42 Academics on whether Greece should default

Chicago Booth's IGM Forum asked 42 academic experts whether Greece would be better off defaulting on its debt.

The best coverage of the Greek crisis I have seen so far

Recently I viewed a one hour documentary byBB3 regarding the Greek economic crisis and its effect on various social and economic groups. I believe it is trully worth watching and I would like to share it.

Stable Link for "Coming Here Soon: Greece, Bust, and Broken" - http://www.bbc.co.uk/i/b01kbz15/

 

For NON-UK residents the documentary is available in 4 parts via youtube:

Part 1, Part 2, Part 3, Part 4

The most realistic predictions on what follows in the Greek debt story

I reproduce from Economistmeg.com an article written by Megan Greene on what follows in the story of the Greek debt crisis.

German proposal for Greece’s compliance: accelerating eurozone exit

JANUARY 28, 2012

At the top of my list of to do’s for the past few weeks has been to update the post on Greek PSI that I wrote just before Christmas to include some more recent developments, such as the prospect of ECB participation. Last night, Peter Spiegel from the Financial Times (@SpiegelPeter) published the German government’s proposalfor Greece’s “improvement of compliance” with the terms of the bailout, and all of a sudden Greek PSI positively pales in comparison. According to Germany’s proposal, whatever the result of the PSI deal, Greece will need to “legally commit itself to giving absolute priority to future debt service” and “accept shifting budgetary sovereignty to the European level”. If the Greek government is not willing to do this, the troika would presumably turn off the taps of bailout money and Greece would default. With no access to market or official financing, Greece would be forced to exit the eurozone.

Why the Greek rescue plan is condemned to a failure

Given the opportunity derived from the article posted by Mr. Provopoulos, Governor of the Bank of Greece to Financial Times this evening, i had the wish to reply.

My prediction is that the near future will reveal that the  views expressed by the governor of the Bank of Greece are unrealistic. Primarily for two simple reasons that are not at all discussed by Mr. Provopoulos.

First, the Government that is implementing the reforms, for a respectable proportion of the Greek public, is perceived as non-legitimate, non-democratically elected and thus non-socially acceptable. Although they have an enormous parliamentarian majority, the ability to make an effective policy change and reform the economy primarily depends upon the perception of how legitimacy the government is. In the Greek current case perhaps the government lacks of that dynamic. Hence, any policy change that is proposed and enacted will fall into the umbrella of the authoritarian decision-making hence will gradually increase the existing tension which will in the end lead to social unrest (at a level that the past will seem idealistic and peaceful compared to what will occur)

Second reason why the government's attempt to reform and restructure the economy is condemned to a massive failure concerns the issue of the disbelief and uncertainty derived from both domestic entities and foreign institutions and officials on whether the Greek economy can be viable by remaining in the Eurozone. Foreign agents ranging from public officials in the EU, IMF and ECB tend to offer opinions and statements that contradict, thus leading to an increase of the economic uncertainty. That disbelief of the success of the Austerity programme that is currently applied together with alternative scenarios that indicate Greece will not remain in the euro for very long destroy any positive attempt (if such exists) towards the increase of investments and expansion of the economic participation of the private sector. Assuming that today a private agent in Greece or abroad is interested in investing in a project and possesses the required capital to do so, the climate of uncertainty for the currency drives her to a delay and continuous postponement of the investing process. This delay is extremely rational given the enormous devaluation that will occur to a hypothesized new currency. An investor who decides to invest today in that unstable Greek environment is willing to take massive risks due to the immediate losses that will incur from a change in the currency and the devaluation that will follow as a consequence. Thus the potential investor chooses rationally to delay until the environment settles (and there is a political and economic guarantee what the currency will be in the medium-run).

Due to these two reasons my projection and economic forecast differs completely from that of the Governor of the Bank of Greece. I tend to believe that the push for reform and economic restructure will continue to expand while the response on behalf of the society and the private agents will continue to be defensive and negative. As the indicators will be on deficit from the expected ones further pushing for reforms will be required, by a perceived as non-legitimate government which will lead gradually to the perception of an aggressive strategy by the government and the aggression at some point will destroy the remains of the social cohesion within the Greek public with severe and perhaps threatening consequences. The existing economic strategy is condemned to failure due to the public opposition.

Stable Link for the Original Article by Mr. Provopoulos: http://clippings.ft.com/listnavigator/mwgs/1781471

Can't find data on private deposit outflows for the EU countries

Having examined the recent developments in the Eurozone, one of the main consequences of the euro crisis is the incline of outflow in private deposits as individuals perceive the economic climate quiet unattractive in certain areas. In addition countries suffering the immediate threat of a potential default face the  concern of a withdrawal from the Euro as the case for Greece that could cause a collapse or turbulence in the banking sector with unpredicted results which at the worst scenario can even mean a breakdown in financial institutions that will hence be unable to preserve the deposits of the individuals.

Given the above macroeconomic picture in the Euro area, households that foresee negative financial prospects attempt to protect the lifetime savings by either gambling in currency, i.e. exchanging their euro saving accounts into some different currency that they perceive as more stable, such as dollars, english pound, australian or Canadian dollars, etc. This option guarantees the protection of the deposits in the scenario that the country to which the bank account is held decides to exit the euro and devaluate a newly launched currency. However, the threat of this choice is that the banking institution of the domestic country that finds itself under a default regime, might end up bankrupt as well. Since the deposits are held at home (where home defaults and the financial institution faces bankruptcy) the owner might risk to lose all the deposits regardless of the currency that the account is in. As a result, gambling in currency while keeping the deposits at home should be selected if the individual foresees that the default and the devaluation of the new currency after the country exits euro will not harm the banking sector or threaten financial institutions with a potential collapse.

Alternatively, the second scenario a forward-looking depositor might select, is to send the deposits to a financial institution abroad, to a country that is more protected from the current euro financial crisis. In such case, even after a country in the Eurozone defaults, the deposits will not be threatened as the banking sector of the recipient country will be more secure.

I have analysed the two mechanisms of "rational" (?) investing thinking so as to explain two interesting measures that are derived from the concepts. These are the deposit outflows by country and the currency preference by country. The first involves the individuals who select to expatriate their money to a foreign financial institution. For academics and journalists it is extremely useful to measure the countries that the individuals choose to send funds to. The second, is a figure of "currency strength" in the minds of the individual depositors. Both may constitute an exceptional index of economic climate expressed by the confidence of the private account holders.

Unfortunately, although I thoroughly examined the sites of both Eurostat and European Central Bank for data related to the status and movement (flows) of private account holders by country, I was unable to retrieve anything useful or relevant. The problem is that this information should exist and financial institutions, policymakers and a few journalists are aware of. Does anyone have an idea how or where relevant information may be retrieved? I would appreciate any recommendations as i ended up desperate after searching in most relevant data portals. I am mainly interested in deposit outflows and currency conversions for countries at the core of the crisis which belong to the periphery of the EU such as Greece, Italy, Portugal, Spain. 

Funnily enough, in various newspapers the reader will be able to find numerous articles containing information about private deposit outflows such as number of outflows in money and frequency, recipient countries etc. The articles i have read, unfortunately, don't reveal the sources of the data while some mention that are derived from confidential banking sources and analysts.

A good insight on the latest Greek socio-political developments

I copy the article which has been retrieved from Globalpost.com and conducted by Ken Maguire

I think that the article is extremely objective in terms of the facts provision. I would add that the main source of insecurity for the people is derived by the government itself (both the elected ex government of Pasok and the current transition government) which do not hold any social legitimacy at all among the majority of Greeks. 

 

Where Greeks hide their savings

With safes and Swiss accounts, rich Greeks could stand to profit from the crisis.

Demonstrators burn an EU flag during a protest in Thessaloniki on November 17, 2011 against austerity measures demanded by the new unity government to persuade its creditors to release bankruptcy-saving loans. Greeks are draining local banks in favor of Swiss accounts, London property and cash stashed in home safes. (Sakis Mitrolidis/AFP/Getty Images)

The most excellent depiction of the EU debt crisis

I found an exceptional presentation of rough  data by various official sources like Eurostat, IMF, World Bank in tables and graphs regarding the macroeconomic situation and the debt crisis the EU is experiencing. The site is knowledge Performance Indicators (KPI) and can be accessed here. Worth a visit! Unfortunately the data cannot be automatically extracted by the KPI Library.

An interesting view on Eurozone crisis resolution

I read a very alternative perspective on how the Eurozone crisis may be overcome by exiting the Euro and immediately rejoining by devaluing the new exchange rate. It is a quiet smart policy recommendation and at least to the extent i am aware, completely new. It offers a both politically and economically viable solution to the lack of monetary independence of the Euro indebted countries.

The full article with the analysis of the proposed mechanism by Julian Le Grand might be found here. It's worth a reading.

In Greece, 'corruption pervades every corner of life' - by Jon Henley

I repost the newblog post by the Guardian

Original article stable link: http://www.guardian.co.uk/world/blog/2011/oct/20/europe-breadline-corrution-pervades-corner

AT THE BOTTOM I INCLUDE MY COMMENT

Jon Henley is travelling through Portugal, Spain, Italy and Greece to hear the human stories behind the European debt crisis. Here Leonidas Pitsoulis describes Greek corruption

Many Greeks have extremely low levels of personal debt – by western standards. Photograph: Angelos Tzortzinis/AFP/Getty Images

Leonidas Pitsoulis, 43, returned to Thessaloniki seven years ago after leaving at 18 to study and then teach in America and at the LSE in London. Coming back as an adult after leaving as a teenager was an eye-opener, he said.

Information on Greek Strikes and disruptions

Two sites attempt to summarize and offer up-to-date information on anyone interested in Greek disruptions and strikes. The latter tend to be quiet numerous after the sequence of austerity measures imposed by the Greek government. As a result, living in Greece, or even worse being a tourist while not possessing the information about public disruptions might lead to plan disruptions and other inconveniences.

Hence, the following two sources resolve the asymmetry of information by offering the exact details of the body (union, sector, etc) that will pursue action.

• Apergia (Strike): Written in Greek but may be translated in many languages by clicking on the button at the very top of the home page. The site is exceptionally informative as it summarizes all the details for each labour action to a weekly schedule which is coloured depending on the type of action. Pretty good!


• LivingInGreece: This site can be found entirely in english and other languages. It doesn't summarize various actions as the previous one, into a weekly schedule, however, it provides the most analytical and updated detail of the action plans. Due to the fact that labour action plans tend to be altered even at the last-minute I suggest checking this site for the last second changes so as not to be captured by surprise!

NOTE: By no means I don't believe that strike actions are negative for an economy (especially when a whole society is destroyed by the financial measures introduced by the government) and I think that massive awareness can be raised by attending (in a self protected and careful way) a demonstration in Greece.

Silver blasts Standard & Poor’s, “whose advice has more often than not led investors toward the losing side of bets” - by Royal Statistical Society

The Article was retrieved by the Royal Statistical Society

As turbulence in global financial markets continues in the wake of the downgrading of US debt by Standard & Poor’s (S&P), statistician Nate Silver has made a withering critique of the agency's "fundamentally flawed" ratings.

Objective statistical measures have been proved to be more reliable than S&P's ratings, in part says Silver because ratings changes are serially correlated – a move either way is likely to be one of a successive series. Hence the ratings are "inefficient about how they incorporate new information."

He opines: "No competent brokerage firm would ever convey that kind of information to investors. If I signal to you that I’m likely to accept a cheaper price tomorrow than I am today, nobody would buy at today’s price."

In Why S. & P.’s Ratings Are Substandard and Porous, published in his fiverthirtyeight column in the New York Times, Silver uses various analytical approaches to test the ratings' reliability and to "reverse-engineer" them to determine how S&P reaches its conclusions.

He notes that S&P takes account of GDP, sovereign debt, debt:GDP ratio, inflation rate, annual and long-term deficits but "also places very heavy emphasis on subjective views about a country’s political environment … these political factors are at least as important as economic variables in determining their ratings".

Silver says that S&P's ratings "have an extremely strong relationship" withTransparency International's Corruption Perceptions Index, a governance indicator which has been criticised in some quarters as too subjective. Using regression analysis on S&P's ratings, he concludes that "the subjective Corruption Perceptions Index is more closely related to the S&P ratings than any of these economic fundamentals."

Making the point that he doesn't necessarily disagree with downgrade of the US rating, Silver comments on S&P's historic ratings of debt-worthiness for countries including Ireland, Spain, Iceland and Greece. He concludes these gave "no insight … about which countries in Europe were relatively more likely to default."

Using a country’s ratio of net debt to GDP – a poor measure in objective terms – "would have been a better predictor of default," he says, citing research from Carmen M. Reinhart published by the US National Bureau of Economic Research which found that objective, statistical indicators significantly outperformed S&P ratings as predictors of default.

As recent events show, there is a relationship between credit agencies' ratings and market sentiment and investors' behaviour. But Silver finds that "S&P ratings tend to lag, rather than lead, the market … in cases where the market’s view of default risk is misaligned with S&P’s, S&P is a good bet to change their rating to catch up to market perception".

He tests this by putting S&P ratings for countries from June 2009 into a regression equation with credit default swap prices - which indicate market perception of default risk – from the same date. The credit default swap prices proves to be "a statistically significant predictor" of S&P’s 2011 rating, implying "that the markets pick up on salient information about the countries’ default risk before S&P does".

Taking this a step further, "Evidence from the past five years suggests that it may be worthwhile to adopt a contrarian investing strategy that specifically bets against S&P’s ratings," says Silver. S&P does influence market perceptions but actual debt prices are a "compromise between daft investors who take S&P’s ratings to be gospel, and savvier ones who have conducted their own analysis and have concluded that the country is at significant risk of default. By betting against S&P’s ratings, you’re taking the side of the smart investors — and getting a subsidy from the suckers who think S&P’s price is right."

In conclusion, Silver writes that "relying on the consensus of the market is almost certainly better than relying on Standard & Poor’s, whose advice has more often than not led investors toward the losing side of bets. The fact that billions of dollars in wealth are tied up in the judgments of a company with such a poor record is all the proof you should require that the global financial system is in need of reform."

Original Link: http://www.rssenews.org.uk/articles/20110809_1

Witness - Children of the Riots

As the financial crisis weighs heavily on Greece, the country seems trapped in a cycle of violence. But discontent over the misuse of power has long been simmering. Greek youths reflect on how the killing of a teenager by police changed their lives.

The effects of the IMF era on Greece - by Manos Matsaganis and Chrysa Leventi

Greek financial crisis has alarming effect on poverty levels

21 August 2011

 

New research from members of ISER’s EUROMOD project shows that levels of poverty among the Greek population have risen alarmingly since the financial crisis hit last year. The research concludes that policies to reduce Greece’s deficit need to be redesigned and stresses the importance of fighting tax evasion.

The research by Manos Matsaganis and Chrysa Leventi from the Athens University of Economics and Businessshows that as a result of the austerity measures and the wider recession in Greece, relative poverty (as measured conventionally, by reference to a poverty threshold of 60% of median incomes) has increased from 20.1% in 2009 to 20.9% to 2010. Extreme poverty (measured by reference to a threshold of 40% of median incomes) has followed a similar pattern, rising from 7.3% to 8.0%.

The researchers say that while these figures may appear unimpressive, poverty was shown to have risen to 25.5% if anchored in pre-crisis terms (measured by reference to a threshold of 60% of median incomes in 2009, adjusted for inflation). They argue that the latter indicator is better suited to periods of rapid change in living standards, better approximating the experience of impoverishment when nominal incomes fall and prices rise (as was the case in Greece in 2010 relative to 2009).

Iceland has won - by Krugman

September 1, 2011, 9:01 AM

Iceland Exits

Iceland is no longer under an IMF program; here’s the IMF report (pdf) pronouncing the adjustment program successful. Indeed. Iceland still has high unemployment and is a long way from a full recovery; but it’s no longer in crisis, it has regained access to international capital markets, and has done all that with its society intact.

And it has done all that with very heterodox policies — debt repudiation, capital controls, and currency depreciation. It was as close as you can get to the polar opposite of the gold standard. And it has worked.

 

The original article on: http://krugman.blogs.nytimes.com/2011/09/01/iceland-exits/