Greek debt 'crisis' overblown 2

Feb 10, 2010

The financial press is full of stories warning of the impending disaster that has befallen Greece because of its supposed sovereign debt crisis. But this crisis is largely manufactured by the absurdly out of date and totally arbitrary deficit and debt criteria imposed by the European union and the European central bank.You will recall that these august institutions cry wolf whenever a member country has a deficit level that exceeds 3 % of the GDP and a debt level in excess of 60 %.

Almost all of the analysis lacks the salient statistical data about the Greek debt situation including its debt to GDP ratio over the past fifty years, the list of foreign holders of the debt, the percentage of the debt held by foreigners, the rate of unemployment in Greece and so on.

It is possible to assemble much of this information using Eurostat, the BIS and quality papers like the FT, the Wall Street journal etc. When one does that here are some of the salient facts.

Unemployment as of December 2009 was 9.7 % in Greece.
About 30 % of the Greek debt appears to be owed to foreign bond holders.These appear to be principally in France, Germany and Switzerland. Since about 99 % of the debt is denominated in Euros there is no exchange rate risk. (It is difficult to tell from the official data that I have searched so far as to who the principal foreign bond holders are but some of the financial press make these claims.But they sometimes get things wrong. For example, the Economist at one point claimed the population of Greece was only 7 million people. In fact, it is 11 million from the Government 's official data.)The debt to GDP ratio   was as high as 119 % in 2005. It is now currently lower than this. One official site gives it as about 100%.

The proportion of the debt apparently owed to foreigners is higher than other EU members but it is not inherently a disaster unless the financial press can create an emotional stampede about the possibility of default and the necessity of austerity and bailout. This may happen but one must ask to whose benefit?

Since Greece has to rely upon the European central bank for help in managing their sovereign debt they are in an awkward situation because of the dogmatic rigid monetarism of that institution. The central bank should actually step in and buy a sufficient quantity of the Greek debt to calm nerves and assist the Greek government in the management of their debt.

It does not have to buy it all but a significant purchase that is in proportion to the size of Greek economy in monetary terms in relation to the whole Euro area would be appropriate.The ECB should be buying and selling govenment bonds from all of its member states as a normal part of its monetary policy.

It would help show that   the panic is irrational and will be self-fulfilling with unforeseen consequences if left unchecked. Eurostat data suggests that the Greek debt to GDP ratio as of the end of the 3rd quarter 2009 was of the order of 99 %. Italy was higher 107 %. Japan was higher over 160 %.As stated above in the recent past 2005 it was higher at 119 % of the GDP according to the Greek Ministery of Finance, 2007 budget.

Now the recession has battered Greece as it has a number of countries.
Hence its projected deficit this year is about 13 % of the GDP. This is a significant figure but hardly Armageddon. If the media had not seized upon the situation and played up the fears that monetarists have about deficits I very much doubt that we would be having this crisis.The behaviour of speculative hedge funds in buying credit default swaps on Greek sovereign debt, thereby increasing pressure on Greece in managing its bond sales, even when the speculators hold none of the debt in their portfolios has also not helped. Such speculation should be strictly regulated.

One thing that is clear. IMF style austerity will not solve the problem but further strain the Greek economy which needs to recover to bring Greece through the crisis. It is a very bad and damaging policy idea. By all means support Greece. But forget austerity in an economy that already suffers from 9.7 % unemployment.