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.


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.


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.


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.


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.

In this post I am going to take a quick look at Greece vs Turkey population dynamics based on available statistics by the World Population Prospects of the UN. I will focus mainly on the working age population (25-64 years old) since this segment participates in production, defence and makes a society more or less dynamic. Moreover, projections up to 2050 have a small margin of error since (almost) the entire population has already been born.

Greece Population Dynamics 1995 - 2050

Greek total and working age population peaked in 2010 driven by the steady fall of people under 25 years old and the increase of the 65+ population. By 2020 working age population will be 6.1mn persons down from 6.4mn in 2010 while 65+ 2,35mn from 2.1mn. The 2025 numbers will be 5.9mn and 2.54mn. The negative dynamics will be present up until 2050 when total population will drop below 10mn, working age people will be only 4.4mn and 65+ 3.5mn.

It is clear that the Greek society will slowly lose all its dynamic and vibrant elements and transform into a nation of elderly people reliant on an ever decreasing working age population to care and contribute for their pensions. This is quite evident in the evolution of old-age dependency ratios, even if we enlarge the working age population to include the 65-69 segment:

Greece - Dependency Ratios

While the 65+ dependency ratio was a bit over 3:1 in 2010, it will drop to 2.6 during 2020 and reach 1.25:1 in 2050 while the 70+ ratio will also be less than 2 hovering at 1.85:1. The above suggests that either old-age pensions will be almost non-existent or that the working population contributions be very high in order to provide for the retired population. Instead of the classical class conflict we are likely to observe a strong age conflict.

Obviously Debt Sustainability scenarios regarding the large Greek government debt are prone to failure since the debt per person employed will quickly become too large (and compete with old-age pension contributions) unless Greek productivity miraculously increases at an astonishing rate.

Turkey on the other hand is a vibrant, young nation with the majority of its people being relatively young. In 2015 the country had a total population of 78.27mn with 42% younger than 25 years and a total of 73% being up to 44 years old. Its young age population will keep increasing until 2020 while its working age population will only stabilize around 2045 at close to 49mn (with a total population a bit less than 95mn). Still, its population over 65 years old will also show a substantial increase during this period growing from only 3mn in 1995 (5% of population) to almost 20mn in 2050 (20.5% of population) with an old-age dependency ratio of 2.5:1

Turlkey - Population Dyanmics 1995 - 2050

Nevertheless, during the 2020s, Turkey will still reap the rewards of a growing working-age population without the increase being overwhelmed by a stronger growth in the 65+ population (something which will happen after 2030).

Comparing the working age and 25-44 population groups of Greece and Turkey up until 2030 it is evident how different these societies will be as well as how their relative sizes will evolve:

Turkey vs Greece Population Ratios 1995 - 2030

At the end of 1995 (when the Imia crisis erupted) Greece had a working age population of 5.7mn while Turkey 24.5mn for a ratio of 4.3:1.

During the 2020 decade the working age population ratio will reach 10:1 while the same will happen for the more vibrant (and important as military reserve) 25-44 age group. Given that the Ameco database projects that Turkish GDP per person employed (in Euros) will be close to 2/3 of its Greek counterpart by 2019 one can assume based only on population dynamics that the Turkish economy will become 5 to 6 times larger than the Greek economy during the next decade (the IMF is already projecting that it will be 4.5 times larger by 2022).

Given such dynamics, coupled with the costs faced by Greece to service its government debt and old-age pension needs, it is highly unlikely that Greece will be able to maintain sufficient military forces in order to counter Turkish pressure. Having an economy 5-6 times larger as well as an industrial base capable of providing for most of its military equipment needs domestically will mean that Turkey will be in a position to procure a military force several times higher than its Greek counterpart with an investment still lower as a percentage of GDP.

Greek society will have to make a tough choice during the next decade. It will be next to impossible to simultaneously service its large government debt, provide for its elderly (in terms of old-age pensions and health services) and counter the Turkish military force with a sufficiently large investment in equipment.

Most people believe that the significant deterioration in the Greek balance of payments after the introduction of the Euro is a clear sign of the fall in Greek competitiveness and of unsustainable private debt expansion dynamics. It is assumed that the Greek economy was not able to provide the global market with goods and services of a sufficient quality and competitive price while the large expansion of domestic demand (due to significant private credit flows) expanded imports with a rate that led to a large increase in the goods deficit.

Although there is some truth in the above statement, a closer look at the detailed balance of payments data (from BoG) reveals some very interesting facts. The actual balance of payments figure deteriorated significantly from a deficit of €11bn in 2002 to €36.5bn in 2008 all while nominal GDP expanded by 50% in the corresponding time period.

Yet imports and exports of goods excluding oil & ships expanded with the same rate (although at a rate higher than nominal GDP which suggests that private credit flows did play a role). What made the corresponding deficit increase by around €10bn was the fact that exports are only 34-36% of imports although that ratio remained relatively steady throughout that period:

Greek Balance of Payments Imports Exports of other goods 2002 - 2008The actual increase in the balance of payments deficit can be attributed to 3 factors:

  1. An increase in the oil balance deficit which more than doubled by 2008.
  2. The ship balance moving from a surplus of €400mn to a deficit of more than €4.6bn in 2008 and
  3. A significant increase in the balance of investment income (mostly interest payments) from €2.3bn in 2002 to €10.6bn during 2008

Greek Balance of Payments - Oil Ship and Investment Income Balance 2002 - 2008

The first factor can mostly by attributed to a large increase in global oil prices during that period, especially denominated in Euros.  By 2008, global Euro oil price had increased 150% compared to 2002 while the Greek oil balance deficit had expanded by a comparable 170%.

The swing of the ship balance to a large deficit is most probably accounted by a corresponding increase in ship building/purchases investment by Greek ship companies. This was a period of large global trade growth with the Baltic Dry Index reaching new highs. The reasonable assumption was that these large investments would quickly translate into increased shipping payments that would be used to finance the initial outflows and (also) lower the current account deficit through a higher services surplus.

As for the investment income deficit this is mostly the outcome of stock-flow adjustment and monetary policy. Each year’s current account deficit added to an increase of Greek foreign net liabilities and to larger net interest payments in a semi-automatic way. Moreover, the increase in short-term interest rates by the ECB after 2005 made servicing the same amount of net liabilities even more expensive which is one of the reasons why the investment income deficit expanded more rapidly during 2006 – 2008.

If we assume that the sum of the Balance of Goods excluding oil & ships and the balance of services can be regarded as the most representative metric for the Greek external sector and competitiveness we observe that this deficit expanded by only €4.5bn during 2002 – 2008. The bulk of the balance of payments deficit expansion can be accounted by oil, ships and investment income. In other words, global factors (oil prices, expansion of trade and the shipping industry, ECB monetary policy) as well as the automatic effect of flows on stocks were the main drivers of the Greek external deficit.

Greek Balance of Payments changes since 2002 up to 2008

As I ‘ve highlighted many times in the past, the level of future long-run primary surpluses for Greece plays a major role in the debt sustainability scenarios. The major difference between the IMF and Euro institutions projections is identified in the primary surplus assumptions. The IMF projection for a 1.5% surplus makes debt restructuring necessary while the European institutions assume much higher primary balances which make debt sustainability more favourable.

IMF vs Euro Institutions Greek DSA

A recent ESM paper on Greek debt reveals the importance of these projections. If Greece achieves 3.5% primary surplus until 2032 and 3% until 2038 no debt restructuring is required as long as economic growth is 1.3%. On the other hand, the IMF scenario of 1% economic growth and a primary surplus of 1.5% after 2022 makes Greek debt explosive.

European institutions try to make the case that episodes of large and sustained primary surpluses are not uncommon in European modern history. The ECB especially highlights the cases of Finland and Denmark as well as other countries:

The European Central Bank says such long periods of high surplus are not unprecedented: Finland, for example, had a primary surplus of 5.7 percent over 11 years in 1998-2008 and Denmark 5.3 percent over 26 years in 1983-2008.


ECB - Selected Episodes of large and sustained primary surpluses in Europe

My comments are twofold. First, the average primary surplus figure is not always equal to the year-by-year primary balance. Denmark achieved a primary surplus equal or higher than 5.3% in only 5 years during the 1983 – 2008 period. Actually, the primary surplus was at least 3.5% during 9 of the total of 26 years.

Yet the most important element that is not highlighted in the above cases is the fact that large primary surpluses were achieved in the context of equal or (mostly) higher current account surpluses. This is highly important since it allows the domestic private sector to achieve a positive net asset position even when the public sector is in surplus. As a result, economic growth is not threatened by the public sector and the private sector maintains a healthy balance sheet.

To illustrate the above I ‘ve «corrected» the primary surplus by subtracting the current account surplus. I ‘ve also deliberately set the vertical axis maximum to 3.5% which is the surplus requested from Greece to illustrate the fact that it is almost never achieved.

corrected primary balance for current account - selected high surplus episodes.jpg

On the contrary, of the total of 60 years in the above episodes, 26 had a negative corrected primary surplus while it was lower than 1.5% in 40 years illustrating the fact that the IMF assumption of a 1.5% surplus is not unreasonable.

Since the Greek cyclically adjusted current account is highly negative it is clear that the assumption of high primary surpluses which will be maintained for decades is almost without precedence in the context of the private sector balance. Assuming a 3% nominal growth rate (based on the IMF assumption of 1% growth), a 10 year 3.5% primary surplus is equal to a 30% GDP transfer from the domestic private sector while a 20 year 3.5% surplus is equal to 52% GDP transfer which will not be counterweighted by a current account surplus.

In my view, the European institutions continue to make assumptions consistent with avoiding explicit costs for Greece’s creditors but inconsistent with economic reality and sectoral balances.

A recent paper tried to perform a very important exercise of evaluating the balance sheet effects of a Euro exit for various Euro countries. Its results were that the relevant sectoral net positions will be the main drivers of balance sheet effects. Periphery risks are concentrated on the net positions of the government and the central bank while the financial and non-financial sectors mostly hold a positive net position.

net position by sector and country

More specific risks do arise from the fact that certain sectors (within countries) have significant levels of short-term debts, although this fact does not change the overall picture substantially.

Debt by sector and country

I would like to use this opportunity in order to take a detailed view at the sectoral balance sheet risks from a Grexit scenario relying on BoG Greek NIIP data (data are for 2016Q3). I am focusing on specific categories and not taking categories such as direct investment or derivatives into account.

Greek Sectoral NIIP 2016Q3

On the asset side:

  • BoG now holds a large stock of foreign bonds as a result of its participation in the ECB QE program.
  • MFIs have a total of €19bn in deposits and €59bn in bonds a loans. Nevertheless, a large part of the latter are EFSF notes offered as part of the various rounds of Greek banks recapitalization exercises.
  • NFC and households have substantial claims in the form of deposits and banknotes, more than €52bn in total.
  • The general government holds no assets while its foreign exchange reserves are very low and mostly in the form of monetary gold. Although Greece does have a claim on the ECB reserves this would not change the picture in a serious way.

On the liability side:

  • The general government is the largest debtor with €28bn in bonds and €236bn in loan liabilities. Yet most of the bonds and almost all of the loans are long-term in nature.
  • BoG is the second largest debtor with almost €93bn in liabilities which consist of Target2 and extra banknotes.
  • MFIs have a large stock of liabilities in the form of deposits (which are usually a proxy for repo trades).
  • NFC and households have a very small stock of liabilities in the form of bonds and loans (a bit over €10bn).

Overall one observes that:

  • The largest part of the Greek NIIP is attributed to the Greek government with over €260bn in debt.
  • Taking into account the bonds held as part of QE, BoG net foreign liabilities drop to €47bn.Using the most recent available data (January BoG monthly statement) this figure further decreases to a bit over €38bn or close to 20% of GDP.
  • NFC and households hold a strong positive net claim from the RoW equal to almost €44bn. This most certainly masks firm-specific risks and mismatches but overall, the Greek non-bank private sector will improve its net position in the case of a currency depreciation (following a Grexit).
  • Using only deposits figures, Greek MFIs have a net liability close to €28bn. Since a large part of their liabilities will be under foreign (instead of domestic) law this creates a serious risk of missing debt payments or being unable to roll-over short-term repos and other obligations. Given that the Greek banking system will be the one intermediating in all of the private sector’s foreign transactions this net liability position can create rather difficult scenarios.

I will also use BoG MFI balance sheet data to take a closer look at Greek bank foreign risks:

Greek banks foreign risk Jan-2017

It is clear that things are a bit complicated, especially since Greek banks have a large stock of intra-group transactions with group members in other (Balkan?) countries. Nevertheless, after correcting for such transactions one observes that they owe €13.6bn in net liabilities to other MFIs (€18.5bn gross) and another €8.6bn in foreign deposits. The main source of risk will mostly be the first item which is usually secured by a standard contract (master agreements) and is under foreign law.Missing a payment on these liabilities will create serious problems for the corresponding bank and its ability to continue transacting in international markets. Obviously a risk assessment would be made easier if the maturity profile of these liabilities (and assets) was known.

Regarding the BoG liability position I believe that in the event of a Grexit, securities held for monetary purposes will be used to settle the largest part of Eurosystem claims while the remaining net position will be settled with some form of Greek government long-term securities (probably floating rate notes paying Euribor).

In summary, I generally agree with Kostas Lapavitsas who believes that a Grexit scenario will necessitate increasing Greek government foreign reserves to at least €12-15bn. The main immediate sources of risks are the short-term debt of the Greek government and Greek banks. The first consist mainly of liabilities towards the IMF (since SMP Greek bonds are under Greek law and would be converted to the new currency) while the second require a thorough risk analysis. A Grexit would be extremely difficult if Greece only held €7bn in foreign exchange reserves (with 2/3 being monetary gold) since a bank debt payment failure would create serious disruptions in the country’s international transactions.

ELSTAT released the second national accounts estimate for 2016Q4 today and the announcement did make a lot of noise. The main reason being the large growth revisions for the last quarter of 2016 with the volume decreasing by 1.1% compared to the last quarter of 2015, in stark contrast with the initial flash estimate of an increase equal to 0.3%. This development erased the initially estimated annual expansion of 0.3% with the current figure being slightly below zero.

Yet I think that looking into the detailed evolution of specific aspects of the Greek GDP paints a rather different and less alarming picture:


Both private consumption and net exports posted positive growth compared to 2015Q4 while general government consumption fell by €200mn in volume terms. The negative outcome for 2016Q4 is entirely attributed to investment which dropped 1.76bn. The reason for this is twofold.

First, change in stocks was a negative 1.47bn which coupled with another -1.53bn in Q3 resulted in a second half figure of roughly 3bn. Nevertheless, private consumption was 0.9% higher in 2016H2 which does not justify such a fall in stocks (almost 10% of quarterly private consumption). Taking a look at a 4-quarter moving sum reveals that the sum is close to the trough of recent stock cycles.


Given the fact that 2016Q1 change in stocks was a positive 1bn, even a zero change in stocks during 2017Q1 will lead the moving sum to a figure close to -2.7bn similar to what happened during 2012, at the depths of the Greek Depression. Obviously such dynamics are hard to reconcile with a stable/slowly increasing private consumption. A zero reading for τηε change in stocks during 2017Q1 will be equal to around 3.5% of quarterly GDP and thus have a large impact on quarter-by-quarter growth figures.

The second aspect of investment was gross fixed capital formation which came at roughly the same magnitude as previous quarters (5.45bn). Nevertheless, the corresponding 2015Q4 figure was exceptionally large (6.3bn) and resulted in a negative effect when compared to the last figure of 2016. Yet the 2015Q4 number seems to be a clear outlier, probably attributed to capital controls effects during 2015. This is quite clear if we compare the difference of fixed investment to its 4-quarter moving average since the start of 2011:


Overall, I think that 2016Q4 investment developments constitute a set of outliers and will not have a large impact of 2017 GDP movements. Although I do not share the government’s optimism about a large 2017 growth, I do not think that today’s revision for Q4 growth will change this year’s dynamics considerably.