Tuesday, June 30, 2015

Greece Defaults on IMF Loan Payment



Greece, the cradle of Western Civilization, is a sunny, happy place, but they have problems. They've been profligate and have enjoyed their Mediterranean lifestyle too much. Today they defaulted on a $1.7 billion loan re-payment to the International Monetary Fund. The IMF provided emergency funding in 2010; and the understanding is that when the IMF provides you emergency funding you will repay them first. To stiff the IMF is bad for your national fiscal outlook. It has seriously put Greece’s credit at risk, forced Greece to impose a six-day bank holiday in order to stave off a bank-run, and some people say it may presage a Greek exit from the common European currency, the Euro, and from the EU itself.

This would be a disaster for Greece and the European Union both. 

Eleven million people live in Greece. Their economy measured a GDP of $242.2 billion in 2013, and the CIA factbook reports they have a national debt of ~$568 billion. Government debt to GDP is alternatively reported at 177% (don't ask me how these get reconciled).

Greece's national debt, though large compared to its economy, is not a big deal for the EU as a whole to digest with its $17 trillion economy—if only they wanted to.  As a result, it sure seems like there is more family drama involved here than necessary….


Nearly a decade ago, … [the] probability of a Grexit, or any Otherexit, I confidently asserted, was vanishingly small…. So where did this prediction go wrong? My analysis was based on a comparison of economic costs and benefits of a country exiting the euro. The costs, I concluded, would be severe and heavily front-loaded. Raising the possibility, however remote, of exit from the euro would ignite a bank run in said country. The authorities would be forced to shutter the financial system. Economic activity would grind to a halt. Losing access to not just their savings but also imported petrol, medicines and foodstuffs, angry citizens would take to the streets. Not only would any subsequent benefits, by comparison, be delayed, but they would be disappointingly small. With the government printing money to finance its spending, inflation would accelerate, and any improvement in export competitiveness due to depreciation of the newly reintroduced national currency would prove ephemeral.

In Greece’s case, moreover, there is the problem that the country’s leading export, refined petroleum, is priced in dollars and relies on imported oil, which is also priced in dollars. So much for the advantages of a depreciated currency. Agricultural exports for their part will take several harvests to ramp up. And attracting more tourists won’t be easy against a drumbeat of political unrest.

In other words, Eichengreen thinks the current Greek government is foolish indeed to be flirting with default and an early exit from the EU. But the miscalculations of the European Commission, the ECB, and the IMF, he says, are worse:

The three institutions opposed debt restructuring in 2010 when the crisis still could have been resolved at low cost. They continued to resist it in 2015, when a debt write-down was the obvious concession to Mr Tsipras & Company. The cost would have been small. Pretending instead that Greece’s debts could be repaid hardly enhanced their credibility. Instead, the creditors first calculated the size of the primary budget surpluses that Greece would have to run in order to hypothetically repay its debt. They then required the government to raise taxes and cut spending sufficiently to produce those surpluses.

They ignored the fact that, in so doing, they consigned the country to an even deeper depression. By privileging their own balance sheets, they got the Greek government and the outcome they deserved.

Anil Kashyap at the University of Chicago School of Business has published a useful guide to the crisis, A Primer on the Greek Crisis. He agrees that one of the problems is that, in connection with bailouts in 2010 and 2012, the European Commission, the ECB, and the IMF forced Greece to adopt stringent austerity measures: reducing government spending, laying-off workers, reducing pensions, and increasing taxation. These austerity measures resulted in 25% unemployment (56% among youth), and a severely depressed economy.

Here is an interesting chart from Matt Yglesias (at Vox) to explain how Greeks and Northern Europeans see the current crisis differently:

"The magenta line is more or less how things look to Greek people. Since 2008 or so, under the watchful eye of European Union elites (the central bank, the European Commission, the International Monetary Fund, the government of Germany, etc.), the Greek economy has completely collapsed. And the Greek population has been thrown into a state of dire immiseration.

"The yellow line reflects more how things look to European officialdom. Greece is about on track for where you would expect it to be if you extrapolated forward from the pre-euro era. The prosperity of seven years ago was a bubble, driven by imprudent lending and dodgy government finances. Meanwhile, though Greece is a lot poorer than it was it's not actually a poor country in the global sense. As a supplicant looking for charity, Greece is a lot less compelling than India or Guatemala or any number of sub-Saharan African countries."

Greeks may be care-free profligates to the hard-working and thrifty Germans, and less deserving of charity than sub-Saharan Africans, but then sub-Saharan African countries don’t threaten a break-up of the Euro and the European Union. An EU break-up would have far reaching consequences.

The Greek debt and economic crisis is a problem that the EU must solve. It’s complicated because if debt is forgiven for the Greeks, and the European Commission, ECB, and IMF, endeavor to stimulate the Greek economy--as opposed to asking for more austerity--Italy, Greece, Portugal, Ireland, and others with future financial problems will expect similar treatment. That's not necessarily bad, however.  Isn't that what a united Europe is all about?  It’s also complicated by the fact that Northern Europeans don’t trust the Greeks to follow through on their commitments. But then Greeks have a sunny disposition and a very beautiful country to visit. 

It all seems like a lot of drama. Greece may be a profligate family member, but they’re part of the family. Europeans, if they are going to be a united Europe must find a way to sort it out.  I trust they will.  


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