We are all familiar with the so-called domino effect, or contagion, that began in Greece and has taken its toll throughout the Eurozone. Interestingly, no formal economic model has ever attempted to capture the essence of this negative dynamic. When the Association for Evolutionary Economics (AFEE) chose to honour me with the ‘Ayres Scholar for 2013′ accolade, in return of which I was asked to prepare a suitable talk, I seized upon the opportunity to come up with a simple model of the Eurozone’s disintegration process; what I like to refer to as Europe’s Reverse Alchemy. While this is still work in progress, which will result in a fully fledged academic paper soon, I thought that readers of this blog might be interested to hear the talk I delivered in San Diego on 5th January as part of the ASSA-AEA panel organised by AFEE on the Eurozone Crisis and chaired by Professor James Galbraith; to whom I owe a great debt of gratitude for all of the above.
Click here for the audio: Ayers Scholar Lecture – 5th JANUARY 2013: AUDIO
And click on for the slides and further explanation.
To hear the talk, click the audio button above and then follow the slides below. But beware: this is not a talk for unsuspecting citizens. It is pitched at economists and comes replete with some equations and diagrams. If you wish to continue, you will find below the transparencies that the audience was seeing during my talk. To help you follow the talk I have endeavoured to add on top of each image (see below) the precise minute-second of the talk when the image becomes relevant to what I am actually saying. Hope it makes some sense.
[Note that mms stands for marginal member state: the member state that is next in line to drop out of the money markets and into the arms of the EFSF-ESM.]
SLIDE ABOVE relates to minutes/seconds 4:20 to 9:14
SLIDE ABOVE relates to minutes/seconds 9:14 to 9:53
SLIDE ABOVE relates to minutes/seconds 9:53 to 11:04
SLIDE ABOVE relates to minutes/seconds 11:04 to 11:48
SLIDE ABOVE relates to minutes/seconds 11:49 to 14:09
SLIDE relates to minutes/seconds 14:10 to 15:08
SLIDE relates to minutes/seconds 15:09 to 23:08
SLIDE relates to minutes/seconds 23:08 to the end
BTW, – and I mean this as a blanket statement for those belly aching about Greek banks needing more money – take a good look at the Greek external debt courtesy of the Bank of Greece (Greek Central bank not to be confused with the National Bank of Greece which is a private bank).
Click on the link that says External Debt: Quarterly data and concentrate on Part I – General Government. Then look under the subcategory called “Long Term” further broken down into “Bonds and Notes” and “Loans”.
At the end of the 4th Quarter of 2010 Greece had roughly 140 Bil. euros worth of debt denominated in Bonds and Notes and about 40 Bil. worth of external debt in Loans. By the end of the 3rd Quarter 2012 #and prior to PSI Deux# Greece had reversed the mix by holding roughly 48 Bil. euros in Bonds and 158 Bil. euros in Loans.
Two observations right away:
1. The subsequent PSI 2 probably transferred another 32 Bil. from Bonds by increasing the Loans figure even further.
2. That despite all the publicized haircuts the debt of Greece remains the same or higher than before.
Therefore ask yourselves these questions:
a. What is this theater of 1 to 1 substitution all about? Greece had debt payable to its own banks and substituted it for debt payable to Europe under much harsher terms. The net effect in terms of indebtedness is zero; arguably some better rates which however are dwarfed by the ever increasing debt level (my point is that any benefits are marginal at best).
b. Why such a brutal destruction of Greece’s banking sector in the process? Was it worth to take future profits from your own banks thus rendering them insolvent in order to save yourself? Was causing a damage of upwards of 200+ Bil. euros (see reply below) to your own banking sector which you need to propel growth worth it(BTW, the destruction caused is higher than the entire Greek GDP)? and what of the people? those who had to sacrifice even more?
This is the inequity of the whole deal folks. The Greek debt remains as high as ever and will continue to go higher still. The savage damage done to the Greek economy is beyond description. Yet from all of this carnage the only entity that remains unscathed is the same inefficient state which all have agreed that it had to die. Only, it’s alive and the rest of us dead.
http://www.bankofgreece.gr/Pages/en/Statistics/externalsector/debit.aspx
Wishes to everyone for a good year.
In the following link there is a discussion with Kostas Gavras about his new movie “le capital”.
http://www.sgt.gr/players/gavras/gr/
What is relevant though with this specific topic is something Mr Gavras mentions:
An algerian comedian responded to him in a discussion: In Algeria, there is a falling and then there is the ground and then there is a come back. You, when you hit the ground you start digging with your hands!
Banks to need more money for their recapitalization
According to estimates for the country’s four main banks, the buyback signifies a revenue reduction of at least 1.5 billion euros, thereby increasing their capital requirements. The Bank of Greece has announced that the four systemic banks will need in the region of 27.5 billion euros for their recapitalization, but if that estimate on the buyback is upheld, the bill will reach up to at least 29 billion euros.
The four lenders’ losses from the credit risk (including loans in Greece and abroad) are estimated at 14.58 billion euros, but if the deepening of the recession is factored in, the losses would grow by about 10 to 20 percent and the capital needs would expand by between 1.5 and 3 billion euros.
As a result the capital stock of 5 billion euros formed by the Bank of Greece for future needs may have to be used immediately by the big banks, eventually taking the total bill of the recapitalization process to over 30 billion euros.
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_07/01/2013_477234
Greek government finds it can’t have its moussaka and eat it
http://ftalphaville.ft.com/2013/01/08/1326243/greek-government-finds-it-cant-have-its-mousakka-and-eat-it/?
Of course the Greek banks need more.
After stealing 32 Bil. euros last December alone from them, so that Antonakis gets his drug dose, what do you think? That they would need less money?
This is all Tier 1 stuff. If the banks don’t get that money they can’t be open for business in any form of ownership. These are the European rules.
The real question is this:
What did Greece expect after raiding the Greek banks on PSI 1(55 Bil.) + PSI 2 (32 Bil.) + red loans (55 Bil.)+ Grexit terror deposits flown out of the country(82 Bil.) = 224 Bil. euros total? That it would end up with a healthy banking system? Why? Because Germany wants its own payment avoidance at all costs?
No banks could function without deposits. And the deposits are permanently outside Greece because the minute they enter Greece they become evidence of ability to tax by the government and thus quickly confiscated by an ailing state.
Only an idiot would ever return deposits back to the Greek banks. And without deposits there is no lending and without lending there is no growth.
This is what the anti-bank biased folks fail to understand. That you have shot your own foot and then you complain that you can’t run.
There nothing Greece could do about its banks now. If they nationalize them, then Greece will incur further loses which citizens have to plug in. The only thing Greece could do to revive its banking sector is offer better recapitalization terms and then pray hard that this would be enough to spark lending liquidity.
Dean – This is what has to happen for banks to lend.
1. Tax and regulatory regime has to come stabilise
2. Tax and regulations have to follow a template similar to Hong Kong/Singapore or any other small country with a prosperous economy.
3. Effective, transparent and easy to access legal system
When this is done.
3. Banks will offer secured loans to Greek businesses and people.
4. There is plenty of cash in the world looking for a home, look to China, India as the most obvious examples.
Real world example even in the current climate
http://eu.greekreporter.com/2013/01/08/turkey%CE%84s-bank-plans-massive-loan-for-greek-farmers/
Its very simple and it can all happen without any cost to the taxpayer ie without bailouts of bankrupt banks
Richard:
Are you serious?
Do you consider (your link) a 40-50 Million total lending to farmers as a massive loan? This is chicken feed. So 5 farmers at 10 Mil. each loan and that’s it?
40-50 Mil. loan is a single loan. Then what? Where is the massive part?
Dean – Am I serious? Are you Serious? “Massive” is the word in the article not in my post, take it up with them.
I gave an example of banks prepared to lend to Greeks even though the economy is imploding and the results of the latest round of tax increases are not understood.
Richard:
Please read the articles you post. This is not an example of banks willing to lend. This is a shameless piece of Islamist propaganda and nothing more than that.
First, it’s conditional on an approval not yet obtained nor guaranteed to be obtainable either.
Second, it’s aimed at a segment of Muslim Greeks which Turkey for its own propaganda purposes is trying to manipulate and make them dependent on Turkey rather than Greece.
Dean – Your missing the bigger point as usual. Forget the link, I wish I hadn’t included it
Richard:
Let me also clarify:
“Islamist propagand = Islamo-fascist propaganda.” This is AKP mixed with elements of a Greek Golden Dawn type with a different religion.
Snow job! Glad ran to the end to see what you were getting at. Did you get any laughs?
This looks like Oliver Blanchard’s kind functions in his macro book.
Reblogged this on Greek Left Review.
While a student composer during the mid-1980′s. I became fascinated with the possibility of discovering an outlook and practice which unified all existing theory and undiscovered forms. As sophomoric and grandiose as that may sound, to figuratively accomplish this my choice was to explore the history of classes of belief anthropologically engrained in the human psyche. It made sense at the time, the small number of categories into which knowledge can be classified by its means of development might be genuine both as a tool of analysis and application. Why beliefs are held as principle and considered valid is a riddle for the ages, I primarily wished to find a practice which made them all available as a resource to expand my own creative potential and aesthetic judgement. I had many good hours at the music desk experimenting with my little projections and toys. If I took away one general principle from those efforts it was that selective systems (classed orders of resources) can be managed to provide an optimum result by some by fairly simple methods.
Following your discussion, the point of Veblen seems particularly relevant as incompatible systems are being imposed on one another but aren’t regarded as an altogether new specie. In theory the present situation in the EU can be described as a derivation, an outcome of empirical order expanded into one that has statistical limits of being able to function. It’s obvious that functional limits, which are inherently restrictive, must be addressed by changes in rule structure. And while solvency programs would appear to reflect a bending of the rules they aren’t informed either by the best empirical or scientific data, which is contrary to valid empirical design. What has happened is that a new dysfunctional specie has evolved, one that now incorporates systematic tenacity. In the sense of Ars Musica that might useful, but we’re talking about Musica Mundana, the music of the human world in which it is not morally licensable. Your argument, its supporting data and human outlook suggest this and I agree. Cheers
Wow.
Can I have that in plain English please as I am only a person possessed of a second class mind . What you write may or may not make complete sense or it could be complete bull@&. Would it be too much to reduce to simple language?
I have been explaining this in plain language for three years. But here is the shortest version of the story: In 2009 banks and many member-states in which they were domiciled became insolvent. Europe then created a bailout fund that resembled as silly group of mountaineers, who were tied to one another with a single rope but forgot to attack it to the rock face. So, when one fell into the abyss, his weight was transferred to the rest, with the weakest of them being brought to the limit of his capacities. When this new ‘marginal’ climber also fell, the weight of two fallen climbers over-burden the new-new marginal climber. And so on. Finally, the condition for being attached to this rope was austerity: the equivalent of making the rock steeper every time one climber fell off.
First things first. Yani, on the occasion of your name day, I just wish to offer my best wishes for a long life full of health, creativity and joy. Secondly, your paper offers considerable food for thought that will take me a while to digest, but I am certainly keen to contribute to the argument, as it touches on my field of practice. Till later.