Thought for this morning: Is Greece the equivalent of GM? Here are some parallels:
- GM promised to pay out more in pensions than what it could earn in profits (2009 post); Greece promised to pay out more in pensions than what it could collect in tax revenue
- GM received about $100 billion in taxpayer dollars while its competitors received nothing; Greece has received about $400 billion mostly from its partners (also competitors in many industries, such as agriculture and tourism) within the EU
I was always shocked that Ford could survive as a company when its major competitor had just been handed $100 billion for free. Now I’m wondering why Greece isn’t doing better than some of its competitors. With $400 billion in free money, shouldn’t Greece have an edge over other countries in the region? Maybe the answer is that the people who provided the $400 billion want it back, but Greece is sovereign and, assuming it is willing to live within its means going forward, can simply say “we’re not giving any of it back.” That would leave Greece as having had a massive injection of free cash, especially on a per-capita basis, that neighboring countries haven’t enjoyed. Greece could even keep the euro in the same way that Ecuador uses U.S. dollars as its official currency without having any special ties to the U.S. Treasury.
Clearly there is something wrong with the above analysis because (1) Ford is still more profitable than GM, and (2) Greece is the subject of a constant stream of doom-and-gloom journalism. But I can’t figure out why this back-of-the-envelope calculation is wrong. In short: assuming that they’re not going to pay it back, shouldn’t Greece be better off than a country that had never borrowed $400 billion?
Interesting comparison! But there are some important details you’ve missed.
1. Countries that provided Greece the money never said it was “free”. It was always agreed upon that money should be returned back at the specified time in the future.
2. Country saying “we’re not giving any of it back” is a bankrupt country. Wikipedia has an article about – “Sovereign default”. The whole world stops trusting this government and nobody wants to give credit to the government or to the companies in it. And the world runs on credit. Because governments usually realize they want to get out of this mess, they start prolonged negotiations with their creditors to “restructure” the debt. Consequences can be very harsh and unpredictable, with financial, economic, currency and political crisis. Just one example: in 1998 after Russia government announced the default, the currency lost its value 4 times, the government was dissolved and there was much political uncertainty (parliament vs president). And it all ended with Putin coming to power a year later.
You are right that “Greece could even keep the euro”. Greece staying the euro zone or leaving the euro zone makes no effect on its debt situation. The debt is nominated in euro and will still be nominated in euro, no matter what their domestic currency is.
You wrote “assuming it is willing to live within its means going forward,” but I’ve sene nothing to suggest that assumption is correct.
The debt emperor has no clothes and a situation like Greece (or Russia or Argentina) in their time it just shows clearly. Greece’s immediate problem is that it is small and weak, showing no promise of returning to “creditworthiness” (code for attractive to predatory rent-seeking huge banks) within an economic time frame. Greek debt is just big enough to be embarrassing to northern politicians after they bailed out the rent-seekers. The pols don’t have the will to post the write-off after they knowingly posted the debt from the private banks to their own central bank.
If Greece had been obviously hopeless like Iceland, the pols would have let the banks take the loss and dealt with insolvent banks like they did in Iceland. In Greece’s case, it is easier to bludgeon the Greek public than the northern banks.
Unsustainable debt is unsustainable debt, and either the ECB or the Greek govt will ultimately write it off (if it’s the ECB, they will embed it in a larger corpus of debt and thus button the kimono). Greek financial behavior has already changed but it cannot change enough to ever repay the past folly, or perhaps even to remain in financial Europe.
In the GM case, the auto makers had become banks that incidentally made their own collateral. GM was just another case of too big to (explicitly) fail. Ford was like JPMorgan, not explicitly insolvent, so the big banks loaned one last tranche that surprisingly proved sustainable under a new product cycle and cost structure enabled by better management. Chrysler was taken under by Fiat using euro funds backed by the US Fed, and who knows where all that debt is buried?
Thatcher say that the problem with socialism is that you eventually run out of other people’s money. Think of a dysfunctional country/company as a bucket with a hole in it (and Ford as a bucket without a hole). No matter how much water (money) you dump into the leaky bucket (and even if you say that the water that has leaked out no longer has to be returned), the non-leaky bucket is going to end up with more water in it.
The whole thing is like a Hillary Clinton/Bernie Sanders debate writ large. Plenty of bad ideas to go around with nary a thought towards what’s best for the country.
Your mistake is in assuming that all the money ‘pumped into Greece’ was put to productive use. It seems this was not the case and just a fraction of it went toward giving Greece a notional competitive edge. The rest of it? Well, it went to perpetuating the broken European financial industry of course: http://www.theguardian.com/world/2015/jun/29/where-did-the-greek-bailout-money-go
The Greek GDP per capita is about two to four times that of nearby countries Bulgaria, Macedonia, Serbia, Albania, Romania and Turkey. So yes, it *is* doing considerably better than its competitors. It’s just not doing well enough to pay off its debts.
Thanks, Andrew, for the Guardian link. I don’t think it sheds any light on the original posting. It talks about government bailout money being spent to cover 310 billion euros previously borrowed from private banks, but doesn’t say what the 310 billion euros originally borrowed was used for. I have a tough time believing that the Greeks simply wasted 310 billion euros.
It depends what you mean by “wasted”. They got a certain amount of infrastructure. Athens has a nice subway and a few miles of decent highway and an Olympic stadium. They were built at a high cost inflated by corruption and bribes (and the fact that they had to stop the subway digging every few yards for archeological finds). So maybe there is $50 billion worth of infrastructure and another $50 billion is sitting in Swiss bank accounts and invested in NY City real estate, etc. where the Greek tax authorities can never reach it even if they tried, which they don’t.
However, once you get outside of the city, the highway system is a nightmare. The main national highway is two lanes. The custom is that in order to pass, you drive head on into the oncoming lane and the oncoming traffic drives on the shoulder when they see you coming. All along the highway are little shrines put up in memory of those deceased on the spot. When I saw all this I didn’t know whether to laugh or cry, but actually it was terrifying.
But most of the money went for paying pensions to 52 year olds, no-show civil service jobs to “economists” in government ministries, etc. and there is absolutely nothing to show for it – that money is spent and gone and never coming back.
Izzie: If you look at Chart 3 in http://philippewaechter.nam.natixis.com/2013/08/12/gdp-dynamics-in-greece-3-frightening-charts/ you’ll see that Greece GDP per capita went up dramatically starting in 2001 when the Greeks first gained access to the euro. Then as the spigot of cash slowed down, GDP per capita began to revert to where it had been. So “nothing to show for it” doesn’t seem right. They had a bunch of years of higher consumption during which time, for example, a lot of Greeks got broadband Internet, the mobile phone network was built out, young people went to college, etc. At least some of that higher consumption should turn into long-term productivity advantages compared to, say, Albania.
Greece total depth: $303,920 million
Greece total population: 11.12 million
Greece depth per citizen: $27,330
Greece GDP per capita: $21,956
US total depth: $1,8628,000 million
US total population: 320.09 million
Greece depth per citizen: $58,196
US GDP per capita: $53,041
@George A.
My pet conspiracy theory is that this is why feds are trying to inflate dollar for the last few years (always take credit in your own currency; but fortunately or not still haven’t really induced sustainable inflation). In this light Obama’s attempts to raise minimal wage are rational: what is better way to induce inflation than by giving money to people who will spend it for sure?
OK, I take back “nothing to show for it” and change it to “very little to show for it”. How much is a 14 year old Mercedes worth?
Phil – remember that servicing interest on $400B prevents those tax dollars from going to more productive uses. Also the quick growth of the debt indicates that interest was capitalized to at least some extent, compounding the problem. It’s similar to Detroit’s bankruptcy – lots of debt and interest to be paid on it, and few services provided to the population for the taxes they paid.
Why use tax dollars for ‘productive uses’? Tax dollars are for keeping government running, social security spending in case when social security is not backed-up by savings and for debt servicing. For productive uses Greeks need to lower tax on production by giving tax breaks to foreign firms for moving shop there and to local businesses to promote production. It is time to make created infrastructure productive by using it to facilitate business. EU also suggests to increase tax on consumption. This is going to be good for Greece as it encourages savings.