On the eve of the elections (19th September), I spoke at the Monthly Barometer Gathering at Chamonix, in a very condensed format, called Speed Ideas: Ten Tips in Ten Minutes. The audience was investors and policy entrepreneurs from around the world. Here is what I said.
NATURE OF THE CRISIS
- We should see this as a balance-of-payments rather than sovereign-debt crisis
- Greece had a trade deficit every year since 1962,
- It had a current account deficit since 1982.
- The deficit was financed for the most part by borrowing from abroad:
- The government, borrowed by issuing bonds;
- And the Greek banks borrowed from foreign banks and they also bought Greek government bonds.
- The government then spent money on salaries, and pensions, boosting domestic demand.
- This is what created the trade deficits.
- The business sector adapted to this long-term imbalance. It focused on the local market, in the so called non-tradable sectors.
- Such as retail, or construction.
- The so called internationally tradable sectors shrunk.
- Exports, as a % of national income, were the lowest in Europe.
- In 2010, inflows of capital from abroad stopped suddenly, domestic demand dropped, and this started the spiral of the crisis.
- Ireland, Portugal and Spain were in a similar “sudden stop” situation. They managed deal with this rather quickly, by increasing exports. Greece did not.
- That is why the crisis has been so deep and long.