• Yanis you say that Greece will take decades to recover. You mean even after a 60% haircut and reform implementation? Don’t you think that when the landscape clears, banks are recapitalized and tax collection becomes efficient, we will have investment and fast rise in GDP? Why decades and not 5 years?

    • Yes. It is not a matter of just by how much Greece’s debt will shrink. It is primarily a matter of what will happen to Italian debt, Franco-German banks and, above all, aggregate investment in the eurozone.

    • I do not quite agree with the assumption that everything will be fine as soon as the landscape clears (i.e. balanced budget, recapitalized banks, etc.). Neither do I agree that Greece’s future depends on what will happen with Italian debt and/or Franco-German banks. I definitely agree that it is all a question of investment, that is investment in Greece and not necessarliy overall investment in the Eurozone. Greece is far too small a part of the Eurozone in order to be directly influenced by the macro-developments which happen there. Greece in her own small niche can make the things happen almost regardless what happens elsewhere in Europe.

      Greece will always need new money from abroad as long as she has a current account deficit. Should the landscape clear as suggested above, Greece would find it easier to attract that new money (= funding for the banking sector) than today. But such funding is debt and Greece cannot fund domestic growth forever with foreign debt.

      Greece MUST have a current account deficit in order to finance the growth which she needs because there is not enough of an increase in domestic savings to finance that.

      If the Greek banking sector cannot go on forever to take loans from abroad but if Greece MUST have funding from abroad to achieve growth, there is only one way to cure that: money from abroad must come in the form of investment instead of loans.

      Would money from abroad come in the form of investment if the Greek landscape cleared? That depends entirely on the clearing of the Greek landscape. If Greece becomes an attractive location for investment (internationally competitive framework, etc.), then foreign capital would flow immediately to Greece like capital flows anywhere where it finds a safe economic framework and attractive return potential. Remember the hundreds of billion EUR which Greeks hold in foreign bank accounts. Part of that money would be the first to flow back to Greece!

  • Thank you Yannis for an extremely succinct statement of the problem as it stands right now!

    Indeed, I believe Greece will take decades to recover not just because the “if tax collection becomes efficient” assumption of the first comment is just that an unsupported, highly unlikely assumption, but also because whatever is left of the Greek economy is disintegrating during the current recession (actually depression).
    Not to mention the room left for any sort of accident, such as a bank run, or a collapse of the pension funds (by the way, who will recapitalize them?).

    Again, thanks for unwaveringly pointing at the bigger picture!

  • James Galbraith, Age of Uncertainty

    someone reminded me of that video today, I’ve seen it a few years ago.


  • Yani, you say in the video that this is a debt crisis caused by a banking crisis. While that probably holds true for, let’s say Ireland, or Portugal, or Spain, do you think it also holds true for Greece? If I recall correctly, none of Greece’s banks were involved in the financial meltdown of 2008 and none needed bailing out by Greece. In Greece, isn’t it actually a sovereign debt crisis from the get-go? In other words, isn’t Greece actually a special case.

    In Greece, it seems to me, there are structural inadequacies that must be dealt with before your third point (i.e. regional Investment policy) can come to pass. Otherwise it just becomes handouts. Do you not see the role of the troika as, in effect, attempting to push through structural reforms using the crisis as a vehicle?

    Nice blog. You have a new follower….


    • Our particular set of troubles did indeed emanate not from our banks but from our profligate state and an upper income class that managed to gain tax immunity. BUT, the European banks (and some American ones) flooded Greece with cheap money, on which our public and private sectors got hooked. Then, all of a sudden, the tap was turned off. And now we are asphyxiating in a global/European recessionary environment which ensures that Greece cannot escape by its own efforts and means. In short, a banking crisis began an almighty global crisis within which Greece’s public debt brought the Greek social economy down. However, the reason why Greece can now not escape from this trap has to do with the continuing banking crisis…

  • There are 2 different crisis: one is the banking crisis. That can be handled by a few hundred people in a conference room as long as they can agree on something. The other one is the economic crisis of Greece. The latter cannot be solved short-term; that will take a generation at least.

    Suppose all of Greece’s sovereign debt were held by Greeks domestically (theoretically, this would be possible because domestic savings of Greeks are 193 billion EUR and the portion of soverein debt which is financed from abroad is 179 billion EUR). In that scenario, European banks would not be affected by what happens in Greece. And you can bet that there would be a lot less noise between Paris, Brussels and Berlin about “helping Greece”.

    Even if the soverein debt of Greece were an absolute self-contained crisis within Greece and even if Greeks were prepared to invest all of their savings in their country’s sovereign debt, it wouldn’t change a bit the economic crisis. That crisis can be defined as follows: the Greek economy is light years away from being able to support the Greek people. Without imports, the Greek economy would come to an immediate halt. Unfortunately, the Greek economy can’t afford those imports at the phenomenal levels of the past. Thus, Greece will have to transform dramatically: curtail imports and replace them with new domestic production; attract foreign investment and stop capital flight. Details are in the links below.