Kalimera*,
This week, we need obviously to take a look at our Greek
friends since a new government was elected and is vowing to not pay the debts.
Alexis Tsipras, leader of Siriza, won a relative majority
and has started to govern the country.
The first measures have had a populist angle, such as
rehiring teachers or trying to nationalise the main country’s harbour.
Obviously, his insistence that Greece will stop austerity is
attracting some nervous comments from his European counterparts.
Some market pundits seem to rejoice to the idea that
something bad may happen and therefore increase their audience.
While the new Greek government insist they will stay in the
Eurozone, a lot of pundits are not agreeing: below is the google search
analysis for “Grexit”.
Greece is important to the history of economics.
The Greeks have given us the word itself: οἰκονομία, ikonomía, the management of the
house.
So when we talk about economics, no wonder we employ
expressions such as “putting one’s house in order”.
Before you think that the Greeks made no effort to put their
house in order, take a look below at the government spending as planned by the
Troika in 2010 versus what was achieved.
Cutting public spending is notoriously difficult and yet
they did it by nearly 25% in 4 years.
However, as growth collapsed, this has prevented Greece from
returning to growth and better budget balance.
This helped Siriza win the elections on a platform of
no-austerity.
Greek bondholders are now scared.
Does it matter? Will it derail everything? Will they keep
for themselves their delicious olive oil as retaliation?
Remember the IPC view on Greece: it is a small portion of
global GDP and therefore its small size will not derail the world economy.
Greek debts are currently of €423bn (see here to know more http://www.nationaldebtclocks.org/debtclock/greece).
This is around €39,000 per inhabitant or $44,000.
The US by comparison is $56,000 per inhabitant (http://www.usdebtclock.org/) so beaten
by Greece (hey hey).
But the Greeks have an uncanny history of defaults
while the US have not (actually the US and Switzerland are the only countries
to have never defaulted).
The first recorded default in Greek history occurred in the
fourth century B.C., when 13 Greek city states borrowed funds from the Temple
of Delos. Most of the borrowers never made good on the loans and the temple
took an 80% loss on its principal.
Greece then defaulted regularly in the 19th
century as the young nation was fighting for its independence.
In 1932, due to the Great Depression, Greece also defaulted
and stayed in default until 1964.
After 1932, we have to come to 2012, with a €172bn
restructuring, to this day the largest ever sovereign default.
Since its independence in the 19th century,
Greece has spend half these years in default.
In an empirical study by Michael Tomz from Standford University,
we learn by a country in default remains there for 9.9 years on average, and
that a haircut of 38-40% is the average loss faced by investors.
Therefore, in the current Greek case, if creditors lost 40%
of their €423bn, they would lose nearly €170bn or a bit more than $190bn.
Since global GDP is nearly €78trn, it means a loss of 0.24%
of global GDP.
Actually, if we look at recent history, we find several
large defaults which did not derail the global economy:
-
Mexico has a default in 1994, which affected US
banks but they were given the time to recover and boy did they do this.
-
Argentina chose to stop paying more than $80bn
of debt in 2001, ruining a lot of Italian savers, but this was not a starting
factor to the then bear-market.
On the other side, some small defaults had large impacts: in
1998, Russia defaulted on $5bn of domestic debt, triggering the LTCM crisis and
a sharp stock market correction.
However, by the end of 1998, equities had already rallied
back above their pre-correction level.
So it seems fair to say that what matters is more how
interconnected the economy is rather than just the size of the default.
Bond investors are currently fleeing Greek bonds but not
other Eurozone countries’. That means that there is little expectation of
contagion.
Part of the reason could be that Greek banks have neither
foreign shareholders nor major foreign operations: they will sink on their own.
To finish, a few random facts about Greece and its
economy for this elusive pub-quizz:
-
Greece’s currency, the drachma, was 2,650
years old and Europe’s oldest currency. The drachma was replaced with the Euro
in 2002.
-
Some scholars say that the Greek
civilization has been around for so long that it has had a chance to try nearly
every from of government.
-
Approximately 16.5 million tourists visit
Greece each year, more than the country’s entire population. Tourism
constitutes nearly 16% of the Gross Domestic Product (GDP).
-
About 7% of all the marble produced in the
world comes from Greece. – Think about it when you shower in a posh hotel.
-
Greece is the leading producer of sea
sponges. Think about it when you gently wash your partner’s back in the bath
-
Greece has zero navigable rivers because
of the mountainous terrain. Nearly 80% of Greece is mountainous. But they
have one of the largest merchant shipping fleet in the world!
-
Spartan warriors were known for their
long, flowing hair. Before a battle, they would carefully comb it. Cowardly
soldiers would have half their hair and half their beards shaved off - Don’t
mess with the dress code.
Special bonus: the new Greek
finance minister Yanis Varoufakis - Professor of
Economics at the University of Athens.
Also here:
Looking better here:
And as younger man:
Years pass, hair falls but the dress style remains :-)
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