THOSE INEVITABLE EUROZONE CURRENT ACCOUNT IMBALANCES, REVISITED

Health Warning: See Manolis’ comment below and my response regarding the figures. By the looks of it, Eurostat didn't mess any figures up.

One of the core narratives employed in an attempt to explain the Eurozone crisis has always been a variant of the 'global imbalances' theme - the Euro peg puts member states on a treadmill, on which the weighted-average speed of the group sets the pace. If you can't keep up, you rack up current account deficits until you are unable to finance these and fall off. If you can keep up easily, you rack up current account surpluses at the expense of everyone else.

Since most of the trade carried out by Eurozone members is intra-Eurozone trade, the argument goes, it is impossible for everyone to achieve surpluses. The Eurozone treadmill is a zero-sum game, and unless you can lead the race, your best option is to exit.

Well the latest data can be found here, and they show that, at a price, current account deficits can come down within the Euro straitjacket. 

The detailed sources of Greece's adjustment can be seen here. It's mostly down to an improved goods balance, while a reduced net income balance is a distant second. 

'That's a recession for you' I hear some readers snort. Since Greece is in a deep downturn, imports must be falling and therefore the goods balance is improving. Except that's not the case. Looking at the goods balance in detail (data here), reveals the following:

And since better economists than me occasionally read this blog, a puzzle for you. Can you explain what happened to Greece's income debits in 2012 (data here)?

To my regret I was originally unable to, but my reader Manolis spotted the difference - Greek government interest payments. These fell by 2.2 percentage points as a share of GDP between 2011 and 2012 (see p 51 here), so they can probably account for most of the 2.7 percentage points loss of income debits during this period (data here).

My original guess, which I will keep up for historical reasons, was that the change had something to do with tax reform, since income debits spiked in mid 2002, following what was then called the 'mother of all tax reforms'. I theorised that the 2002-3 reforms had forced companies to change the way they used offshore companies to avoid tax, sending an increasing amount of money 'abroad.' I also thought that regulatory uncertainty around the tax reforms of 2012 might have momentarily stopped this flow of income. In fact, following Manolis' contribution, I would still offer my conspiracy theory to anyone trying to understand the remaining 0.5% drop.

For details of the 2002 reforms, and the pre-reform environment, see p. 26 onwards here and the image below:

U CAN HAZ GOVERNMENT ASSETS!

UPDATE: For the latest developments in this story, see here.

Since the idea of the great EUR50bn Greek asset sale first became a matter of national debate in a staged intramarital spat earlier this year, there's been a good deal of speculation on whether it can be done, how it might be done and what might go under the hammer. Depending on one's predisposition for foaming at the mouth, the purported stakes tend to range from the National Electricity Co., to Greek islands or indeed the Parthenon.

The idea itself is not new. In fact, in a curious twist of fate, the senior opposition party (of whom I am a repentant voter) had proposed the Great Asset Sale as early as  mid-2010. They even mooted the original 50bn figure. To hear some in the Left speak of 'selling off the People's property' you might think that a majority of Greek are against privatisations. In fact, the most recent poll on this subject (commissioned by a centre-right leaning daily) found that 41% believe they are 'definitely' necessary, while another 33% believe that they are 'probably' necessary. 58% generally believe they are a good thing. The most popular target for privatisation is the Hellenic Railway Organisation group (a listed company), which as one of our few libertarian MPs (and a minister of finance for a mere 2 years) put it back in 1992, once made more losses than the cost of booking every last rail passenger in the country a taxi.

I've promised to look into this matter in the understanding that our Government is hoping to use privatisations to build a war chest of cash that will help Greece default a little earlier. Alternatively a proper price list of public property could facilitate the equity to debt swaps I've called for here. Either way selling state assets could break an important deadlock because, although we can't default without a primary surplus, the longer you draw out a default that everyone knows will happen, the worse off everyone is. And of course everyone's patience is beginning to wear thin.

This will take some time for me to research properly so please come back to this page later if you have time. Here's what I've got to date.

One place to start digging for past privatisation data is the World Bank's privatisation database, which covers the periods from 1988 to 2008. It is focused on developing countries, but let's face it. That's what we are, too. Alternatively, the European Privatisation Barometer is another option. Registration is required to view the data, but it is free.

Examples of such mass privatisation are scarce; indeed most examples come from post-communist states where mass privatisation programmes were carried out almost overnight. (A very interesting review of this experience showing a link to higher mortality rates can be found here. It shows that social capital is a crucial mediating factor mediating the effects of privatisation on mortality, and I think this will be a telling factor in our case as well.)

Of course moving from communism to (hopefully) capitalism is not the same as the Greek experience will be as we have an experience of things like private ownership, corporate governance, protection of minority investors and the trappings of half-way workable markets. But it can still go very very wrong.

Another good place to start is this review which shows that privatisation tends to improve efficiency in publicly owned enterprises and that this more than makes up for loss of jobs where these do occur. I note that the productivity gains aren't necessarily passed on to consumers (the evidence is not there for me to be able to say this). And by the way privatisations mostly tend to cost middle-managers, rather than blue-collar workers, their jobs (evidence reviewed here).

More details soon.

I CAN HAZ CHINESE VOTE OF CONFIDENCE?

Those Greeks currently cheering about the prospect of China buying Greek bonds, and who cite this as evidence that we are not going to default after all, should remember that China now has its own credit rating agency, Dagong Global Credit Rating.

Dagong issued its opening salvo of credit ratings to great consternation a few weeks ago, and these are summarised here. Scroll to page 11 and you will find that Dagong actually thinks Greece's debt is rated too leniently by the Western credit rating agencies which our FinMin so reviles. The Chinese actually assign us the same credit rating as Nigeria... in which they also have substantial investments.

If one considers inflation as a means of default, I would argue that the ratings are not too bad actually - the Big Three are a little bit too sensitive about downgrading major economies, and took months to catch up with the market in the case of Greece. Moody's in particular are so far behind they are laughable.

Indeed, Dagong does consider default by inflation to be default:

"Regarding the partial default, it is worthwhile to take note of the hidden default via malicious devaluation of domestic currency. In extreme cases, a government might choose to let domestic currency depreciate for part relief of its debt burdens. When it happens, if the contract does not have any arrangement to offset currency value fluctuations, such as adopting floating interest rates or indexed interest rates, and the government does not announce any measures to preserve the value of the bond, even if the government repays the debt in full and on time, we still consider the bond to be in default."

 

Dagong's full rating methodology is elaborated here.

At any rate, the string of deals the Chinese signed with Yorgo is cleverly put together and even more impressively Premier Wen Jiabao's speech to our Parliament was 100% spot on. He was probably briefed to tell our parliamentarians something about ancient Greece, produce a quote, say that China will continue to participate in our bond offerings (i.e. bid for some of our bonds if and when we next go to the markets), and then leave the Greeks to pat each other on the back and go talk business with whoever's in charge of privatisations.  I bet even the officials who prepared this speech cannot believe how well they had our press figured out.

Speaking of the Chinese, Greece-watchers may not be aware of the horse-trading we have done with China over the years. For instance, did you know that Greece does not acknowledge Taiwan as an independent state, but only as a province of China?  No? Neither do 99.9% of Greeks. Sure, there may be historical and legal reasons for taking this approach (more here and here), but I note that our position is much stronger than that of other nations who merely 'take note of' or 'acknowledge' the Chinese position on this, or who 'do not support' rather than 'oppose' Taiwan's arguments on independence.

Apparently all of the above comes as no surprise to people familiar with this long-running dispute but I'm new to this and I'm still holding my jaw up. Our statesmen may want to remember this the next time we bleat to the global community about how credit rating agencies and the FT are playing with our national sovereignty for money, or when we complain about people not siding with us in the Macedonian naming dispute due to geopolitical or economic concerns: we're happy to do the same to others.This is just the way the game is played - we should learn to live with it.

UPDATE: Turns out the Chinese have given us one further vote of confidence. 3.7% fewer of them visited Greece in 2009.

UPDATE 2: I spoke too soon - 83% more Chinese nationals visited Greece in 2010. 

YOU CAN HAZ GREEK ISLAND!

I've been saying for a while that there is no taboo surrounding island sales - past Greek governments have contemplated this even when the country was not looking the Grim Reaper in the eye.

Now the Guardian reports that the Greek Government is seriously considering the sale of state property on islands (including some of the lesser islands themselves). Even parts of Mykonos are not exempt.

I for one am 100% in support. Remember, selling an island does not make it any less a part of Greece - Greek law still applies, and the Greek state holds as much power over a private island as it does over central Athens.
Except now, somebody else beside the Greek government can pay for much-needed infrastructure: from sanitation, electricity and broadband to schools and hospitals if enough people turn up.

As a matter of priority, I would start selling off crappy little bits of rock near the Turkish coast. A wall of foreigners would be a better guarantee against invasion than a thicket of missile arrays - and it make, rather than cost, money.

HE'S GONNA BRING IN INVESTMENT FROM *WHERE*?

I have nothing to add to this story. It appears that our PM, G-PAP, has given up all hope of getting foreign direct investment (FDI) from anyone who is not a 100% f*cknut, and is now going to turn to Gaddafi's Libya.

There's a reason of course why we can't get FDI from less ridiculous sources, as I've explained here: our governance structures are crap and we rely too much on EU structural funds.

To be clear, this is no bailout, as the Libyans will not be buying our bonds; simply an investment deal. Some of the details the FT is quoting sound like reasonable things for us to do, like investment in renewables. But, make no mistake, there will be strings attached.

For instance, one cannot help but draw parallels with Papandreou Sr's (G-PAP's dad's) plans to turn Greece into "Switzerland for the Arabs".  It is apparently Gaddafi's friendship with A-PAP that Yorgo will be falling back on to seal the deal. As if.

So try this out. Only very recently, Gaddafi called for holy war against Switzerland. They made the substantial mistake of deporting his son after he beat the crap out of his servants in one of their hotels, which apparently is illegal in Switzerland (go figure).

The UN duly criticised this act of lunacy. Would G-PAP be able to do the same next time Gaddafi gets a bee in his botox? Aaah, I see. So G-PAP, will you join me in singing the Internationale? Surely you know how it goes?

Il n'est pas de sauveurs suprêmes
Ni Dieu, ni César, ni tribun



[...]


Les rois nous saoûlaient de fumées
Paix entre nous, guerre aux tyrans
Appliquons la grève aux armées
Crosse en l'air, et rompons les rangs
S'ils s'obstinent, ces cannibales
À faire de nous des héros
Ils sauront bientôt que nos balles
Sont pour nos propres généraux




...and Colonels, presumably.

I CAN HAZ SELF-AGGRANDIZING BULLSHIT?

Two of my media heroes, the Greek news blog Troktiko and the american financial blog Zero Hedge, appear to have joined forces in propagating bullshit this week. I seriously did not see that coming.

In brief, Troktiko published a rather hastily written "letter" from an anonymous reader claiming to be a senior Greek government official. ZH reported this as a possible political risk in Greece, alleging that if this stuff were to be proven right it would destabilise the Greek government.

The author of the Troktiko letter alleged that the accelerated involvement of the IMF in our bailout talks was due to our Prime Minister's ultimate allegiance to the US of A.

The author goes on to explain that the Russians were about to offer us a EUR50bn overdraft at 4% fixed, no strings attached, and the Chinese were about to offer to buy our ailing public transport operator, OSE, a joint offer we could not refuse.

The author added that he was about to resign next week over this, to a great gnashing of teeth.

Now, it may well be that such a person exists and is about to resign, and does believe all this crap. But it may also be that somebody is about to be kicked out of the government for failing to get with the programme and accept austerity (a good reason if you ask me) and wants to lay the groundwork for his/her subsequent good name as an uncompromising defender of the little man or some such bullshit.

Or someone unrelated to politics is taking the mick.

I say this because Russia,whose economy shrank by 7.9% in 2009, is not itself rolling in money - it has returned to the bond markets for the first time in years and now appears to be borrowing at 3.8% for 5-yr bonds and 5% for 10-yr bonds. And that's for amounts much smaller than 50bn. Remember, deficit financing is selling, not buying: you don't get a better price if you do it in superbulk.

Of course, Russia also has a Sovereign Wealth Fund of some note. Based on their latest figures, the Russians can tap into EUR67bn of reserves from that - and the Fund is allowed to purchase Government debt, including Euro-denominated debt.

However, as astute readers will note, the list of acceptable countries does not include Greece. It also more generally excludes our bonds because they are junk:

"foreign issuer of debt securities shall have a long-term credit rating AA- or higher according to scale of rating agencies Fitch Ratings and Standard and Poor’s, or Aa3 or higher according to classification of rating agency Moody's Investors Service. In case the issuer has different ratings by mentioned agencies then the lowest of them shall be applied." [Emphasis ours]

Cross-reference with our current ratings from Fitch, S&P and Moody's . No? Didn't think so. Note that the S&P rating is now officially Junk.

That rules out the Russian SWF, although it could have worked if they were in the business of losing Putin's money. I hear it's not a healthy business to be in.

Which means one of two things, if we accept the odd rumours here - either Russia is happy to lend to us at a 1% loss, or they are happy to expose themselves to massive interest rate risk by funding our long-term obligations with their short-term ones, and all of this no strings attached.

Once again, our "Orthodox Axis" zealots are stirring things up and bigging up Putin. I don't like the IMF's involvement either but convincing ourselves that a silver bullet existed all along but was somehow not only hushed up by the Greek government but also ignored by capital markets desperate to rope in a guarantor is a leap too far - into stupidity.

BAILOUT? HOW ABOUT NOT BAILING US IN?

I just came across details of EU expenditure for 2008 (released in November) here. Note the EUR8.5bn of funds the EU pumped into Greece.

My main concern with all this money is this. No government can turn down EUR8.5bn of free cash. But what if the benefits of this money are not what they appear to be, and what if there is a hidden downside?

A recent study of the effects of EU structural funds has found  that their effects on Foreign Direct Investment (FDI) can be effectively less than zero, if the quality of a country's institutions is low. As the authors state:

 The empirical findings are consistent with the findings of previous studies regarding the determinants of FDI and indicate that the impact of EU Structural Funds on FDI inflows critically depends on the institutional quality of the receiving countries. For countries with high quality institutions the EU Structural Funds have a positive impact on FDI, for countries with low quality institutions the impact will be negative.

Worse, a simple search on Google Scholar corroborates the authors' claim  that their findings are in line with the corpus of research on the matter.

Does Greece have low quality institutions? Another recent study finds that we do (the second-worst in fact among old EU members, second only to Italy), and in fact quality has fallen substantially since 2006. So in fact, the EU is crowding out private investment in Greece by continuing to give us money despite our poor .
government record.

But perhaps it is possible that EU funds themselves have an effect on the quality of our institutions, transforming our civil administration to an even more bloated bureaucracy responsible for (mis)allocating this bonanza of free money. I compare this to the effect of aid on governance in the third world - as Dambisa Moyo claims, a government with access to free cash is less accountable to its own citizens, with disastrous political and economic effects. A recent study suggests that the effect of aid pre-1997, when anti-corruption conditionalities were added to aid mechanisms worldwide in a robust way, was to increase corruption or leave it unchanged. EU funding is not thought of as aid, and so conditionality is virtually unknown, so there is reason to believe its effects on Greece have not been benign. Of course, the EU too has started to think twice on this, as in the case of Romania and Bulgaria. The answer has been, as with African aid recipients, conditionality and intense monitoring.

Now the commission notes that these are not the worst offenders. According to Transparency International, Greece is almost level with Romania in perceived levels of corruption. So why not apply the same reasoning to us?

Perhaps it's a matter of the relative flows of EU funds. Our own figures suggest that in 2008 the Government's EU funds made up 16.5% of our regular government income. So in fact, about one sixth of the power of the average citizen to hold our government to account has effectively been usurped by Brussels and, as EU funding is not conditional, it has been handed back to the incumbent government. Worse still, as the chart below clearly shows, the amount of EU funding has risen in precisely the same years (2007 and 2008) that the quality of our institutions has fallen. We're being rewarded for poor governance.

So here's an idea for Brussels. Stop bailing us in. Then you are going to be less likely to have to bail us out.

WE HAZ HERO! (MUPPETRY ALERT)

It's official - Joseph Stiglitz has come to our rescue, in an article that we are sure to see cited and re-cited ad nauseam for the next few days. His argument goes like this:

• Greece is not alone in having broken the Stability and Growth Pact. Everyone has, except this once we're not important or powerful enough to get away with it.
  
  
• The EC can afford to disregard some poor conduct from Greece because Greece is nowhere near as systemically important as other members.
  
  
• The EC's hawkish statements and its failure to acknowledge the progress we are making are compounding Greece's fiscal woes by increasing bond spreads.
  
  
• Greece's deficit is not entirely its fault  It's party Europe's fault for not giving us more money
  
  
• Greece has confronted its heritage of dodgy statistics and owned up to its poor practices
  
  
• Greece is a relatively poor country that will be plunged into a very deep recession if we're not allowed to run whatever deficit we want
  
  
• Credit rating agencies are useless at rating debt and they should not be trusted with this role when the stakes are so high.
  
  
• Yorgo personally is a great guy and the EC should back him up. 

I disagree with a great deal of this, and in this I know I am letting down many friends who have welcomed Stiglitz' messianic intervention with much relief. With respect, here are my arguments:

First, the issue of whether anyone plays by the rules anymore. Obviously they don't. But what exactly is Stiglitz' argument? The SGP was the guarantee that underpinned whatever type of solidarity there was between Eurozone economies. That it isn't worth the paper it was written on only suggests that there can be no solidarity between member states. He is right, however, that since nobody gives a hoot about the SGP, bitch-slapping Greece with it is not entirely fair. Why not just allow states to run whatever deficit or debt levels they want?

Credit where it's due. The SGP was rubbish and I agree that as a country we should have opted to set our own rules any way we want. Except of course we signed a treaty to the effect that we would respect the SGP, so perhaps it sets a very poor precedent for the EC to signal it will tolerate the breaking of treaty obligations.


More to the point, we have in the past used the SGP straitjacket as an added guarantee so we could borrow money cheaply. To this day, the suffocating stranglehold of the Eurozone ministers on our finances is the only thing that stands between us and a junk bond rating. What credible guarantee of self-discipline will we be able to offer if the Europeans cannot make us bleed for maxing out our overdraft? And if our own Ministers can't be bothered to bolster our image by refraining from alarmist bull, why should the ECB or the EC supress their thoughts on the actual facts?


So, far from making Greece less creditworthy, hawkish Europeans actually make us more so in the long run. But Stiglitz himself has managed the opposite. As I've argued before, the final guarantee our creditors have is that there is more political capital to be made in Greece from cutting the debt than from adding to it. Stiglitz' remark, on the other hand, has handed anyone who wants to increase the Greek deficit a get-out-of-jail card with at least the liberal part of the political establishment (which, in Greece, is easily 50% of it). This means that it is now politically that much easier for our government to justify an enormous deficit.


Greece's woes, it would appear, are unlikely to cause an EU-wide meltdown - just as Stiglitz argues. Although Europe's banks have lent us some pretty big wads of money, there is no evidence of infection from Greece to our neighbourhood. The point is irrelevant, however. If Spain, Portugal and Ireland were to be given the same amount of slack that Stiglitz wants us to be give (and why not?) they might take it. And if they do, the share of European GDP at risk from massive government deleveraging would skyrocket. The PIGS together account for 14% of the EU's GDP.


The new government has made some very good proposals for restoring credibility. But already the Stability and Growth Programme update shows that we're quite nonchalant with statistics. Our PPP debt, for instance, is largely unaccounted for. And while the EC has applauded us for coming clean with the dodgy practices of the departing government, they also applauded us for our honesty 6 years ago when said government came clean with the dodgy practices of the previous administration. One in which, if any reminder were needed, our own Prime Minister was a Cabinet member. What would be a rational response? Give advice, issue a stern warning, then wait and see. Which is what they've done. The EC can lie on our behalf but that doesn't mean creditors will buy it.


Which brings us to the worst Stiglitz argument of all - it's the EC's fault for not giving the periphery more money. First, in our case that would clearly be throwing good money after bad. We know this and the EC knows this and Stiglitz knows this because our own data show we are amazing at wasting EC infrastructure funds. That is, when we manage to use the funds at all. Second, it's been proven that unless we can shift our budget to investment rather than government wages (which we're not good at doing, especially with other people's money) government spending actually slows economic growth. Finally, we're already prey to the malaise that afflicts all aid-dependent countries: a version of the Dutch Disease where government itself is the bloated export industry, coupled with a perfect environment for corruption. To add to this now would consign the country to stunted growth and financial instability forever.