Greece requires even more debt relief than that suggested by the NIESR

It was only on Monday that I analysed the grim survey that Markit had undertaken on manufacturing in the Greek economy. Its analysis of the situation in July led to the lowest reading it has so far calculated for it (30.2 on a scale where 50 is unchanged) which is quite something when you consider the economic depression which has been raging there. This morning the UK NIESR (National Institute for Economic and Social Research) has released its view on what will happen next in the Greek economy.

The economy is expected to contract sharply again this year and next, with GDP falling 3 per cent in 2015 and 2.3 per cent in 2016. We expect the recession to end in mid-2016.

It does not make for happy reading especially if we put it into the overall context.

 At this point the economy will be more than 30 per cent smaller than at its peak in 2007 and smaller than when it joined the Euro Area in 2001.

Actually the Greek economy fell below the level it had entered the Euro a couple of years ago so it would be more accurate to say even further below the level at which it joined the level. Also the NIESR omits to point out that under its own definition of a depression Greece is not only trapped in one but escaping it seems unlikely this decade and maybe beyond that.

The economic effect of raising VAT

I have been very critical of the new austerity plan partly because the recessionary effect of raising indirect taxes such as VAT is now known because of what has happened. The NIESR has investigated this.

“The changes to the VAT system will hit already weak consumer spending, shrinking the economy even further this year and next. It will also mask some of the underlying deflationary pressure this year and next.”

Putting this into numbers they estimate that consumer spending will see a small nudge lower this year but the main impact will be falls on 1 to 1.5% in both 2016 and 2017 and 1% in 2018. Actually this will make the deflation problem worse and it is the disinflation which will be reduced by price rises which may add as much as 2.5% to consumer inflation in 2016. The ordinary Greek consumer facing higher prices is likely to consume even less and the whole downwards spiral starts one more time.

What about debt relief?

The IMF suggested that a large effort would be required in this area.

If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance.

However the NIESR has gone further suggesting that even such a move would not be enough.

According to our modelling, restoring debt sustainability requires a debt write-off equivalent to at least 55 per cent of GDP, higher than the IMF’s estimate of 30 per cent……Restructuring, or writing off, €95 billion (55 per cent of Greek GDP) provides Greece with, at least, a chance of lowering its debt stock to the target levels of the original bailouts (around 120 per cent of GDP in 2020). More could be done.

Thus we see that just as the Euro area plans a new bailout of 85 billion Euros it faces the prospect of having to write-off an even larger amount! Actually they are more likely to do anything like this by fulfilling one of my themes from the beginning that the maturity dates of the Greek date will head towards infinity. Or to use my financial lexicon they will be “temporary”.

Monetary Union

The NIESR touches on another theme of this blog which is how monetary unions normally behave. If we look at the UK as one I have pointed out in the past that the weaker areas (or our equivalent to Greece) are supported by regional policies where funds are switched to support them and investment there is encouraged. For example the Nissan plant in Sunderland is a successful example of this. Actually even in relatively successful currency unions like the UK the amount of regional policy is invariably not enough to solve the problem but in one where national identities and treasuries are still strong it is even less likely.

The NIESR suggest that the following would be a better solution than those suggested so far.

The fiscal transfer from Euro Area members required to achieve this would represent 1 per cent of Euro Area GDP in one year. As it would be spread over many years and across the membership, we argue the impact on other Euro Area members would be minimal, and that this fiscal transfer is necessary if Euro Area membership is to be maintained.

Except we are back in the usual mess of trust and honesty and doubt over how much reform Greece has actually undertaken. Also such a move would have a real cost and have to be accounted for rather than being kicked to off-balance sheet organisations like the ESM and EFSM. I checked the situation for the UK’s involvement in the EFSM and we do not account for any funds guaranteed unless it is lost, so one day we may get a “Surprise,Surprise” type announcement.

The Banks

The opening of the Athens Stock Exchange has led to this for the Greek banks. From Kathimerini.

Greek banks extended a rout that has wiped out more than half their value this week, sending the nation’s stocks lower for a third day….An index of Greek banks has fallen to its lowest level since at least 1995.

I note one comment being Simply Red. The short-selling ban is not going so well is it? But if we look at the impact of this on the Greek economy we see that it continues to be a noose around its neck. From Macropolis.

More than half of small Greek businesses saw turnover dive by at least 50 pct due to capital controls.

Ironically the bank deposit situation has now stabilised and even improved a little according to leaks which suggest a 1 billion Euro net inflow since July 20th re-opening of the banks.


There is one rather odd part of the NIESR report.

While the establishment of a new currency in Greece is clearly fraught with risks, there may come a point where the calculus simply no longer favours remaining within the Euro Area.

Fraught with risks yes and the current situation is not? Also there is the risk of success! But the oddity is that the fact is that due to the continuing economic destruction being inflicted on Greece it is a case of the sooner the better in my opinion rather than waiting for some better day to leave the Euro.

Also whilst the NIESR analysis require more debt relief than published elsewhere the truth is that even it does not go far enough. The 120% target for the debt to GDP ratio only existed to avoid embarassing Italy and Portugal and Greece needs to get back to 100% as a maximum.


15 thoughts on “Greece requires even more debt relief than that suggested by the NIESR

  1. Hi Shaun

    My understanding was that the IMF would not take part unless debt relief was given and this has been vetoed by Merkel (or Schauble). I assume that the veto would apply to debt extension as well as outright write off(?). It seems to me that this is just musing about the practically impossible – although as a theoretical exercise it may have validity in demonstrating the extent of necessary debt relief.

    Surely it must now be blindingly obvious that Greece is on a journey to nowhere but down and Grexit must be the only viable solution. It seems that TPTB cannot admit the truth about Greece because they would have to admit the truth about the Euro itself – that it is a disaster.

    When will this tragedy end?

    • Hi Bob J

      There have been references to debt relief and Mario Draghi said this at the last ECB Press Conference.

      “It’s uncontroversial that debt relief is necessary, and I think that nobody has ever disputed that. The issue is: what is the best form of debt relief within our framework, within our legal, institutional framework? ”

      The crucial bit is the last bit which heads towards infinity as a maturity date and maybe another effort to trim the interest-rates charged. The problem is that such mathematics has put us where we are! As you say it has all the aspects of a tragedy and I will add sometimes looks like a farce too

  2. The Troika goes for extra VAT as making tax payment involuntary begs the question, “If good for ordinary citizens in Greece, why not rich citizens everywhere?”

    Bob J is right; the Euro is a disaster; the means by which a Greater Germany was kept under control by the Euro has failed.
    Germany has managed to overcome the intended hurdle and now uses the Euro both for its own enrichment and for empire building.
    The Euro is Germany’s paper jackboot.

    • Hi therrawbuzzin

      I have seen the mainstream media regularly portray ECB monetary easing decisions as a victory over Germany. Much more rarely do they point out that in the world of exchange-rates Germany has had a very large victory as the current 1.09 versus the US Dollar would be replaced by 1.50+ and if the Swiss Franc is any guide maybe a run towards 2 if there still was a German Dm. How many BMWs, Audis and Porsches would it be able to export then?

      • BMW, Audi and t a much lesser extent Porsche have manufacturing plants outside the EZ so Euro value would have ltd effect.

    • Hi Forbin

      Well the 5 Presidents I mentioned about a month ago would agree with you and someone famous from the “Up Yours Delors” headline wrote something for the Guardian yesterday.

      “We need a balanced combination of more investments, smart reforms and a quantum leap in integration, based in particular on much stronger Franco-German cooperation…… to integrate the euro area further and to complete European monetary union.”

      So Jacques wants more, who would have thought that?

      Also for some reason he things we should not do this.

      “The second danger is to indulge in a lengthy blame game. ”

      He is rightly worried about being a target for some of the blame.

  3. Shaun,
    The level of Swiss Franc ( plus Scandinavian currencies) indicates how Germany needs a low Euro to maintain high trade surpluses and hence the Greek saga continues!
    With Ireland improving does Italy now take its place in the PIGS category?

    • Hi ChrisL

      Both Ireland and Spain are seeing better phases for their respective economies. So I would suggest we are currently left with a PIG where the middle I is Italy. Others may yet join or re-join the list but 2015 overall is seeing growth which poses yet another question for those struggling right now.

  4. “While the establishment of a new currency in Greece is clearly fraught with risks, there may come a point where the calculus simply no longer favours remaining within the Euro Area.”

    I thought it was now illegal to even contemplate the idea of leaving the Euro as the threat of prosecution/persecution against Yannis Varoufakis has shown.

  5. Shaun, I agree with you that the new drachma is the only way forward. This can’t happen because such an event is concomitant with default. Its your 85bn x2 lost and carved out to member countries and the electorates will not countenance it.

    I watched some TV tonite about interest rate rises, please do a piece and explainthat although Carney’s club sit on the fence over rate rises the banking community have colluded together to agree mortgage rises are necessary. Would that mean more profit margin for them?

  6. The answer is for everyone to accept that (at least part of) Greek debt was indeed “odious” as that Greek inquiry found.
    It could then be put to German taxpayers, that previous Greek governments misused the funds lent to them by German banks.
    The troika HAD to bail out these German Institutions via Greece as they are SIFIs.
    1) The German money was indirectly for German banks, which is both true and should mollify German taxpayers somewhat.
    2) No debt forgiveness is necessary, as odious debt does not, in law, need to be repaid. (Happy Herr Schaeuble?)

    • Greece can default. This means Greece say “we are broke, we cannot and will not pay”. Unfortunately the first Greek bailout means that French and German banks have offloaded the liability to European taxpayers. The banksters responsible for this scam should be held accountable in a court.
      Default now means that Greece has little alternative to devaluation, which means adopting a national currency.

      Greece adopting a national currency probably means short term hefty drop in currency value followed by Iceland style recovery.
      It also means the German central bank needs to account for a big TARGET2 loss, and face voter discontent. Herr Schauble is prepared to consider Grexit, but Merkel is not.

      • The acceptance of, at least some of the debt, as odious avoids default, avoids Grexit, avoids capital transfer, avoids all pretence that the EU is sticking to rules, avoids every stumbling block, political or economic.
        Its only “problem” is that it fails to turn Greece into a neo-liberal electoral dictatorship, leaving a leftist govt I/c.

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