsheet of SDRs at the IMF’s website.

Reserve Currencies

Even though dethroning the dollar from its current status as the primary reserve currency is not something that can happen in the current setup, there is discussion about what being a reserve currency means and what are the alternatives to a dollar reserve currency.

FT published an article on the subject and can be found here. It considers a few alternatives like (a) the renminbi, (b) the euro, (c) SDRs (Special Drawing Rights), (d) pegging to gold price. A lot of research has been done on these issues and some thoughts are presented in this article about the pros and cons of being a reserve currency or having one of the alternatives as reserve currency. Bellow are some passages taken from the article together with some of my own thoughts on the matters. The parts taken from the article are in quotation marks.

One reserve currency?

“In truth, the benefits to the US, in terms of support for its currency and its financial assets, are uncertain. Also unproved is the wider case that having just one reserve currency is inherently unstable, contributing to the global current account imbalances that are widening again as the world economy recovers from recession.”

Is one reserve currency an unstable structure because it leads to the currency’s devaluation according to the Triffin’s dilemma?

“On the face of it, a modern version of the Triffin critique explains recent persistent American current account deficits; they have been funded largely by foreign governments buying dollar bonds. But the causation is not straightforward. Under a floating exchange rate system, as long as countries accumulate only moderate amounts of currency reserves allowing them to intervene in any future crisis, the demand for dollar-denominated assets should be limited.”

Are SDRs a good alternative to one reserve currency?

“The SDR is closer to an accounting unit than a currency.”

“In order for the SDR to work as a proper global currency, Prof Eichengreen says, some organisation – probably the IMF – would need systematically to control its issuance beyond the current system of ad hoc one-off distributions. Any such proposal to globalise monetary policy would provoke explosions of disbelief in legislatures worldwide. As Prof Eichengreen concludes: “No global government, which means no global central bank, means no global currency. Full stop.”

Linking currencies to the price of gold?

“An even less likely option is linking currencies to the price of gold, recreating one of the models of international gold standard used in the past few centuries. Following the rapid rise of the gold price in recent years, a phenomenon some investors claim is driven by fears about fiat currencies (those not backed by a physical commodity) being debased by inflation, interest in the subject was revived last year by Robert Zoellick. The World Bank president raised the eyebrows of economic policymakers – before rushing to clarify that he was not in favour of a strict gold standard – by arguing that the metal had become an “alternative monetary asset” and that governments should consider using its price as an “international reference point of market expectations” for inflation and currency values.”

“However, economists have long argued that linking currencies and price levels to the value of a fixed or nearly fixed stock of precious metal means forcing real variables such as growth and employment to bear the brunt of economic shocks – a socially and politically unacceptable outcome. Prof Eichengreen, in response to Mr Zoellick’s speech, pointed out that targeting the domestic price of gold would have caused the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England to have tightened monetary policy sharply in recent years. “It is lunacy to suggest that in circumstances of weak growth and deflation risk, key central banks should simultaneously tighten [policy],”

How about the Euro or the Renminbi?

For these two currencies to be used as reserve currencies they need to strengthen. By that is meant, to strengthen their institutions. For the Euro, Europe has to overcome its current debt crisis, and to emerge from it stronger. In this case Euro may gain some power as a reserve currency.

As far as the Renminbi is concerned, this is a more remote possibility. Perhaps in 30 or more years Renminbi could play a role as one of the reserve currencies. Until then, the Chinese institutions should have to strengthen and be accepted from the rest of the world. It is not just the size of the market that matters but also the stability of its institutions and the trust of the rest of world on them. This is by far the most important determinant of a currency in order to gain its reserve status. 

A Changing Attitude

I do not like to bring up politics but this is an exception for a lot of reasons. First, because I am concerned about the path Greece is on and second, because I want to bring to your attention opinions of foreign officials as they are described by Mr. Michalis Ignatiou, an – according to the Greek media – informed and objective Greek journalist in the U.S. capital.

Mr. Michalis Ignatiou,  the permanent correspondent of several Greek media in Washington and a person with a lot of connections in the US capital, writes an article on the recent reactions in Greece after the announcement by Troika of the 50 Billion Euros privatization plan the government agreed with its foreign lenders. It is important when a person like Mr. Ignatiou, who spends all his time in Washington, describes how the Greek ministers and prime minister are perceived by their foreign counterparts, after 10 months of common life with Troika. The article is in Greek and can be found here, however, I attempt to translate a few key observations of Mr. Ignatiou.

Mr. Ignatiou states, that a source of his reassures him, that the decision to announce the privatization plan of 50 billion Euros was taken at the highest level, i.e. between Mr. Strauss Kahn the head of the IMF  and Mr. Papandreou, the Greek prime minister.  This point is coming together with the opinions of foreign officials about the deterioration of the economic conditions in Greece since Greece entered into the IMF program. Mr. Ignatiou again states that according to foreign officials – his sources – prime minister Papandreou is now seen as the reason of this deterioration. He says that the same person that in the beginning of the IMF involvement in Greece, was considered as the person who can push Greece forward, now is seen as the source of the problem. After a year of interacting with him, they realize that his objectives have changed, and he has become more concerned about prolonging his political career in Greece, rather than pushing forward hard reforms. On the other hand, they view the minister of economy, Mr. Papaconstantinou, as the one who strongly believes that without this program Greece will not survive, and as the only one in the Greek government who firmly pushes for the necessary actions.

Mr. Ignatiou, towards the end of his article, in an attempt to decipher the changed attitude of the prime minister, reminds the Greek people and the prime minister, that if Greece does not pay back the debts it has created with the IMF-EE-ECB consortium, its lenders have rights over the public property. A note that a lot seem to forget in Greece and which can bring Greece in a much more difficult position than the one it was before the IMF involvement.

Why Does The Economy Fall To Pieces After A Financial Crisis?

Here is Robert Hall’s paper published in the Journal of Economic Perspectives.