25 February 2012

A Striking Similarity Between Greece and Spain

Since April 2010 Greece has received disproportionately much attention in financial and economic news when compared to its relative size and importance in the world’s economy. The two much debated bailout packages for Greece, when summed up, are larger than its economy. (According to Eurostat, the Greece’s GDP in 2011 is estimated to be EUR 217.8bn. This compares to the bailout package in the amount of EUR 240bn, that is the sum of the first bailout package in the amount of EUR 110bn and the second bailout package in the amount of EUR 130bn.) It so appears that this amount is pretty well explained by the country’s balance sheet, i.e. by its Net International Investment Position (Net I.I.P.). What is more striking is that the balance sheet of Spain is not that different from what Greece used to have back in 2009. Should we conclude something? Well, sure.

(As follows; the Net I.I.P. data for Greece are from the Bank of Greece; the Net I.I.P. data for Spain are from the Bank of Spain; all the GDP data are from Eurostat. The data are extracted on 24 February 2012.)

The Story of Greece

Let’s first consider Greece’s balance sheet at the end of 2009. Its total Net I.I.P. was EUR -199.4bn. In other words, the residents of Greece (public sector plus private sector) had a net debt to the rest of the world nearly two hundred billions of euros. Out of this, EUR -140bn was attributable to the portfolio investments (mainly short term debt securities) which by definition are short term and highly volatile by nature. The rest was pretty much explained by the so-called other investments which is mostly short-term loans.

Based on common sense, one might easily assume that a country with such imbalances is very vulnerable. As soon as something causes the loss of confidence (in this case, the revealing of misreported country’s official economic statistics in early 2010) all creditors will want their money back at once. If the country’s liabilities are short-term, the result is bound to be an immediate disaster. That’s what is basically happening in Greece.

First, foreign private sector creditors do not want the government debt of Greece. Private sector creditors need to be replaced by the bailout money (ok, it’s by definition not a bailout, because it is in the form of loans with the very high probability of default), by the (involuntary) funding from local credit institutions (which are being saved with the cheap credit from the Bank of Greece, that in turn gets its money from the ECB) or by the debt purchases of the European Central Bank (the ECB). At the end of 2009, the country’s general government had a net debt of EUR 211.6bn in the form of portfolio investments; by the end of Q3 2011 this amount had reduced to EUR 103.2bn, that is a reduction by EUR 108.4bn. Out of this reduction, approximately EUR 56bn had been the already disbursed bail-out money (Source: Wikipedia), EUR 13bn the increase in the government’s debt owned by the local credit institutions (Source: Bank of Greece) and the rest largely the debt purchased by the ECB (approximately in the amount of EUR 40bn). So, at the wake of the European Debt Crisis, we had a trouble of approximately EUR 210bn coming from this source.

Secondly, foreign banks and other private sector creditors want to pull their money back from the Greece’s real economy. Their ability to do so is of course pretty limited, because they have to find a legal way to extract this money from the local households and businesses. This in the time when more affluent residents do everything to protect their wealth (incl. invest abroad) and the others would simply default if “pressed” too hard. During the years 2010-2011 approximately EUR 27bn has left the country this way (EUR 10bn in the form of direct investments, EUR 5bn in the form of portfolio investments and EUR 12bn in the form of other investments). This part is of course difficult to precisely estimate upfront (at least we would need to analyse very detailed data), but if we would have had a clue, than we would have ended up in a total bail-out amount approximately EUR 235-240bn (EUR 210bn + EUR 27bn).

As you see, the total Net I.I.P. of EUR -199.4 indeed could have been considered as a very rough proxy of how much bail-out money Greece would need already early 2010. Back then, this amount would have been considered unbelievably much (86.1% of the GDP in 2009), but now, due to the large concentration of debts in public sector, the reality has turned to be even harsher.

As you also see, the overall Net I.I.P. of Greece has not improved, rather other way round: as of at the end of Q3 2011 it amounted to EUR -200.1bn. The only thing is that private credit has been replaced by the public sector credit from the IMF, the ECB and the fellow Member States of the eurozone.

Comparison of Greece and Spain

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