Tuesday, January 9, 2018

Greek GDP And Credit Expansion - No Money, No Honey

Credit expansion, i.e. easy and cheap access to bank loans, is an essential ingredient of economic growth.  But as with all good things, too much of it can lead to trouble.

This was certainly the case with the economy of Greece during its debt bubble years.  The chart below shows how credit expansion grew much faster than GDP-  sometimes as much as 10 times faster. And this chart shows only bank credit, i.e. it does not include government borrowing which was also rising very fast.

The bubble burst in 2009 and the economy went south, staying in recession for eight straight years.

Can the economy now recover and grow without credit expansion? It is already doing so in 2017, even as banks shrink their balance sheets by selling or writing off bad loans (thus the large credit contraction in 2016-17).  Moreover, the government is not adding any new debt, instead producing oversize primary budget surpluses.

Therefore, credit conditions are currently very, very tight in Greece - one would characterize its economy as the diametrical opposite of a debt bubble;  let's coin a phrase and call it the "no money, no honey" economy..

The economy can continue growing for a while by focusing almost entirely on expanding its external markets such as tourism and exports - and that's exactly what is happening right now.  But this creditless expansion will not, and cannot, create the vigorous growth necessary to bring Greece back to financial health and raise living standards back towards those of a decade ago.

Greece needs healthy, well capitalized and deposit-rich banks that can once again provide sound businesses with plentiful credit to stimulate economic growth well above the 2-3% range.

Is this a realistic possibility? After all, everyone in Greek banking is focused on dealing with bad loans, meeting new regulatory criteria and cutting operating costs.

I believe it is more than possible, and there are early signs that astute, experienced bankers and investors are catching on to this idea.  There are - apparently - several entities preparing to submit applications for new banking licenses to establish credit institutions unencumbered by old bad loans, ready and willing to provide fresh credit.

This will play out over the next few months - so how are the four large systemic banks going to respond?  Certainly, they won't roll over and die... they have several factors in their favor, and I am willing to bet they will use them this year.

Stay tuned, because we may soon see fresh money coming into the Greek banking sector... otherwise, no honey!


  1. "Greece needs healthy, well capitalized and deposit-rich banks that can once again provide sound businesses with plentiful credit to stimulate economic growth well above the 2-3% range."

    Nope, what Greece really needs is for lots of cash-rich and income-secure Greek consumers to purchase lots of Greek-made stuff. No credit needed. No cheap-and-nasty foreign imports. No zero-hour, foreign, casualized labour.

    What does the ECB expect Greece to do with its cohorts of eastern refugees? House them and feed them? For how long?

    1. I agree.
      But the most important thing Greece needs is new leaders.
      The current ones do not care for the country or the people and it is them that brought all the problem to them.
      In fact it's been decades since Greece has seen caring politicians.

  2. You can't have banks lending whilst they have a massive bad debt problem.

    To fix the bad debt they either write it off, or reposess and sell.

    No sign so far of either.

    Living in a fantasy land.

  3. Hi, LB. My understanding of contemporary 'banks' is that they write their own regs. They may require to have some sort of backing for their lending - but its usually of the paper type, not physical cash.

    And they do not exist in a fantasy land - but one populated by real folk who are virtually powerless against the executives of financial institutions. Our national politicians could indeed act to protect folk from financial fraud and looting, but they appear to be 'paid' not to do so. Funny that.

  4. In order to have "cash rich" consumers you need bank credit, one way or another. After all. as we all hopefully know by now, money is debt and debt is money. Can't have one without the other. Problems arise when there is a radical imbalance between what an economy produces and what it consumes, i.e. chronic current account imbalances financed with ever more debt. And the reverse, of course... which is where Greece now finds itself, more or less.

  5. Hi, Hell. I have been making a few 'enquiries' about the Greek economy. So who is this Trumpian-style twit when he's at home?

    Dimitris Avramopoulos, the European Commissioner for Migration, Home Affairs and Citizenship.

    He should be placed in secure custody for the good of both Greece and the rest of the compliant EU. He (and the Commission) do have a real problem with the non-compliants - Hungary; Poland and Czecko; that is, no immigrants need apply.

    Greece has (if I read the info correctly - a youth unemployment rate above 30% ???). Need to crack that one before a positive Rate-of-Growth is attained.

    If global Rate-of-Growth is approx 1.5% p/a, compounding - then its difficult to believe that GR, UK, US and EU rates can be significantly above this level (other than for a short period).

    Crude prices are gently rising and rising. That trend - if it should result in an $80 bbl, spells real trouble for any economy that is disproportionally reliant on fossil energy. Greece ???

  6. The migrant/refugee problem goes well beyond what one man, Commissioner or not, or any one country can deal with. Couple that with terrorism and you have a very poisonous cocktail. Only way to deal with it is at the source: Iraq, Afghanistan, Syria, Yemen, Libya... All are in deep trouble, socially and economically. I am no expert, but blunt force bans do nothing to address the root cause.

    Greek debt is now 80% owed to EU partners and some to the IMF. The average interest is now under 2%, around 1.85-90%. Yields on older government bonds trading on the secondary market are now also coming down fast.

    Additionally, the latest issue of 3m Tbills was just auctioned at 0.99%.

    Things are very much manageable on the debt service front for Greece,

  7. Blunt force bans are the only political option available. Continued refugee immigrations will simply transfer part of the 'root problem' into Europe - and Greece is at the sharp end. Luckily, perhaps, the refugees want to move further west. If the Greek gov were to despatch the lot to Italy or wherever - the ECB would indeed shut all Greek ATMs!

    The root problem is actually completely intractable. Edward Said laid it out several decades ago; 'Orientalism', 1973 and 'Culture of Imperialism', 1993. For a 2017 update: Alfred McCoy, 'In The Shadows of the American centry'. The West has to decamp rapidly and close its access ports. Neither will happen - soon.

    For a readable explanation of the likes of that cognitive cripple from the Commission - 'The Rotten Heart of Europe', Bernard Connolly; 1995.

    I cannot argue with you on the Greek debt front. However, I can see plenty of banker's yachts in Pireaus harbour; but where are the consumer's yachts then?


  8. This is funny. I used to read every post on your blog during the run-up to the Great Recession - I was also extremely skeptical of the excesses, and then stopped reading your blog around 2010 when I figured the excesses had been wrung out (and you stopped posting!)

    Anyway, I checked back in for old times sake - and was amused to see you have turned equally bullish on Greece.

    One observation - the price for apartments in Athens, and the yield you can get by renting them out on Airbnb is really rich. Far higher than I've seen for other cities. Not sure of legal code, so my point may be moot, but seems like this might help revitalize construction spending.

  9. Dear "Unknown",
    Thank you for your long-standing interest!

    Yes, I tend to be a (hopefully) thoughtful contrarian :) The enormous debt/real estate bubble of the early-mid 2000s was orders of magnitude greater in global importance than the current "bottoming" situation in Greece. Nevertheless, it's similar in the extremes to which popular psychology has gone. Thus, my interest.

    The one major difference between tops and bottoms is that bubbles burst fast and spectacularly, whereas a rise from the ashes is more gradual and full of skepticism. Looking at it from another perspective, fear is faster to become panic than opportunity to become outright greed.

    All the best,