We need obviously to take a look at our Greek friends since their new government is vowing to not pay the debts.
Alexis Tsipras, leader of Siriza, is getting some love from his European counterparts and we need to look at why.
The first measures of his government 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?
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 Greek finance minister Yanis Varoufakis – Professor of Economics at the University of Athens.
Looking better here:
And as younger man:
Years pass, hair falls but the dress style remains 🙂