I recently wrote a post on the ECB waiver (for Greek government collateral) and what its expiration on 20 August would entail. Since BoG released its August balance sheet it seems that this question has been answered.

BoG August 2018 balance sheet

As is evident there was no significant change in the relevant amounts of either regular refinancing operations or ELA financing during August apart from a very small fall of €350mn. What actually changed was the total amount of collateral posted by Greek banks which fell by €5.33bn. Since regular financing operations total amount remained constant it appears that collateral quality was enhanced given that the relevant haircut was reduced from 30% to 15%.

It is obviously interesting to know how Greek banks managed such a task. Unfortunately, bank balance sheets data from BoG is not available for August so we will probably need to wait a bit more to find out.

One last interesting fact was the large increase in government deposits of close to €14bn which coincided with an equal drop in Target2 liabilities. This was due to the disbursement of the last round of funds towards the Greek government (by the ESM) which was used to increase its cash buffer. As a result, BoG now only «owes» €26.50bn to the Eurosystem while simultaneously holding €64bn in securities (mostly as a result of the QE program).

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According to recent Mario Draghi comments, the waiver allowing Greek government securities to be accepted as collateral in regular Eurosystem refinancing operations will expire along with the end of the Greek adjustment program on August 20 2018.

Based on the above I would like to take a look at what such a move will mean for Greek banks access to ECB (and ELA) lending. I will be using data available in monthly Bank of Greece balance sheet statements as well as Greek bank consolidated balance sheets (available from BoG).

Overall, Greek banks have significantly lowered their refinancing needs with a total balance of €9bn in MRO/LTRO and €7.3bn in Other Claims (ELA). Compared to the end of 2017 regular refinancing operations are down €3bn while Other Claims dropped a more impressive €14.3bn amount. If one compares the figures to a couple of years ago, the amounts are much more remarkable. MRO/LTROs are down almost €24bn while Other Claims decreased a staggering €47bn.

This drop was driven both by large decreases in liabilities towards the Eurosystem (Target2 and extra banknotes) as well as the ECB QE program. The first item is down €23bn compared to 2017 and €57bn during the last two years while ‘Securities held for monetary purposes’ increased by €31bn since June 2016.

Unfortunately it seems that Greek banks also lowered Debt Securities of Other Euro countries (EFSF notes?) by a similar amount of €33,8bn during the last two years. As a result, they now hold only €5.8bn in securities of that category while they also carry €10.6bn in Greek government securities on their balance sheet.

Compared to the total of €9bn in regular refinancing operations outstanding, Greek banks do not seem to hold enough non-Greek government securities to post as collateral. Moreover, they hold €186.7bn in credit claims (before provisions). According to BoG NPL statistics, almost 50% of credit claims are non-performing which means that much less than €100bn credit claims can be used as collateral in some form or another (with significant haircuts given current Greek bank loans quality). Actually, BoG states that Greek banks have already posted €54bn in assets as collateral on ELA operations (and another €12.7bn in regular operations) which suggests that not much is left unusable.

BoG Balance Sheet 2018H1

Consequently, it seems quite probable that at least some part of regular refinancing operations will have to be moved to ELA after the program expiration due to limited availability of high-quality collateral. The amount of financing allowed for ELA (as set by the Eurosystem and announced regularly from BoG) will be an early hint on that. Other developments such as the QE program or a return of deposits to the Greek banking system will act at the opposite direction. Unfortunately, the June 2018 BoG balance sheet statement states that less than €1bn in extra banknotes is outstanding which suggests that most of the ‘cash under the mattress’ has already returned and no major positive developments can be further expected on that front.

Recently, the IMF published its long-awaited Article IV consultation on Greece which includes an assessment of the latest developments of the Greek economy as well as its own DSA on Greek debt (which rests on significantly different assumptions than the ESM DSA).

The IMF starts with a stark chart showing how the Greek tragedy compares to the US Great Depression, the 1997 Asian crisis as well as the Eurozone crisis:

IMF Greece Crisis US Great Depression Asian Crisis

The depth of the Depression is quite similar to the US case while Greece has managed to «maintain» a 25% lower GDP for a period of 5 years.In contrast, even the US managed to return to its pre-crisis GDP level 7 years after the start of the Great Depression. This is a clear indication of the way the Greek case was tragically mismanaged by the European countries and the IMF whose priority was avoiding a principal haircut of official loans rather than a quick return of Greece to growth.

The IMF projects that Greece will grow moderately during the 2018-2022 5-year period which also coincides with the period during which the country will have to register primary surpluses of at least 3.5% GDP. Most of the growth is projected to come from fixed investment with private consumption contributing 0.5% annually and a neutral contribution from the foreign balance:

IMF - Greece 2018 - 2022 main macroeconomic projections

As I have outlined in the past, such a growth path rests on the assumption that Greek households will continue dis-saving at the order of €9bn annually even while they have already depleted their financial assets by €34bn in the 2011-2017 period. This is based on the fact that, given a neutral external balance and a 3.5% primary government surplus, sectoral balances indicate that the private sector will need to maintain a negative net asset position in order for the other sectors to achieve these balances.

Projecting nearly 1% annual increase in private consumption during the 2020 – 2023 period without any countervailing factor (such as a positive external balance or a significant relaxation in the fiscal stance) seems quite optimistic. An annual negative balance of just €8bn means that households will have to consume another €40bn of their financial assets in the 2018-2022 period. Only employment growth (which will increase disposable income of the household sector) will act as a countervailing force. It’s a pity that the IMF does not use sectoral balances to check whether assumptions for private consumption and government surpluses can be realistic in the long-run.

The other important part of the IMF document is obviously the Greek debt DSA as well as its assessment of the possibility of maintaining large primary surpluses for many decades.

In its baseline scenario the IMF staff agrees with the ESM that debt-to-GDP trends down and Gross Financing Needs (GFN) remain below 15% of GDP in the medium term.

Nevertheless, the IMF argues that Greece will be unable to maintain a primary surplus larger than 1.5% of GDP after 2022 while its long-run economic growth will hover around 1% in start difference with the ESM which is projecting a primary surplus of 2.2%. As a result, the IMF is much more pessimistic for the long-run, projecting that Greek debt will become unsustainable after 2040:

IMF - Article IV 2018 DSA

What is also quite interesting is how even medium-term sustainability rests on assumptions of large primary surpluses and growth during the 2018 – 2022. A small 2 year recession during 2019-22 (with a total of -3% GDP growth) coupled with a small primary deficit for just one year will immediately push debt-to-GDP close to 200% and GFN to 20%.

IMF - Adverse Scenario 2019 - 2022 Greek Debt

Lastly, the IMF staff try to justify analytically why Greece will be unable to maintain high primary surpluses and economic growth in the following years. While the specific arguments have been put forth many times in the past, it is interesting to repeat them here once more (in IMF exact wording):

  • Ceteris paribus, aging would imply an average yearly decline of 1.1 percentage points in Greece’s labor force during the next four decades.
  • Total factor productivity (TFP) growth over the last 47 years averaged just ¼ percent annually, by far the lowest in the Euro Area. Assuming this historical average TFP growth rate going forward, labor productivity (output per worker) would grow only at about 0.4 percent in the steady state (the rate of TFP growth adjusted for the labor share in output).
  • Combining the historical growth in output per worker of 0.4 percent with expected growth in the number of workers of -1.1 percent would imply long-term annual growth of -0.7 percent.
  • While studies have documented an impact on output levels of 3 to 13 percent over the initial decade, the impact of reforms on growth tends to fizzle out afterwards.
  • Lifting long-term growth from its baseline of –0.7 percent to 1 percent requires reforms to add 1.7 percentage points to growth per year for the next decades. The OECD (2016) estimates that full implementation of a broad menu of structural reforms could raise Greece’s output by about 7.8 percent over a 10-year horizon, which translates into an increase in annual growth of some 0.8 percentage points for about a decade. Bourles et al. (2013) estimate this gain to be slightly higher, at about 0.9 percentage points per year, while Daude (2016) finds that reforms focused on product markets and improving the business environment in Greece could boost growth by about 1.3 percentage points per year for a decade.
  • Implicitly, the 1 percent growth projection presumes that Greece would manage to increase labor force participation to levels that exceed the Euro Area average (to offset the significant projected decline in Greece’s working age population) and that would generate TFP growth rates permanently far above Greece’s historical average.
  • Historically, Greece has been unable to sustain primary surpluses for prolonged periods. During 1945–2015, the average primary balance in Greece is a deficit of about 3 percent of GDP, although a brief period of near-zero primary balance took place at the time of Greece’s EU accession. The high water-mark for Greece was a primary surplus exceeding 1 percent of GDP during eight consecutive years (1994–2001).
  • In a sample covering 90 countries during the period 1945–2015, there have been only 13 cases where a primary fiscal surplus above 1.5 percent of GDP could be reached and maintained for a period of ten or more consecutive years.
  • Economic conditions matter. Among EU countries, before entering a period of high average primary balances, countries tend to have strong real GDP growth (2.7 percent) and modestly high inflation (4 percent). They also have moderate unemployment (10 percent) and low net foreign debt (24 percent of GDP), conditions that do not conform to those now applying in Greece. Moreover, during the high primary balance periods, growth has been rapid (about 3.4 percent), inflation slightly elevated (3 percent), and unemployment contained (at about 7.2 percent). This suggests that sustained periods of high primary surpluses are driven by strong economic growth rather than by sizeable fiscal consolidation.
  • Unemployment weighs on the budget through higher social expenditures—such as for unemployment benefits and social safety nets—as well as lower income-related revenue. Greece’s unemployment rate is exceptionally high—only 10 countries have had unemployment higher than 20 percent in the postwar period.Within the above sample, the average primary balance corresponding to countries suffering double-digit unemployment rates is about zero percent of GDP (i.e. balance). For double digit unemployment lasting for 10 years or longer, the average primary balance is about -½ percent of GDP. With long-term unemployment likely to remain high for some time, pressures on social assistance spending in Greece—such as the guaranteed minimum income—are likely to mount.

Overall, the IMF tries its best to provide Europeans with political cover for the medium-term outlook on the Greek front while still presenting a scientific case for why the targets set in the Greek program are highly unrealistic and will not be achieved. In my view it should pay closer attention to sectoral balances which would make it even easier to argue why large primary surpluses cannot be maintained in a country with a structurally negative external balance.

It’s been a while since I last looked into Bank of Greece balance sheet figures and given that the Greek central bank has released its April 2018 numbers I decided to take another quick look into them:

BoG 2018Q1 balance sheet

A few things stand out:

  1. Other claims (which is code for ELA) is down more than €11bn to a total close to €10bn. It is clear that Greek banks are moving closer to eliminating their need for non-standard financing, something which could happen during 2018. Obviously this also means that ELA income for BoG (and by extension for the Greek Treasury) will also show a significant decline (BoG should earn a bit more than €10mn/month as ELA profits by now).
  2. The big drop in ELA was mainly driven by a reduction of almost €16bn in BoG liabilities towards the Eurosystem (Target2 and banknotes) which total €48.4bn.
  3. Since BoG participation in Eurosystem QE continued at a slower pace the ‘Securities held for monetary policy purposes’ registered a further increase to €62bn. This means that BoG has a surplus of €13.5bn in securities held as assets compared to its liabilities towards the Eurosystem which would make a possible Grexit a bit easier since settlement of BoG Euro liabilities would be made using its (Euro government) securities portfolio.
  4. The lower need for CB financing has led total collateral posted at BoG down to €80bn, a figure which is quite manageable and far lower than the peak of €200bn reached during the 2015 turmoil. Most of the collateral are used for ELA financing so a possible elimination of ELA in the near future will make life much easier for Greek banks.
  5. Government deposits at the BoG are now close to €15bn registering an increase of  €4bn during 2018. It seems that the Greek government is continuing its process of accumulating a large cash buffer for its «clean exit» scenario.

Overall BoG balance sheet figures suggest stabilization in external liabilities, ELA financing and a much lower toll on Greek bank profits from ELA loans (BoG should be around €40mn/month lower in April compared to a year ago).

So ELSTAT announced the Greek GDP figures for 2018Q1. The main taking point was that GDP increased 2.3% on an annual basis compared with 2017Q1. Yet if one takes a closer look I feel that there are a few worrying signs, specifically in the sectoral breakdown:

Greece 2018Q1 GDP

It is clear that consumption, especially private consumption continued registering negative growth for a third consecutive quarter. As I have outlined recently I find it quite difficult for Greek households to continue running down their financial assets at a pace of €9bn per year in order to maintain (or even increase) their consumption levels. This is destined to have its toll on investment activity which actually registered a 10% fall during 2018Q1.

As a result, Greek internal demand contributed negatively to GDP growth with only net exports being a driver of the positive 2.3% growth figure. Unless these internal demand dynamics take a positive turn during the next quarters I fear that GDP growth for 2018 will prove to be disappointing, at least compared to projections (the Commission projects that 2018 growth will be driven almost completely by internal demand and not by net exports). Obviously running a primary surplus close to 4% of GDP for the third year in a row will only make matters more difficult.

 

The latest data on Greek national accounts indicate a steady deterioration in private consumption throughout 2017 which registered negative growth during 2017H2 and only contributed 0.1% in annual GDP growth. Overall, only investment was the main driver of the small growth in the Greek economy during 2017:

Greece GDP components increase 2015 - 2017

Since investment is usually described by an accelerator effect (with domestic and external demand driving capacity utilization upwards and increasing the need for investment in new productive capacity) the only way for Greece to achieve significant growth in the coming years will be through an increase in private consumption (which is still close to 70% of GDP).

Yet as was described in a recent Eurobank 7-days economy bulletin, private household saving registered its 6th consecutive year in negative territory. According to AMECO data household gross saving was -€9.4bn in 2017, a new negative record and significantly lower than the €7.7bn during 2016. During the 2011 – 2017 period total saving was an impressive -€33.6bn (or almost 20% of the 2017 GDP figure).

Greece household gross saving 2000 - 2017

It is quite obvious that households can maintain consumption by running down assets only temporary yet the EUprojects the same dis-saving to continue throughout 2018 and 2019 with an additional €16bn reduction in household assets.

On a cumulative basis (starting at 2000 with the introduction of the Euro) total gross (negative) saving by the end of 2019 will have reached back to 2004 levels at close to €44bn (from a peak of €93bn).

Greece - Cumulative Household Gross Saving 2000 - 2019

Given the fact that a large part of household saving is not directed towards liquid deposits but is invested in other assets such as housing, it is evident that a total negative saving flow of €50bn by 2019 will place a significant challenge on household balance sheets. This is even more difficult given the large pool of outstanding NPLs, private debts towards the state/social security funds and the difficulty of securing new loans from the Greek banking system.

Since Greece is targeting large primary surpluses for the public sector at least until 2022 (in the order of 3.5% of GDP) and taking into account its structural external deficit, sectoral balances indicate that the household negative net balance is most likely to continue. Given these balance sheet dynamics it seems quite unlikely that private consumption will register large increases in the coming years and support a strong cyclical recovery for the Greek economy.

Since a previous post tried to answer an Austrian argument regarding how large parts of the (Greek) population are dependent on government, I would like to use the opportunity to elaborate a bit on a number of political economy arguments in favor of big government (and taxation). These will mostly revolve around the issues of scale, insurance, sectoral balances and investment, although I am sure others can think of more.

Scale

What distinguishes the iPhone is basically exactly that. For most people the iPhone is a product which differs significantly from other cell phones, provides social status and higher utility than a much cheaper smartphone. In other words, the main achievement of Apple is that it can sell the iPhone with a large profit margin.

Yet Apple is not in the business of making Ferraris. Its aim is not to produce and sell several hundred iPhones. On the contrary, its business model is centred around manufacturing millions of iPhones which it will sell at a high enough price to achieve a large profit margin yet not so high that it will threaten its sales volume. Its profits depend on a scale effect meaning that it depends on earning a lot per product yet coupled with a large volume of production.

Although Apple can affect its profit margin (through marketing, brand name, product design and features), the scale effect is an externality from its own viewpoint. In order to achieve this effect it requires a large enough base of medium/high income customers and an infrastructure that can support its large distribution and retail network. Ideally Apple would like to not bear any cost for maintaining these networks yet reap all benefits from their existence.

The same goes for almost all companies in the world which base their business model on mass production instead of scarcity. Their P&L statements contain sales proceeds and direct costs entries yet no entry for the cost of the scale effect which they leverage in order to achieve their profits.

Although this scale effect is to a large extent an «emergent property», meaning that as all these companies pay for their costs and investments a large customer base emerges it also depends on a central government to provide for all the infrastructure and networks needed for «the market» to operate. This might be the rule of law, enforcement of contracts, transportation networks, payment systems, standardisation of equipment and networks and so on.

In this sense, taxes can be seen as payment for the provision and maintenance of all these networks that allow the scale effect to continue.

Insurance

To a large extent, what distinguishes a wealthy from a poor person is the ability to self-insure through market mechanisms. A person with high enough income and wealth can cushion itself against bad luck, self-insure using a legally binding contract with a specialized firm against tail risks such as health issues and accidents, buy a high level of education and acquire a long-term contract to provide for his retirement along with his large stock of savings. A poor person will find it very difficult to self-insure against typical risks (such as health problems), have a very small stock of savings to use in a rainy day (ie unemployment) and will not be in a position to acquire high quality education unless it is provided at low/no cost. Such a person might not have access to housing at reasonable prices while his low income, frequent unemployment spells and inexistent wealth would make retirement very painful and entering (and staying) in a retirement plan quite unlikely.

Almost the only way to provide insurance for poor people (health, unemployment) and a level playing field in areas such as education against high income people is through centrally provisioned services by the government. The government will be the one to create an education system accessible to all people, institute unemployment benefits (paid by all employees),  provide housing to low-income communities and some form of universal health insurance scheme which will not allow people to suffer from illness only because of low income.

Sectoral Balances

I think that most people have understood by now that there is no way to avoid the sectoral balances of saving in any economy. By definition total saving must be zero which means that the private sector can net save only if the external of government sector is a net borrower. Unless a country can very quickly move its external balance (which is quite difficult to achieve, especially with regards to exports) this suggests that the government is the sector of choice to allow the private sector to net save in a downturn (especially through automatic stabilizers).

Actually, one of the major reasons why the Great Depression did not happen again is exactly the fact that governments are much larger today than they were during the 1930’s which maintains demand both through government purchases and large swings in the government deficit. Absent a large enough government sector, downturns would be «corrected» through very large changes in the unemployment level just as they did during the Great Depression.

Investment

Although I touched this subject in the scale effect section I think it is quite important to warrant a separate section. The main idea is that apart from their own capital stock, all households and firms in an economy require a large public capital stock consisting mainly of networks such as transportation, communication, electricity and others. Although these networks are extremely important and would make it mostly impossible to conduct market transactions in their absence, the fact is that their benefits are diffused among the general population.

As a result, they remain an externality from the point of view of each individual and firm which means that each of them would like to use them without paying for them. The main way to overcome this difficulty is for the government to construct and maintain these networks and pay for their construction through the general tax system.

Conclusion

I think that the main idea is clear. From the point of view of each individual scale effects, social capital (law, contracts) and infrastructure appear as externalities which are diffused among the general population. Unless a central player acts to introduce and maintain them it is almost impossible for the private sector to coordinate in providing for them while covering their costs. Moreover, insurance is a privilege for the rich (and healthy) and only pooling and central provisioning can allow for less fortunate individuals to enter the market without having the rules of the game rigged against them from the start.

In other words, a private economy by construction includes inequalities and market failures which require a central actor to overcome them. One of the most significant market failures is an economic downturn when the private sector in the aggregate wishes to increase its net saving yet only another sector can provide the necessary assets by increasing its liabilities. Unless the idea is to achieve the desired net saving through mass unemployment and hardship, the government sector is the next best thing.

Since apart from economics I have a long-lived interest in defence and geopolitical issues I will be posting from time to time on these subjects as well. In this post I would like to focus on specific aspects of a deep (first) strike scenario against the Greek air force by Turkey utilizing its F-35 (which are scheduled to start to be delivered this year).

In my view, the most important aspect of the F-35 stealth fighter is not its strike capabilities. Due to a small internal weapons bay it has a limited capacity to carry air-to-ground weapons, especially stand-off cruise missiles designed for heavily armoured and defended targets. Unless the F-35 is available in large numbers, something quite difficult due to its large costs, it does not constitute a significant direct threat as a strike fighter. Nevertheless, it will most definitely be the weapon of choice in order to hit high value targets. At this point in time Turkey has ordered 30 F-35 (with an overall target of 100 total).

What distinguishes the F-35 is its enhanced sensor fusion combined with some fairly advanced sensors (as well as its VLO characteristics). Its APG-81 AESA radar is capable of detecting a target with an RCS of 1m² (roughly the RCS of the F-16) at a range of 82NM (150km). The APG-68(v)9 radar which is the most advanced version of the APG-68 radar on board the F-16 is only able to detect the same target at half the distance. Apart from its radar, the F-35 will also use IR and radar warning sensors in order to create a 360º view of its surrounding environment.

This image can then be transmitted to other fighters and air force elements, either through a special datalink used by the F-35s or through the standard NATO Link-16. As a result, the F-35 can fly deep inside enemy territory, remain undetected (due to its VLO capabilities) and transmit data on the tactical situation to other aircraft such as the F-16.

Given their radar capabilities, roughly 10 F-35s (flying in pairs) could provide significant coverage of the Greek territory. In my proposed scenario, these F-35s will penetrate Greek airspace while flying at high altitudes (to maximize radar horizon) and carry 4 AMRAAM internally in an air-to-air configuration.

They will use Link-16 to transmit data to F-16 packets which will fly «on the deck» at low altitudes with sensor silence. These F-16s will carry stand-off deep strike weapons such as SOM, SLAM-ER cruise missiles and JSOW glide weapons. At a distance of around 200km the first wave of F-16 will release their cruise missile payload against high value targets such the main radars used by the Greek air force, air bases, Patriot batteries and C&C centres. At around the time that the first wave of cruise missiles hits its targets, a second packet of F-16s will fire a much larger payload of JSOW at a distance of 100km (this will require that the F-16s ascend at high altitude and reveal themselves on Greek radars).

The F-35s will be used to provide air coverage to the attacking F-16s by shooting down any Greek fighter jets already in the air as well as the Erieye airborne radar used by the Greek air force. A force of 10 F-35s will be able to carry 40 AMRAAM missiles which is a considerable payload on its own.

The main advantage of this scenario is that the use of the F-35s will allow the Turkish air force to use its large fleet of F-16s on a low altitude strike profile while maintaining awareness of the tactical situation, something that would not be possible without the F-35 stealth capabilities.

A radar at an altitude of 4000 feet (roughly the altitude of the Greek air force main radars) has a radar horizon of less than 200km (regardless of the radar’s specific characteristics) against a target flying at an altitude of 500 feet. This means that Turkish jets will be able to fire their cruise missiles without being detected by most Greek radars.

The same applies for the SOM cruise missile payload, since the missiles will be flying at very low altitudes. A recent article by Konstantinos Zikidis calculated the SOM RCS at 0.01m² rendering it almost undetectable (taking into account its low altitude flying profile).

Apart from the above, a deep strike mission will most probably also be supported by Turkish E-7 flying radar as well as electronic warfare aircraft. It is also quite possible that the Turkish ballistic missile arsenal (with operational ranges of more than 200km) will also be used against targets that can be fired upon from launchers in Turkey.

One can easily reach the conclusion that such a scenario carries the element of surprise with little or no warning for Greek defences, a formidable air-to-air force (consisting mainly of the AMRAAMs carried internally by the F-35s) while constantly providing Turkish forces with up to date information on the tactical situation through the use of the F-35 and E-7 sensors. The fact that less than 10 F-35 will be necessary to execute such a scenario means that it will become plausible as soon as the first batch of Turkish F-35s becomes operational (Turkish F-16s have already been upgraded to the Advanced configuration and are all equipped with the (V)9 variant of the APG-68 radar and Link-16 datalink).

Greek Response

I am a huge fan of the Viper upgrade program for the Greek F-16 fleet and the reason is that the only way to counter the F-35 threat is by creating a «sensor data net» in the Greek airspace. The Viper program will include the SABR AESA radar (which can detect 1m² RCS targets at a range of 72NM/130km) and Link-16 on all F-16s. As a result of the program, each F-16 will be transformed into a small «AWACS» and provide similar situation awareness to the F-35 with the use of only a few F-16 on air.

Interconnecting all ground based radars while also keeping the Erieye on air along with a few F-16s can provide early warning against threats such as the scenario described above, at least regarding the F-16 attack packets. Unfortunately, the F-35 low radar signature means that even the SABR radar will have a hard time tracking it at long distances with the former having a clear advantage in engaging enemy F-16s at BVR range . Low frequency radars (such as the MEADS UHF radar) might provide a solution to the problem yet I believe that the F-35 will remain an issue in the upcoming years with no clear solution.

There’s a (greek) article circulating on the internet during the last few days based on an older Mises post from May 2015 which analyses how 67% of the Greek population depends on public funding which is obviously provided by taxing the remaining 1/3.

The essence of the above article can be summarized in the graph below which is supposed to show the percentage of population reliant on public funding for various countries:

population reliant on public funding by country

Although the article does not really bother to describe in detail how the graph is created or which year it refers to I will assume that it is based on 2014 data (since it first appeared on the Internet in 2015) and try to roughly recreate the relevant metric for Greece but explore it in historical terms.

The main argument of the Mises post is that public employment and pensions are reliant on private sector taxes and pension contributions and should thus be considered «a burden». Since I want to keep the data simple and easily accessible I will assume that pensioners are those over 65 years old and public employment the sum of «public administration and defence», «health services» and «education» from the Employment Survey. According to the latter, the sum was roughly 800 thousand persons at the end of 2014 which I will regard as constant due to data availability at FRED.

Based on the above a rough estimate of the percentage reliant on the private sector will be «1 – (employment – 800,000) / population over 15 years old» which is shown in the graph below (FRED only has data starting at 1998):

Greece population dependant on private employment.png

What is evident is that this percentage was over 50% already before the introduction of the Euro and started decreasing after 1999 reaching 48% in 2008 (from 54% in 1999) mainly driven from the increase in private employment. It shot through the roof during the Greek Great Depression to the level of 62% in 2013 because of the increase in unemployment. This is the point in time when Mises took «a picture» of this percentage to make its argument.

It is almost a tautology that in a country with more than 25% unemployment and another 20% of the population being over 65 years old a large part of the population will be reliant on those left working for its income and basic needs. Mises (circular) argument is more or less that the large unemployment in Greece is due to… people being massively unemployed. The fact that Greece has a structural primary balance of over 6% obviously seems to not play any role.

 

The latest ESM compliance report on the Greek adjustment program also contains an updated Debt Sustainability Analysis (DSA) which reaches some fairly important results.

Its main assumptions are:

  • Real GDP growth close to 1.5% after 2022 and 1.25% from 2030 onwards. Coupled with inflation equal to 2% after 2024 the Greek long-term growth outlook is equal to 3.25% in nominal terms (the IMF on the other hand expects a nominal GDP growth rate of 2.8%).
  • Total privatisation revenues of €17bn with no need for further bank recapitalisations (the IMF projects €10bn revenue and a need for an additional €10bn buffer for bank capital needs).
  • A 3.5% primary surplus until 2022 after which the primary surplus starts to decrease 0.5 p.p. per year levelling off at 2.2 % as of 2025 (the IMF does not consider these long-term surplus targets sustainable).

Event under these assumptions the baseline scenario expects the debt-to-GDP ratio to reach 165% in 2020 and 127% in 2030 while the Gross Financing Needs (GFN) are projected to increase from 2020 onwards reaching 23% in 2055.  As the report itself states:

Given the high debt-to-GDP and GFN-to-GDP levels, concerns remain regarding Greece’s debt sustainability under this scenario.

 Under more unfavourable scenarios the debt-to-GDP and GFN ratios are quite explosive and do not allow Greece to reach any measure of debt sustainability.

DSA - results* Scenarios B & C are the adverse scenarios.

Even the ESM is not able to paint a rosy picture of Greek debt dynamics despite making some very favourable assumptions regarding long-term growth and government primary surpluses. A small deviation from these (optimistic) assumptions puts the Greek debt to an unsustainable path.

Although the above make it clear that further rounds of debt restructuring will be needed, the fact that GFNs fall significantly during the 2018-20 period means that Europeans can narrowly focus on short-term targets regarding Greek primary surpluses while postponing debt reduction measures for the more distant future. As a result, Greece might be caught in a situation where short-term measures are demanded (such as bringing the income tax threshold reduction forward) while debt restructuring is only offered as a promise for .. the next decade and contingent on fiscal measures being passed immediately.