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.

Here is why Greece won't exit the Euro

The link is from the Efxnews.com

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

The Greek PM most responsible for the debt? A graphic

Here is a very informative graphic depicting the Greek public debt against the time period of governance by each PM. Useful observations can be extracted.

 



 

Source: http://www.xrimanews.gr/agores/24608-poios-prwthypoyrgos-ths-xwras-dhmioyrghse-to-megalytero-xreos

 

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)

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.

A truth about the impact of Euro on Intra-EU trade

Few days ago I came across an article entitled "This Chart is the Holy Grail for Understanding Europe" and signed by Joe Weisenthal. While discussing the recent dramatic developments in the EU with Greece and Italy being at the very edge of economic and social stability and in essence flirting with a "default" which could, especially for the case and magnitude of Italy, propagate the financial crisis towards the core of Europe, Joe mentions that primarily and almost solely Germany is the country that has been influenced positively by the EMU through an incline in exports.

I remembered that i had written an essay (2010) on the issue of intra-EU trade and its connection to the implementation of the common currency. You may read the entire essay here.

My main points were:

1) The basic economic gains from the Economic Monetary Unions and hence the Euro zone were the elimination of the transaction costs, the exchange rate certainty that comes with a single currency, and the price transparency since the consumer can compare national with foreign (within the Euro area) prices more easily. As was explained, all lead to a possible increase in trade since these parameters affect the economic environment in a positive way allowing space for extra trading activity.

2)  The prevailing dimension is that Euro does have a positive effect on trade among the Euro zone countries but this is NOT as high as
Rose forecasted (maximum 15 to 20 percent in the long run) and thus the gains from an increase in trade should not be a unique reason for a country to enter the euro area.

3) it was found that entering the euro zone leads to trade creation (not diversion).

4) Lastly, should be noted that although evidence shows a certain increase in trade after the adoption of the Euro among the Euro zone countries, has not been clarified whether this phenomenon is solely caused by the Euro or other policies that led to the establishment of the European Monetary Union.

5) Hence, our main consensus is that Euro should lead to a limited increase in trade among participant countries but is not statistically significant that the main reason for this increase is the introduction of the common currency.

Hence, given the observations that I made on the essay, intra-EU trade seems to be affected slightly positively by the introduction of the European currency while even that is argued by some economists.

The truth about the euro is that only core euro zone states like Germany (and even perhaps only Germany) are expanding exports to the other euro allies. The latter (especially those at the periphery) who tend to be less competitive for the beginning of the euro advventure find themeslves losing exports to other euro states.