Greece is falling further and further into a debt-filled abyss

25th September 2012 by The Harried House Hunter

One of the main issues that keeps coming up again and again in the economic crisis that is afflicting Greece is the way that official forecasts and estimates keep being wrong,often very wrong. If you are polite you would call these forecasts rose-tinted if you are less so you might consider it another version of kicking the can into the future. Actually they have been tantamount to lies and in the way that they have put Greece on the wrong course with false hope they have been very dangerous lies. It must be very demoralising for the Greeks to find that again and again they have to do more because reality keeps being ignored and replaced by wishful thinking.

The International Monetary Fund

If we go back only to March this year we saw an example of this from the IMF as it produced this on the 9th of March after Greece’s debt restructuring or private-sector involvement.

A key ingredient in the government’s revamped economic strategy was the successful conclusion on March 9 of a substantial write-down of Greece’s bonded debt, which will dramatically reduce the country’s medium-term financing needs. The IMF has maintained that Greece must reduce its debt-to-GDP ratio to 120 percent by 2020 if its debt is to become sustainable in the medium term. The debt exchange, which saw private sector investors agreeing to write down 75 percent of their Greek bond holdings, is the largest and steepest debt reduction agreement in history.

The problem was that the 120% of GDP target for Greece’s National Debt was never very likely as a result of that move alone. A large factor in this was the fact that a substantial investor in Greek debt the European Central Bank excluded itself from the process. A so called rescue vehicle -purchases of Greek government debt under the Securities Markets Programme to support their price and reduce yields- actually became a punishment for Greece as otherwise the bonds would have been subject to a restructuring.

To get anywhere near the 120% of GDP level for Greek national debt in 2020 both the present and the future needed to be manipulated as I discussed back on the 21st of February.

To get anywhere near the target established above the Euro zone had the problem that somehow it needed to “improve” the numbers. It started mildly by assuming an economic contraction of 4.3% this year and a flat outcome in 2013 although already it is probably too mild. The current figures point to a worse outcome for 2012 and if there is any evidence for a turn-around in 2013 I hope they will present it. But then we see the dark-side of such analysis as look at Greece go!


Just to make it even worse all this manipulation of the future was to achieve a national debt to GDP ratio that does not actually mean anything. Research on the subject has suggested that ratios of 90% and 100% may have significance as barriers. The only possible reason for using 120% was that otherwise you gave Italy a problem.

At the time I criticised such analysis as being like the Mad Hatters Tea Party. As time goes by I am starting to think that I may have been somewhat unfair on the Mad Hatter.

Reality has begun to unfold in the meantime

The Greek economy is already behind on the absurdly optimistic growth forecasts shown above and as I discussed on August 8th Standard and Poor’s gave a very different view.

We project GDP will contract by 10%-11% cumulatively during 2012-2013, versus the negative 4%-5% assumed by the EU/IMF Program for 2012-2013.

This much more realistic view had a sting like a Scorpion’s Tail attached to it.

the related worsening of the fiscal position imply a high likelihood that Greece will require additional financing of as much as €7 billion (3.7% of GDP) for 2012

At that time I suggested that Greece would need bailout mark 3.0.

What is the significance of this now?

Last night Christine Lagarde who is the managing director of the IMF gave us a clear hint of problems with the Greek programme.

The last thing we want is for programs to be off track and off track and off track again

If we review the economic forecasts for Greece that were signed off by Mademoiselle Lagarde we can see that the fact that the programme is off track again is because it was full of fantasies. Indeed she continued one of the fantasies as she repeated the importance of the Greek national debt coming down to 120% of GDP.

Whilst there have been genuine problems with the Greek implementation of her austerity programme it is not even remotely fair to blame her for forecasts which were of the garbage in garbage out variety. Unfortunately Christine Lagarde has a long record of failure which is simply getting longer.

What is happening in Greece now?

Back on August 8th I discussed the claims of Greek politicians that they were near to a resolution of the issue of another 11.5 billion Euros of cuts. Well it would appear that they are still near to it! Frustration with this lack of progress must be a major reason why the inspectors of the troika (ECB,IMF,EC) have left Greece for a week.

It looks as though the Greek Prime Minister is planning to give a national address on television to try to rally support for the austerity plan. This comes at an unfortunate time as Portugal’s Prime Minister has only just been forced to reverse measures announced in a televised addressing of his nation. Tomorrow’s General Strike in Greece will only increase the difficulties she faces. I doubt that their mood will be improved much by passing this sort of evidence of Greece’s economic collapse. From Kathimerini

In the city’s «commercial triangle», where generations of merchants had run successful businesses a stone’s throw from the central Syntagma Square, an August census by retail lobby group ESEE found 31 percent of shops had closed.

Even if this is achieved issues remain

As ever the troika process is leaking details and they have been making a steady progression in terms of extra austerity required by Greece from 10 to 20 and now apparently 30 billion Euros if she is to achieve the targets under her second bailout programme. The reason for this will come as no surprise which is mostly that Greece’s economy has underperformed the fantasies that the troika made on its behalf. No wonder she is suffering from bailout fatigue!

One issue that never seems to go away is the fact that the Greek government has continued to use not paying its bills as a way of keeping expenditure under control. Her finance minister admitted to unpaid bills of 6.5 billion Euros only last week. Such numbers make one wonder how what is reported below by her Ministry of Finance has actually been achieved.

State Budget expenditures up to August 2012 were reduced compared to same period a year ago by 5,657 million Euros or 11.0%. It is noted that most individual spending categories were reduced with the greatest saving achieved in Primary Expenditure which presented a 9.3% decrease (or 3,170 million Euro), a figure constituting the main indicator of State Budget expenditure restriction.

Greece’s Balance of Payments

Greece’s statistics office has released her latest trade figures for today and they show a worrying sign. The improvement in her exports seems to have stopped as July 2012 showed a 1.3% fall on July 2011 in value terms. As there is positive inflation this is a larger fall in real terms. Monthly figures can be very erratic so care is needed but it looks as though Greece’e export boom is slowing as for 2012 so far her exports had increased by 6.1%. As one thing that IMF style programmes can usually achieve is balance of trade improvements this is very worrying if it should continue.

Also there is food for thought for one of the supposed benefits of being in the Euro as Greece’s trade performance improvement in 2012 so far is much more marked with nations with whom she does not share a common currency!


As if on cue Greece’s deputy finance minister has announced this morning that she may ask the European Central Bank to keep rolling over its holdings of Greek government debt. Why? Because she does not have the money to repay them. The catch of course is that this is a back-door method of financing Greece and does anybody recall the supposed three-year term of the original 2010 bailout?

So we see Greece being saddled with ever more debt which is a complete contradiction of the modus operandi of the debt restructuring. This is the consequence of the austerity,economic decline, more austerity, more economic decline cycle in which her leaders have trapped her and to which there is no apparent end. The bailout of Greece just like Quantiative Easing is seemingly taking advice from Buzz Lightyear.

Too Infinity…..And Beyond!




39 thoughts on “Greece is falling further and further into a debt-filled abyss”

  1. Ray_Fletcher says:

    An excellent article, Shaun. There has to be a limit to citizen suffering and I think now the time has surely come to say “enough is enough”. If full default and exit from the EZ (but not the EU) is the way it has to be, so be it. I understand there will be a lot of finger-pointing and apportioning blame, but little (now) can be placed at the door of the Greek people; kicking the can into the (dubious) future cannot be the way for Greece to exit its parlous state.

    1. Anonymous says:

      Hi Ray
      Thank you. How are you getting on? Am I right in presuming that you are now back in the UK….?

  2. James says:

    Great article, Shaun. The only thing that can be said in favour of Mme Lagarde is that at least we didn’t get one G Brown at the helm, as was rumoured at the time.
    My theory about all of these debt problems is that governments will do anything that
    1. makes them look good and decisive
    2. doesn’t scare the voters.
    The two put together mean that truth is a long way down the list of priorities. It also means that anything too technical for the (popular word now) plebs is better than anything that they can understand.
    So, with Greece, you
    1. Lie about the figures
    2. Dream up some imaginary benchmark, such as the magic 120% of GDP
    3. get the troika involved, which both means that noone understands who they are AND they are not subject to popular votes, so can say unpleasant things
    I have a prediction, which is as follows:
    1. The ECB will keep on rolling over the Greek debt, whatever has been agreed
    2. As part of some mega Euro initiative, the ECB debt will be written off/transferred to some off balance sheet vehicle
    3. The Greek debt ratio will then miraculously come down to less than 120%, which the politicians WILL claim credit for
    4. This will be repeated across Europe
    5. The German constitutional court will OK this arrangement “But no more”, as usual
    6. Our financial mess will continue for decades

    1. Anonymous says:

      Hi James
      Actually it seems likely that most politicians would be interchangeable in this role! Although you might think that Lagarde’s track record -“shock and awe”- would have counted against her.
      Anyway Gordon Brown was otherwise engaged today as he and his wife rang the opening bell on the New York Stock Exchange. I have to confess that I am a little unclear as to why…

      1. Rods says:

        All he can break and ruin is a bell! Seems like a safe place to keep him to me :-)) Next put him is an orchestra to play a triangle :-))

        Just keep him well away from all levers of economic power.

    2. Shaun Richards says:

      listen here son, u a lse graduate u mad.

    3. Hi James
      I just thought I would point out that for some reason someone has decided to impersonate me and use my name on a hotmail account. Slightly bizarre but the reply 14 hours ago was either another Shaun Richards or an impersonator.

  3. therrawbuzzin says:

    I cannot believe that anyone still believes that the motive for austerity is to cure Greece’s debt problems; there has never, ever, ever been any prospect of this.
    The debt problems are the excuse for austerity, and that’s the only way the two have ever been connected.

    1. Forbin says:

      yes its the only conclusion – but the effect would be a like a house of cards, the old Domino effect.

      and our lords and masters will loose a packet so they will resist with all their might ( until they have relocated all their assets to safe havens – heaven above they should loose anything !! as for the plebs – well slavery* will be a boon to them ….. )

      surely nobody thinks anything good will come of this ? For us , that is, afterall what are the bailouts for ?


      PS: how many Forbins worth of popcorn should I stock up with ? 😉

      * slavery will be renamed, PR’ed , spun to death, and sold as “Freedom”

    2. Anonymous says:

      What do you suggest? Spend money they don’t have? Borrow more? Even if they default on the debt they still won’t have real money to spend, only whatever they can print in massive amounts.

      Expect Zimbabwe style hyperinflation if they do.

      1. DaveS says:

        Agreed Andy.

        With a devalued drachma, they would experience an inflationary spike that effectively makes the citizens much poorer. The theory is that this would be temporary until the economy and the currency recovers.

        Quite how the Greek economy might recover, I don’t understand. Argentina and Iceland did it by exporting commodities – not sure Greece can do the same. Not at all convinced it would attract manufacturing even with cheaper labour – can’t see how they can compete with China or even places like Ukraine/Turkey that already have very low wages.

        Greece is also very energy poor – something thats often overlooked,

        Would Greece receive more IMF help if it exited ? What kind of foreign currency reserves does it have to buy oil and other essential imports ? If they remained in the EU then I think there would likely be a mass exodus of workers so perhaps they could become a foreign remittance economy. What happens if the drop in living standards provokes anarchy ?

        It seems quite possible, that whatever they do, the Greeks are destined to become a lot poorer and unfortunately provide a vision of the future for the rest of us.

        1. Anonymous says:

          Yes, devaluation makes the general population poorer. As the population get poorer, local production of goods becomes more profitable as imports become more expensive. This stimulates local economic activity & employment bringing recovery. This is probably the best option in a bad bunch.

          Default, devaluation with austerity keeping spending in control is a tested and proven solution. The IMF has had many successes with this. Now they should be learning that austerity alone does not work ….

          1. DaveS says:

            Thanks Expat.

            Labour does get cheaper, but imported energy, raw materials and components get more expensive. Local demand drops due to poorer citizens so much of the growth must come from competing for exports in a very competitive globalised world. We aren’t seeing much benefit of a devalued pound – the textbooks said we should.

            It would need inward investment to rebuild its manufacturing capacity and it would need to be able to educate and importantly retain its talent to be able to compete in high end manufacturing. This needs social and political stability.

            Are there IMF examples of de-industrialised service economies that managed to re-industrialise ? Argentina didn’t do this (it used to be an industrial country) – rather it became an agricultural exporter – maybe Greece can do this too, although it doesn’t quite have the same land mass.

            I am sure that Greece will manage to find some areas to compete in with a devalued currency but I guess my question is – will it be enough or will there be a permanent drop in living standards ?

          2. Anonymous says:

            That’s a difficult question – I don’t know. Brasil, Turkey and Bulgaria have been through IMF rescues and are doing relatively well now. As long as the people have enough food & basic needs covered, it doesn’t matter whether it’s industrial or agricultural or commodities wealth. The trick is to live within your means and avoid overspending.

            As to living standards – that is difficult to appraise. It can be measured by purchasing power parity or GDP. Purchasing power parity tries to compare what goods your local money buys. For example Bulgarian wages are lower than English, but a pub pint costs about 90p and a kilo of tomatoes about 50p here.

          3. Rob says:

            @Expat & DaveSThe best solution for all concerned would be for Germany to bite the bullet and leave the €. The euro would devalue for all the southern med countries and also help France and Belgium. It would be tough on Germany but they have the muscle to get over it. More popcorn required for 2013….

            Terrible demonstrations in Madrid today/now, coming to the many cities of Europe in the near future.

          4. Anonymous says:

            Agreed, Germexit is the best solution. And for all the talk about German exports being harmed, the average German wage earner sees direct benefit in the strong currency with price reductions in fuel and imported food. Appreciating currencies enrich the people !

            Not only will the Germans cope with a strong currency – they might revel in it’s strength …

          5. Rods says:

            The history of countries defaulting shows that countries, start recovering very quickly, with falling unemployment.

            The fear of the consequences of defaulting, mean that generally countries leave it too long before they do, which leaves them in a weaker position than if they bit the bullet earlier.

            If Greece left the Euro and the Drachma was devaluing fast as a currency, with the potential of a major undershoot and growing inflation I wonder if they could learn and apply some of the lessons from what Russia and Poland did in the 1990’s to stabilize their currencies, inflation and economies?


            I guess this is a question for Shaun.

        2. Rob says:

          Hi DaveS,

          As Forbin has alluded to below it is the Domino effect that is the worry. Greece would survive leaving the €, devaluation of the Drachma would be tough but it would at least put them in control of their own destiny.

          The other dominoes would fall rather quickly, PIG is only 2% of the EU GDP it’s Spain and Italy that they are trying to save to stop the destruction of this political project.

          Spain is in a dire position too, Shaun has made this known on his blog for long enough and a return to the Peseta would benefit her in the long run.
          Take a look at Italy’s GDP, Deficit and Debt revisions for 2012, not pretty.

          I stated on here after the last G8 meeting in May that Barry gave the order to the assembled EU leaders to “Sort It”
          Europe’s Crisis must be delayed until after the US election!

          Forbin will need plenty of popcorn after that…..Go long popcorn.

          1. DaveS says:

            Even with devaluation, I’m not sure that Greece would be in control of its destiny – I think the same could be said for much of the West – the world has changed too much – the textbook economic levers aren’t enough.

            And as you said, if the dominoes fall, then defaults on that scale are going to change the world a whole lot more.

            I think I can here the microwave pinging…………

        3. Anonymous says:

          News in Greece are full of analysis which show that out of Euro we are dead in the water. I think similar for Portugal. So exit voluntarily? very slim chance. The fear of domino makes an imposed exit remote also. Probably we will have a new haircut. We will be in these muddy waters for many years.

      2. therrawbuzzin says:

        There is evidence to suggest that Greece is at, or near, a primary surplus.
        Default on the debt would not, therefore, need to seriously impact on domestic spending.
        Cancel a few defence orders and put the money to better use.
        Ok, the Greeks aren’t immediately better off, but at least with reform, any savings and wealth creation goes to Greeks and not international finance.
        Greece ejected from Euro? Just what Italy Spain and France need, a rising Euro.

  4. pavlaki says:

    Greece is in the most frightening mess and will never meet any target set by the Troika. Euro membership has been catastrophic for Greece and it is time that it defaulted and left the Euro zone. Only then is there a glimmer of hope. Unless you go to Greece and talk to ordinary folk you cannot begin to understand just how bad things are. A close Greek friend sent me an e-mail from Sydney this morning to say that he and his family are abandoning Greece as there is no future at all (they have dual nationality) and they will try to start again in Australia. His parents had to do this last century when they were kicked out by the Turks! Family members in Athens are at breaking point and fear that further austerity will cause chaos. I don’t know where this is going but I wish this Euro purgatory would end.

    1. Anonymous says:

      Hi pavlaki
      That is a sad story that I do not doubt is repeated a fair bit. As to what Greece can do to improve matters I remain in the devalue and default camp. She has managed to export more and has done so in 2012 to countries outside the Euro disproportionately. So there is hope for this route.
      Also I believe the “shock” of such a move would change Greece both politically and economically and help to get her out of her current sleepwalking nightmare. This effect could be the most powerful of all and would hopefully be peaceful and via an election.

  5. Anonymous says:

    I guess that Greece is reverting, painfully, to the living standard it had before EZ entry. Time will tell, but the ‘more than depression’ will eventually have that effect. My question is: ‘was that standard so very bad?’ Or has the distribution of incomes altered so much that the poor can no longer manage?

    1. Ray_Fletcher says:

      barncactus . you make a valid point about standards. Can we say that the majority of people (anywhere) seek to maximise rather than optimise? There’s a huge difference, and perhaps in the past Greeks (like most others) have sought to maximise…..

    2. Anonymous says:

      Hi Barbcactus
      You make a good point about the income distribution in Greece. It reminds me of this story I read in Kathimerini earlier.
      Particularly if you combine it with politicans being investigated for corruption (although as we in the UK have discovered in recent years that seems a theme of the times).

  6. Anonymous says:

    I don’t think that the situation is that desperate. It is tough, very tough for some who dcide to leave the country, but not desperate. So far, protests and participation to strikes has been minimal. On Wednesday there will be a general strike and things will happen but I don’t expect anything worse of what we have seen. The issue is that still most people (even syriza) believe 1) that an exit from Euro will be worse and 2) there will be a fiscal union in the end. The alternative is collapse of EZ and it is clear to people’s minds that this won’t be allowed even if it necessitates outright bailouts and not ‘bailouts’ i the end. So politics rule and economics is of secondary importance. It might be very wrong, an accident can happen (especially for Greece) but this is the feeling I get from the country.

    1. Anonymous says:

      It is hard to predict a revolution and especially it’s timing. Berlin in 89 was a surprise. The euro elite keep using the same failed policy and kicking the can. Reality as represented by economic statistics keeps getting worse.

      It’s dangerous to assume that German funding is never ending – they might just stop paying and/or have a Germexit

      1. Anonymous says:


  7. Anonymous says:

    I found the comparison of Greece’s ‘bailout’ and QE very interesting. It does not solve the underlying problems (but I doubt if the re is an acceptable solution to this by the electorate) and just kicks the can. It postpones the sharp pain and one hopes for some ‘divine’ intervention in the end.

  8. Anonymous says:

    There is of course a fundamantal problem with lending to countries – you can’t repossess them when they default like you can houses! I wonder if it would be so tempting if there was a warning “your country is at risk of annexation if you don’t keep up the payments”?

    Regarding the idea of the “austerity, more economic decline, austerity…” cycle, though, I do wonder if there is a natural bottoming out point.

    If we asked the question “what would happen if the government spent no money at all?”. There is of course a massive reduction in GDP, but much of that is illusory productivity driven by borrowed money.

    If all the props were pulled out from the greek economy, what would survive on its own? Nothing? Something?

    If the latter, is that something capable of growing on its own?

    1. Anonymous says:

      I think that ‘annexation’, threat of war etc. is illegal under UN charter. I think that’s why Germans are so furious. Greece or any country can default and they can do next to nothing for this. I don’t think that Greeks worry about this.

    2. Anonymous says:

      Hi andyrwebman
      One of the ironies of such an attempted “forced repossession” if I may put it like that is that the invading force would face weapons that were sold to the Greeks by them, such as German submarines and tanks and French frigates and fighter planes
      Another irony would be that if Greek defence spending had been lower so would her current economic crisis……

  9. pavlaki says:

    I think that Greece would be better off outside the Euro providing it wasn’t just abandoned once it had left. I do not believe that fiscal union will ever happen – 75% of Germans are already of the opinion that the Euro has been bad for them and that there should be no fiscal transfers. Opinions are hardening. It is only those who have a lot to lose who want the Euro to continue – long enough to safe guard their investments.

  10. Anonymous says:

    Hi Shaun,

    Looks like the IMF is failing to deliver a solution to the eurozone crisis. It’s time to ask if Lagarde should be stood down due to Potential conflict of France’s national interest. Alternately if there is no conflict of interest – that implies incompetence.

    Either way it is time for a new IMF director to bring in new policies and a difference approach.

    1. Rods says:

      I think you will find it is intended for Lagarde’s IMF, the EU and the French national interest to be one and the same.

      Fortunately the biggest enemy of France is the French, which is why they have a glorious history of failure. French hegemony has failed in a Germany-French EU axis as Germany is too strong, so it is now teamed up with Italy and Spain to assert French hegemony, well I think we know where that is going to go.

  11. pavlaki says:

    I remember driving second hand cars imported from Germany and having to pay a huge import duty on a Nikon camera but I also remember cheap housing, locally produced food and tavernas. The tourists came in their millions and the filter down effect of tourism was massive. It employs a lot more more people than those in the front line. Tourism would be given a massive boost by a devalued drachma. With a bit of organisation to encourage inward investment Greece could be a cheap source of manufacturing on Europe’s doorstep. Life was better pre Euro and it can be again. It isn’t going to be easy and it needs a huge effort to scrap stupid restrictions on business and to clear out corruption but it can be done. I just do not see any of this happening under endless austerity and a high value currency.

  12. Anonymous says:

    So far the usual incidents in Sintagma square that the foreign press likes to dramatise. I would say with much less vigour than many times prior to 2009 (the worse in 2007 with no crisis!). These has always been the case. Anarchist movement in Greece has always been vibrant. Anyway, general participation to strike has been larger than I predicted and this was the main news (not the usual incidents by the usual suspects that the foreign press mistakes for general uprising).

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