Greek Investment Components

The return of economic growth in the Greek economy appears to have a positive impact on fixed investment. Given the opportunity it is interesting to take a closer look on fixed investment components since before the Greek Great Depression (GGD).

I ‘ve grouped Fixed investment into two major categories: (Private) Dwelings + Transport Equipment (Ships etc) and Other Investment. Greece experienced a housing boom in the early Euro years while the ship balance exploded after 2004 from roughly balanced to €5.4bn in 2007. While both series increased steadily during the 1995-2005 decade, dwelings + transport equipment surged almost €13bn in a very short time period.

Moreover, while Other Investment stabilized at around €15bn annually after 2012 and has since touched €20bn, the former category dropped to only €5bn per years, a loss of €33bn in a matter of years.

New building permits suggest that this drop is permanent with 2018 permits being 15% of 2007 figures. Decreasing population, stressed bank balance sheets and low household incomes are all factors pointing towards the same direction with only demand for AirBnB apartments being suggestive of positive prospects.

Assuming an accelerator model for fixed (other) investment we can examine Other Investment as a percentage of consumption and exports (total demand) to determine if there is scope for improvement:

Other Investment hovered between 8-10% of total demand in the period before the GGD with a relentless fall to 6.5% until 2012Q2 probably due to animal spirits and lack of access to credit. It now moves between 8-9% suggesting small room for further improvement.

In my view, the above indicate that Greek fixed investment will not return to pre-crisis levels any time soon and projections of 20% GDP investment are quite optimistic and probably overstated. The share of GDP will most likely stabilize around 15% of GDP with dwelings construction being permanently lower.

Given that the external balance is the difference between domestic savings and investment and that the Greek government is destined for semi-permanent primary surpluses of 2-3.5% GDP, my view is that the (Greek) «structural» current account deficit is now quite low. Greek households have already dis-saved almost €40bn while the Greek banking system will not be in a position to provide ample amounts of credit any time soon.

On the other hand, anemic dwelings investment, stable other investment and large Greek government primary surpluses indicate the absence of factors for a large boom in the Greek economy. Demand drivers will include the steady increase in employment (and consumption), external demand and «autonomous» investment mostly in the form of FDI. I am not sure how Greek growth can become impressive any time soon.

Greek Primary Current Balance

In this post I will do a simple enough exercise: Look into the evolution of the Greek government primary current balance. This is just the balance of current income minus current expenditure excluding interest. Thus it excludes both the investment budget as well as interest payments on government debt.

Although public investment does impact national income (and is added in GDP in the first place), the current primary balance can act as a crude estimate of the «weight» of government on the economic process. Especially its change from one year to the other indicates the expansionary or contractionary stance of fiscal policy.

The general pattern is quite clear. The primary current balance was in surplus in the late 1990s and reached a peak of 7.5% GDP during 2000. Afterwards, the fiscal stance relaxed substantially with a drop of 6.5% GDP in the 2001 – 2007 period to reach only 1% in the final year. The Great Recession took its toll with the balance dropping almost 6% of GDP during 2008-9 to a negative close to 5% GDP.

Then came austerity: The balance grew 8.6% of GDP in the 2010-13 period while it relaxed substantially during 2014 with a drop of 1.1% compared to an increase of 3% in 2013. This can most clearly explain the return to growth in 2014 since the economy experienced a change in the fiscal impulse of 4% GDP.

The effects of the 3rd economic adjustment program are also quite visible with the balance increasing 4.2% in the 2015-18 period which explains why these years had a sense of strong austerity despite a return to economic growth.

The 2019 current primary balance is expected to reach 7% of GDP, roughly similar to the 1999 balance. Yet 1999 registered 6% GDP private credit flow with a further increase to 10% during 2000 (which increased and persisted until 2008) while 2017 closed with a 1% fall in that flow. It is thus clear that the underlying dynamics are quite different and such a large surplus will definitely act as a serious drag on growth.

It is also interesting to take a closer look on the evolution of current revenue and primary expenditure during this time:

Current revenue starts with a steady increase during 1996 – 2000 (close to 5% GDP total increase), remains stable for a couple of years and then makes a step drop of 1.5% GDP in 2003 to 37.5% around which it hovers until 2009. Since then it starts an uphill march to around 45% in 2013, a change of 7.5% GDP. Although it grew more than 3% GDP in 2014 to 48.4%, this level appears quite unstable since current revenue is projected to return to 45.5% during 2019. Assuming that 45% is the «new equilibrium», future current primary balance will depend heavily on the primary current expenditure trajectory.

The latter appears to grow steadily from 30% in 1998 to 39% a decade later. Even the large austerity package from 2010 onward was not able to break that limit, mostly because of the large fall in GDP which made the denominator fall substantially along with nominal expenditures. The 2013-17 average was 41.7% which dropped significantly during 2018 to 40% GDP and is projected to reach 38.5% in 2019, a cumulative fall of 3% GDP in two years. Whether such a fall can be sustained in the long-run is a question that will be difficult to answer.

If primary current expenditure returns to the 41.5% average, the primary current balance will drop to half its 2019 projection to 3.5% GDP. Since that is the current primary balance target until 2022 this implies that the investment budget will need to be balanced. Given that is close to impossible, the stability of the 3.5% primary surplus target will depend on the Greek government achieving a primary current expenditure level of close to 38.5% GDP.

Actually (Gross Fixed Capital Formation – Capital Transfers Received) has a mean value of -2.4% GDP and a standard deviation of 1.42% for the period 1995 – 2017. If the values were drawn from a normal distribution the probability of a non-negative balance would be around 4%.

BoG August 2018 balance sheet

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.

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).

ECB Greek waiver post-program

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.

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.

IMF 2018 Article IV Consultation for Greece

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:

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:

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:

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%.

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.

Greece Household Saving

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:

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).

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).

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.

Greek population dependent on public funding

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:

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):

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.

 

Latest Greek DSA by the ESM

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.

* 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.

Long run primary surpluses for Greece

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.

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.

and

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.

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.

Balance Sheet risk assessment of a Grexit scenario

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.

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.

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.

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:

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.