Wednesday, 28 April 2010

Lessons from Greece

Michael Burke: Irish Economy has a thread on the impact on Ireland on the decision to downgrade Greece and Portugal.

The credibility of the ratings' agencies ought to have been dealt a fatal blow by the sub-prime debacle. But, as far as sovereign debt is concerned, it seems financial market participants like to have an additional, outsourced voice of neo-liberal orthodoxy as well as their own. The FF-led government has done everythng demanded of them by the ratings' agencies, and more, so it might be impolitic to downgrade Irish government debt too.

However, the bond markets reflect the nature of the crisis. The yield levels at 10yr maturities for govt. debt were as follows as of close of business Tuesday (%, FT bond table);
Austria 3.38
Belgium 3.52
Finland 3.21
France 3.26
Germany 2.93
Greece 9.54
Ireland 5.25
Italy 3.95
Netherlands 3.20
Portugal 5.61
Spain 4.03

Greek yields rose 81bps yesterday, Portugal up 59bps and Ireland up 46bps. Portugal is widely thought to be next in line from the ‘contagion’ effects of the Greek crisis. If so, in terms of both level and change in yields, Ireland cannot be far behind.

Of course, Ireland’s unique experiment in fiscal contraction was designed to “reassure the financial markets”. It has clearly done nothing of the kind. No-one, not even Greece, has a higher projected general government budget deficit this year. And many countries with higher levels of debt now have considerably lower yields, including Belgium, Italy and France.

Yield levels which exceed nominal growth rates, or more accurately the growth rate in taxation revenues which derive from them, cannot be sustained indefinitely. Perhaps, post the German elecions all will return to normaility and yields subside. Perhaps not.

But even in the optimistic scenario, it is clear that Irish government policy has failed in its own terms. Growth has not resumed, taxes continue to decline and the deficit continus to widen. Unsurprisingly, none of this has reasured financial markets and relative borrowing costs have continued to climb.

Perhaps it is worth trying to learn something from the Greek experience, as well as from others. The Greek recesion had been milder than the EU average, and recovering, before austerity measures were adopted, as both the PMI and GDP charts here show.

Now the Bank of Greece warns that the austerity measures themselves have lowered taxation revenues and argues therefore (!) for greater austerity measures. This sounds depressingly familiar.

By contrast, other EU countries adopted fiscal stimulus measures. Their debt has stabilised along with economic activity and they have been rewarded with much lower bond yields than Ireland.


Michael Taft said...

Michael - given that tax revenues are expected to increase by less than 1 percent over the next two years, it would seem we're going to be lagging behind yield levels for some time. Still, I'm sure there will be some who will claim that this is 'affordable and manageable', as 'affordable and manageable' as the Anglo-Irish bailout.

Michael Burke said...

Indeed. The cumulative, multi-year effect of government policy will be to increase welfare payments and depress taxes way beyond any supposed savings from their actiona, and by a multiple.

Anonymous said...

This guy says you are not just a bit wrong but totally wrong.

No offence, but I find his analysis a lot more convincing than yours.

Michael Burke said...

None taken, Cde Anonymous.

But it's hard to know where to begin to engage with a fact-free commentary.

To take just one example, my contention that Greece was initally facing a milder recession than the EU average is derided. Yet there is a link to 4 charts from Reuters in the post which includes the Greek and EU GDP and PMI data, showing precisely that.

Similarly, the point is questioned that virtaully all the EU member states who now enjoy much lower deficits and bond yields than Ireland adopted fiscal stimulus. I would have thought anyone acquainted with economics would be aware of that, especially the 'true' variety.

Here is one official estimate of the average fiscal measures in the Euro Area and EU as a whole for 2009. EU Commission, European Economic Forecast, Autumn 2009,

In the Euro Area the 'automatic stabilisers' were equivalent to 2.4% of GDP, the increased discretionary spending was 1.1% and other deficit measures amounted to 0.9, for a total 4.4% of GDP. In the EU the total was 4.6% of GDP, with the the difference accounted for by increased discretionary measures (Table I.3.2). As we know, Ireland engaged in a simultaneous fiscal contraction of 6.4% of GDP.

Since it was published in Autumn 2009 there were in fact large increases in the stimulus measures in both France and Germany.

My argument is that the EU fiscal stimulus has worked and Ireland's slash&burn hasn't. It is an argument that is open to challenge, and repeatedly is (see the original thread on IE, where you can both(?) join the critics).

But the facts on which the argument rests are not subject to dispute. It is, I think, more productive that criticism should proceed from facts, not assumptions or prejudices.

Mack said...

Michael, I've read a fair bit of analysis on the Greek crisis - this argument, that the austerity measures are to blame, seems to be unique (which is not to say it is wrong). And it leaves a huge question answered - Why would the Greek Socialist Party engage in austerity measures - if everything else was otherwise fine? If there were better alternatives available why would Socialists follow what I would presume you would regard as a neo-Liberal agenda?

Mchael Burke said...


The long-term cause of the crisis was government-allowed tax evasion, combined with lying about the fiscal position (more than half the overspend was on the military budget). An initially mild Greek recession exposed both the lies and the further weakness of tax revenues. But all this was known to the EU for many years; Greece published an apologia in 2004, but no measures were taken to prevent a repeat.

In the immediate crisis the charts show the Greek economy double-dipping, precisely at the time when austerity measures were introduced. The Bank of Greece ascribes both the renewed downtun in GDP and tax receipts to this factor.

The Greek government is being strong-armed by the German and French governments to engage in austerity, with ECB help, since it triggered the crisis by refusing to accept Greek govt. bonds as collateral (and could end it by reversing that decision).

One irony, among many, is that the European governments forcing Greece to cut pay and welfare entitelments are the very same ones pressing Greece to increase their spending by over €4bn.....on armaments. These just happen to be made in France and Germany and negotiations on the two issues have been directly tied, according to Reuters

Michael Taft said...

Mack - John McHale over at Irish Economy linked to a New York Times article which reported the reason why S&P downgraded Greek and Portugese debt:

'Officials from Standard & Poor’s said the main reason for downgrading the debt of Greece and Portugal was the prospect that forced austerity packages would be an even bigger drag on economic growth.

It is the most vicious of circles: stagnating economies are forced to cut back more, which reduces their ability to generate revenue and thus pay off their debts. As part of the euro zone, these countries do not have the ability to print their own money to stimulate growth and bolster exports, so increasing debt and an increasing prospect of default result.'

Whatever one may think of this analysis (or the source) it at least shows that the argument that the austerity measures are contributing to Greece's debt crisis is not unique.

As to pump-priming the arms industry in times of melting butter - imagine that.

Mack said...

@Michaels -

There's plenty of support for the dangers of a Greek deflationary death spiral, it's the argument that the austerity measures are the source of the problem. I was questioning a single sentence, this one -

The Greek recesion had been milder than the EU average, and recovering, before austerity measures were adopted, as both the PMI and GDP charts here show.

Which if you take Michael's subsequent explanation, the Greek's were living in a fools paradise dependent on extraordinary largese from the ECB and the EU in terms of tolerating Greek corruption.

To paraphrase Maggie T, the problem for the Greek socialists was they ran out of other people's money ;-)

Rory O'Farrell said...

I find the reference to 'facts' interesting.

Unfortunately most people (who should know better) are surprised to find out that Greece's recession in terms of GDP has been relatively mild, and Irish bond yields did NOT significantly move after the last budget.

Irish bond yields decreased last summer, were largely unaffected by the budget, and began to decrease around February. Of course having a Senior Counsel for Minister for Finance means he is very good at how information is portrayed in Ireland.

Outside of Ireland people know better. All that happened is the Greece started performing worse.

Damian Tobin said...

Standard and Poor’s were quite happy to describe the increasing reliance of Irish banks on non-deposit based funding as simply reflecting the broadening funding base of Irish banks (Financial Stability Report 2007). One wonders what they will make of this broad funding base when it shows up in the government deficit.

Of course any explanation of Greece’s deficit cannot be viewed in isolation from capital flows within the Euro area. Germany has been a net exporter of capital (FDI and bank loans) since the early 2000s and Greece (along with others including Ireland and Portugal) net importers. The ECB clearly showed that banks were “too big to fail” with its near immediate injections of liquidity to the banking system in 2007, but it seems that Greece isn’t quite that big!

Michael Burke said...


They ran out of taxpyers- they cut the wages of the one section of Greek society that does pay taxes, the average- and low-paid. Unsurprisingly, taxes plummeted (long with spending, hence the double-dip).

The rich in Greece pay next to no taxes, a large illicit economy- and Greek shipping is entirely exempt from taxes altogether.

seafoid said...

The Irish Times today toed the neoliberal line by quoting a German official who was very complimentary towards Ireland's austerity measures. There was no mention of yesterday's widening in Irish spreads or the fact that the decision to prioritise Anglo Irish over the employment of over 400,000 people is purely ideological. There was no debate in the Irish Times over whether or not austerity was the way to go. The markets obviously take a different view of the situation tothe Irish Times, as evidenced by the spreads. Irish borrowing will be more expensive AND government tax take will be lower AND the social welfare spending will be higher all because of this adherence to ideology.

Joseph said...

@Michael Burke - "One irony, among many, is that the European governments forcing Greece to cut pay and welfare entitelments are the very same ones pressing Greece to increase their spending by over €4bn.....on armaments. These just happen to be made in France and Germany and negotiations on the two issues have been directly tied"

I was in a reasonably good mood this morning until I read that. I just despair. I just utterly despair. How can anyone even consider spending money on bombs and bullets while cutting spending on mothers and children? We live in an insane world. I wish corporate media would headline this kind of thing so that it is more widely appreciated.

Mack said...

@Michael Burke

"The government there has not been as much improved as one might hope, and the ruling elite that took over did maintain certain advantages as before, such as not paying taxes. Tax revenues thus not being sufficient to maintain infrastructure and other social amenities at the level expected by the Greeks as European citizens, the difference needed to finance the lifestyle to which voters had become accustomed was borrowed abroad. Thing is, every German and Frenchman and other European has been perfectly aware of this forever. The French and Germans are famous for levying hefty taxes on any large moving financial object. The ruling elites are heavily taxed to the point where it is practically illegal to be as rich as, say, Warren Buffett or Bill Gates. Thus, when the European debt crisis eventually arrived, triggered by the US mortgage credit crisis, ironically, the Germans and French were in no mood to send money to Greece’s ruling elite to save their bacon, and still aren’t. Faced with a threat to its credit rating, rather than change the tax laws to tax themselves and end the fiscal crisis that is at the bottom of the PIIGS debt crisis, the Greek leadership instead decided to cut expenses and impose “austerity,” that is, extract even more from the Greek middle class, such as it is. That didn’t go over so well with voters, and soon the Greeks were out on the streets as my friend was so many years ago. It’s a tradition there that does not exist here. "

Mack said...

Or as Bild put it -

Why is German taxpayers' cash going to a Greek billionaire?

Nice pic on the homepage

Mack said...

"Nice pic on the homepage"

Which, um, has since changed since the time I wrote that to something far more seedy!

seafoid said...

Saturday's Irish Times

i The (NTMA) agency’s chief executive, John Corrigan, had earlier signalled that it was considering postponing the auction and described current bond pricing on the markets as “irrational”.

Very interesting

Joseph said...

@Mack - ""Nice pic on the homepage"
Which, um, has since changed since the time I wrote that to something far more seedy!"

What? You mean they've removed the pics of the girls and replaced them with a banker?