How has the Greek government used international loans?
Using the data available from the flow of funds published by the Bank of Greece and the sectoral accounts published by the Hellenic Statistical Institute (ElStat), we have the following:
|Table 1. Greece. Use of international loans (billion euro)|
|Sources of funds|
|1. Long-term loans from abroad||24.3||30.0||110.0||30.8||5.3||200.5|
|Uses of funds|
|2. Purchases of securities held abroad||19.9||24.4||44.3||8.0||10.7||107.4|
|3. Purchases of financial sector equities||0.2||0.9||0.0||19.0||0.0||20.2|
|4. Capital transfers||3.6||3.7||8.6||23.3||1.4||40.7|
|5. Interest payments||13.2||15.1||9.7||7.3||5.3||50.6|
|6. Residual = 1 – (2+3+4+5)||-12.7||-14.2||47.3||-26.8||-12.1||-18.4|
|NB: * First three quarters for 2014|
We start by estimating the funds received, using the table on “Financial liabilities broken down by holding sector,” and taking the line “Long-term loans received from abroad.” The largest part of these funds has been used to reduce the existing stock of debt held abroad: line 2 in Table 1 is obtained by the change in government long-term debt securities held abroad, which has been negative from 2010 onwards. A negative change in liabilities amounts to purchasing back the existing stock of debt(1). Another large part has been transferred to the domestic financial sector, either by purchasing equities (line 3 in Table 1, obtained from the data on flows of financial assets purchased by the government and issued by the domestic financial sector) or through capital transfers (line 4 in Table 1, which reports total capital transfers of the government).
If we add the total expenditure of the government on interest payments (line 5), we get that, overall, the international loans have not been sufficient to meet these expenses.
It could be argued that, had the Greek government not recapitalized Greek banks, a major banking crisis would have had even harsher consequences for the population of Greece. On the other hand, since these funds have not reached the Greek population, all debtors (households with mortgages, non-financial firms) who have experienced a severe drop in their income (for households) or sales (for firms) may be unable to meet their financial obligations, and this will imply a new, possibly large, fall in the value of the assets of the Greek financial sector, requiring more government intervention.
The only way to have addressed the Greek public debt problem, which was indeed a problem of foreign debt, in a sustainable way should have been to strengthen the Greek economy in its ability to produce and sell abroad enough to cover for its imports. Greece needed an investment plan; as Joseph Stiglitz just said at the ongoing INET conference in Paris, the “EU addresses the imbalances by making deficit countries starve instead of increasing their exports” (as tweeted by INET).
(1) In 2010 and 2011 a large negative value in the flow of government securities held abroad was matched, for a total of roughly 20 billion euros, by an increase in the flow held by the Greek financial sector.