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How well are GDP figures isolated from the loans that Greece was taking on? For example, imagine that we measure GDP based on income. Greece takes on loans in o

by Pyxl101 11y ago

How well are GDP figures isolated from the loans that Greece was taking on? For example, imagine that we measure GDP based on income. Greece takes on loans in order to pay its pensioners, who pay corporations, who report the amount as income. Does the act of taking on this loan automatically increase GDP? (By an amount greater than the loan itself due to trickle down effects?) I assume that because of these loans, someone in Greece became richer than they would have been otherwise, and the wealth allowed them to buy a sportscar, which contributes to Greek GDP. But that doesn't mean they 'should have been' buying sportscars, and you can imagine an alternative timeline where there were no loans, and they weren't rich enough to afford it. No growth, no contraction. If the economy is temporarily stimulated by heavy borrowing, and then the borrowing is shut down, it seems like the GDP will grow and then contract. The percentage of change will depend on the size of the loans versus the overall economy. Is it potentially the case that the "old" GDP was in some sense false because it was supported only by the loans? Is the contraction a "bad" thing if the previous GDP was artificially inflated by the borrowing and in no way sustainable on its own? Is it "bad", or might this adjustment be necessary to realign the economy around operating without heavy borrowing? I'm not an economist and don't know these answers, but they're certainly questions I'm wondering about. Describing the crisis, the World Post wrote: > Nobody expects Greece to repay its debt. It has for a long time been incorporated in behavior and financial planning that this would be absurd. It is therefore a misunderstanding when the crisis is sometimes represented as creditors forcing Greece into impossible austerity. It is not at all about that. > It is about getting Greece to change its economic model from the existing one dependent on heavy borrowing year after year to a model where revenues and expenditures broadly speaking match each other."

tomp 11y ago
> Greece takes on loans in order to pay its pensioners, Apparently, what actually happened is that Greece took on loans (from the ECB, EU and IMF) in order to pay its previous loans (private banks). The people haven't seen much, if any, of that money.
- Pyxl101 11y ago
  Yes. They took on new bailout loans with different people in order to pay their existing loans. They were for that purpose specifically so it shouldn't be too much of a surprise. If they didn't need the money to pay the old loans, they wouldn't have taken new loans. And likewise, since they took out new loans to pay their old loans, it's understandable that the money didn't stay in Greece. Money would only have stayed in Greece if the new loans were even bigger than the old ones. Ultimately, the risk of default was transferred from one group to another. But, the money was in Greece initially, in the form of the original loans. That money has been propping up the economy and stimulating investment for years. The money should have already had its effect, and now Greece's creditors want it to be paid back. Greece hasn't fixed a lot of its dysfunction, so it seems like the loans haven't accomplished much in the way of permanent benefit.
  - makomk 11y ago
    I'm not sure it has been propping up the Greek economy. A decent chunk of the money went to other Eurozone countries, in particular Germany, in exchange for exports (including some fairly expensive military equipment). So yes, it's been propping up the economy and stimulating investment in Germany.
ZeroGravitas 11y ago
It would have been a lot easier to change their economic model (which I support to a degree) at the start of the crisis, offer them 50 billion or whatever the original number they needed in return for sensible reforms. Instead they forced Greece into following some neoliberal fairytale where sharp cuts to government spending were supposed to magically provide instant prosperity because it showed confidence. This was obviously stupid at the time and even the IMF admits it in retrospect, so why are the Greeks required to pay the price for this disastrous intervention? If an obese person has an operation forced on them by a crackpot doctor that only makes things worse, where does the liability lie? If it then turns out that the doctor owns the fast food store that was profiting from selling cheap food to the patient it gets murkier still.
- Pyxl101 11y ago
  My understanding is that Greece's creditors have been asking for reforms all along, but nothing much has happened. For example, Greece's average retirement age has been 61. Meanwhile Spain and Germany are 67 and have discussed 69. (There was also corruption allowing certain people to retire as early as 50!) These people will then receive government pensions for the rest of their life. You can earn a full pension by working 35 years in Greece, while 45 in Germany, and get 80% of your wage as a pension in Greece, while in Germany it's 46%. The actual pension payments in Euros are similar or even greater in Greece. These are some examples of the divide that upsets Greece's creditors [1]. The Greek government has proposed raising the retirement age only recently, basically this week, as part of these last minute emergency proposals. If Greece was seriously committed to reform, they would have passed these reforms independently a long time ago in order to balance their budget, rather than as a condition of receiving more bailout money. Instead, Greece took no action, and allowed their population to continue retiring at the average age of 61, paid for by EU taxpayers retiring years later. These taxpayers had to work a decade longer than Greeks for a pension that's half the size of what Greece pays its retired citizens. Only now in the weeks leading up to a possible default do they actually propose to take serious action or implement reasonable reform. It is my impression that this is why EU sees Greece as irresponsible: they're not doing what they need to be doing on their own to balance their budget. How differently might things have turned out if they started seriously solving these problems in 2010? Greece has been "living large", distributing the IMF money as pension payments to their citizens that could never have been supported with the government's own tax income. Greece has also raised pension payments by a significant % during years when countries like Germany raised them 0%. > why are the Greeks required to pay the price for this disastrous intervention? Greece took on the loans, believing the loans to be in their interest. They're expected to pay the loans back, like anyone is. They can't, and so they're asking to borrow even more money. The question is, why should other European taxpayers shoulder the burden by loaning Greece even more money? It seems quite reasonable to me that Greece's creditors want a reasonable assurance that the money will actually be paid back in order to continue lending. You aren't going to lend money to someone who you know will just spend it, and not treat it like a loan. Greece's creditors want to hear specific details about how Greece will pay the money back, and what changes they'll make to their budget to accomplish that. This is in the context of Greece making few effective reforms in the time since their original loans. They keep saying "We'll change, we'll change", but prove politically incapable of making the hard decisions. So time passes and now their back is up against the wall. (This Spiegel article had some details: [2] ) If Greece has no credible plan for paying back the loans, then they won't get more loans, and they can default and accept the consequences. If they want to borrow more money, then they can accept the conditions that the money comes with. Are they really "entitled" to more? Greece should have passed reforms and fixed its economy as part of receiving the original IMF loans. Instead, it wallowed in corruption and inefficiency. Its populist governments pandered to the people with all kinds of ridiculous concessions that are now proving to be impossible to sustain with a balanced budget. There is a very high rate of tax evasion that Greece also hasn't fixed, and special interests are entrenched. It's a terrible situation all around, but morally I see Greece as having undertaken the loans by their own discretion, and having undertaken the responsibility to reform their economy in order to pay them back. Perhaps the pain is necessary to drive the right behavior - because nothing seems to have been happening without it. Even if there was nothing Greece could have done, and nothing Greece can do, it's still not the responsibility of other European taxpayers to continue to bail them out with loans. A sovereign nation is responsible for itself, and a sovereign nation that takes on loans should do so believing the loans and loan conditions are in the nation's interest, and should uphold its end of the bargain by following the conditions and paying back the loans. EU banks have never asked Greece to take any particular dogmatic path to balancing their budget, they just want a balanced budget that enables Greece to repay the loans. They are understandably concerned that there is no credible plan for Greece to do this, and reluctant to loan Greece any more money while that's the case. If you're saying that Greece should never have taken on any loans at all, even originally, then maybe in retrospect you're right, but it's hard to say. On the other hand, perhaps things would have turned out great if Greece had made appropriate reforms after receiving the original loans. Or maybe things would have been far, far worse without the loans. The loans were made when Greece was in the midst of a serious recession originally, after all. Who knows? Regardless of all of that, Greece is a sovereign nation and made the decision about how to proceed, and whether to take on loans, for itself. The loans have a fairly low interest rate, 3.6%. It's not as if IMF is a loan shark. That said, IMF could be more generous and lower the interest rate to equal their costs. No one is going to invade Greece if they default and fail to pay back what they owe, but neither will anyone lend them more money going forward. To lend them more money, they want a credible, data-driven answer and reform commitment to "How will you pay this back?" [1] http://www.businessinsider.com/greece-germany-pensions-2010-4?op=1 http://www.businessinsider.com/greece-germany-pensions-2010-... [2] http://www.spiegel.de/international/europe/eu-commission-president-juncker-on-greece-and-tsipras-a-1039738.html http://www.spiegel.de/international/europe/eu-commission-pre...

by Pyxl101 11y ago

tomp 11y ago

> Greece takes on loans in order to pay its pensioners, Apparently, what actually happened is that Greece took on loans (from the ECB, EU and IMF) in order to pay its previous loans (private banks). The people haven't seen much, if any, of that money.

Pyxl101 11y ago
Yes. They took on new bailout loans with different people in order to pay their existing loans. They were for that purpose specifically so it shouldn't be too much of a surprise. If they didn't need the money to pay the old loans, they wouldn't have taken new loans. And likewise, since they took out new loans to pay their old loans, it's understandable that the money didn't stay in Greece. Money would only have stayed in Greece if the new loans were even bigger than the old ones. Ultimately, the risk of default was transferred from one group to another. But, the money was in Greece initially, in the form of the original loans. That money has been propping up the economy and stimulating investment for years. The money should have already had its effect, and now Greece's creditors want it to be paid back. Greece hasn't fixed a lot of its dysfunction, so it seems like the loans haven't accomplished much in the way of permanent benefit.
- makomk 11y ago
  I'm not sure it has been propping up the Greek economy. A decent chunk of the money went to other Eurozone countries, in particular Germany, in exchange for exports (including some fairly expensive military equipment). So yes, it's been propping up the economy and stimulating investment in Germany.

ZeroGravitas 11y ago

It would have been a lot easier to change their economic model (which I support to a degree) at the start of the crisis, offer them 50 billion or whatever the original number they needed in return for sensible reforms. Instead they forced Greece into following some neoliberal fairytale where sharp cuts to government spending were supposed to magically provide instant prosperity because it showed confidence. This was obviously stupid at the time and even the IMF admits it in retrospect, so why are the Greeks required to pay the price for this disastrous intervention? If an obese person has an operation forced on them by a crackpot doctor that only makes things worse, where does the liability lie? If it then turns out that the doctor owns the fast food store that was profiting from selling cheap food to the patient it gets murkier still.

Pyxl101 11y ago
My understanding is that Greece's creditors have been asking for reforms all along, but nothing much has happened. For example, Greece's average retirement age has been 61. Meanwhile Spain and Germany are 67 and have discussed 69. (There was also corruption allowing certain people to retire as early as 50!) These people will then receive government pensions for the rest of their life. You can earn a full pension by working 35 years in Greece, while 45 in Germany, and get 80% of your wage as a pension in Greece, while in Germany it's 46%. The actual pension payments in Euros are similar or even greater in Greece. These are some examples of the divide that upsets Greece's creditors [1]. The Greek government has proposed raising the retirement age only recently, basically this week, as part of these last minute emergency proposals. If Greece was seriously committed to reform, they would have passed these reforms independently a long time ago in order to balance their budget, rather than as a condition of receiving more bailout money. Instead, Greece took no action, and allowed their population to continue retiring at the average age of 61, paid for by EU taxpayers retiring years later. These taxpayers had to work a decade longer than Greeks for a pension that's half the size of what Greece pays its retired citizens. Only now in the weeks leading up to a possible default do they actually propose to take serious action or implement reasonable reform. It is my impression that this is why EU sees Greece as irresponsible: they're not doing what they need to be doing on their own to balance their budget. How differently might things have turned out if they started seriously solving these problems in 2010? Greece has been "living large", distributing the IMF money as pension payments to their citizens that could never have been supported with the government's own tax income. Greece has also raised pension payments by a significant % during years when countries like Germany raised them 0%. > why are the Greeks required to pay the price for this disastrous intervention? Greece took on the loans, believing the loans to be in their interest. They're expected to pay the loans back, like anyone is. They can't, and so they're asking to borrow even more money. The question is, why should other European taxpayers shoulder the burden by loaning Greece even more money? It seems quite reasonable to me that Greece's creditors want a reasonable assurance that the money will actually be paid back in order to continue lending. You aren't going to lend money to someone who you know will just spend it, and not treat it like a loan. Greece's creditors want to hear specific details about how Greece will pay the money back, and what changes they'll make to their budget to accomplish that. This is in the context of Greece making few effective reforms in the time since their original loans. They keep saying "We'll change, we'll change", but prove politically incapable of making the hard decisions. So time passes and now their back is up against the wall. (This Spiegel article had some details: [2] ) If Greece has no credible plan for paying back the loans, then they won't get more loans, and they can default and accept the consequences. If they want to borrow more money, then they can accept the conditions that the money comes with. Are they really "entitled" to more? Greece should have passed reforms and fixed its economy as part of receiving the original IMF loans. Instead, it wallowed in corruption and inefficiency. Its populist governments pandered to the people with all kinds of ridiculous concessions that are now proving to be impossible to sustain with a balanced budget. There is a very high rate of tax evasion that Greece also hasn't fixed, and special interests are entrenched. It's a terrible situation all around, but morally I see Greece as having undertaken the loans by their own discretion, and having undertaken the responsibility to reform their economy in order to pay them back. Perhaps the pain is necessary to drive the right behavior - because nothing seems to have been happening without it. Even if there was nothing Greece could have done, and nothing Greece can do, it's still not the responsibility of other European taxpayers to continue to bail them out with loans. A sovereign nation is responsible for itself, and a sovereign nation that takes on loans should do so believing the loans and loan conditions are in the nation's interest, and should uphold its end of the bargain by following the conditions and paying back the loans. EU banks have never asked Greece to take any particular dogmatic path to balancing their budget, they just want a balanced budget that enables Greece to repay the loans. They are understandably concerned that there is no credible plan for Greece to do this, and reluctant to loan Greece any more money while that's the case. If you're saying that Greece should never have taken on any loans at all, even originally, then maybe in retrospect you're right, but it's hard to say. On the other hand, perhaps things would have turned out great if Greece had made appropriate reforms after receiving the original loans. Or maybe things would have been far, far worse without the loans. The loans were made when Greece was in the midst of a serious recession originally, after all. Who knows? Regardless of all of that, Greece is a sovereign nation and made the decision about how to proceed, and whether to take on loans, for itself. The loans have a fairly low interest rate, 3.6%. It's not as if IMF is a loan shark. That said, IMF could be more generous and lower the interest rate to equal their costs. No one is going to invade Greece if they default and fail to pay back what they owe, but neither will anyone lend them more money going forward. To lend them more money, they want a credible, data-driven answer and reform commitment to "How will you pay this back?" [1] http://www.businessinsider.com/greece-germany-pensions-2010-4?op=1 http://www.businessinsider.com/greece-germany-pensions-2010-... [2] http://www.spiegel.de/international/europe/eu-commission-president-juncker-on-greece-and-tsipras-a-1039738.html http://www.spiegel.de/international/europe/eu-commission-pre...