Will EU/Germany Reimburse Greek Bank Deposits Post Default? And What Affect Will Their Decision Have?

Assuming Germany and the EU decide not to “bail out” Greek bank depositors. What does that say about the last Troika Greek government bailouts?

If the Troika were to turn their back on Greek depositors it would tell me one thing. That the troika bailouts have not been intended to help the Greek people or economy in any way.

If the Troika refuse to reimburse Greek bank deposits it shows that the sole purpose of the Troika bailouts were to benefit international investors and not Greeks and the Greek economy.

It is debatable if there would be a more effective way of refinancing an economy and at the same time reforming a government then giving bailout money directly to the people of the country involved.

The Greek crisis is a failure of the Greek government, Troika reimbursing people s savings would completely cut out the factor that has caused the entire Greek economic problem.

Would the Troika be prepared to be exposed in such a way, ie not helping depositers?

That depends on whether you believe the Troika are here to help Greece or not. If you believe the Troika are here to help Greece then you have to assume they will insure bank deposits.

If you believe the Troika is not in Greece to help the country and is happy to see Greece leave the Euro then you would have to say Greek bank deposits are not safe.

Assuming the Troika will come and reimburse Greek bank deposits would this be the end of the Greek government’s financial crisis?

A Greek government default would cut back the country’s deficit massively by cutting interest payments. By how much?

Here are the figures which outlining the benefits;

Greek GDP 2010 304Billion Dollars (Source: Google)

Greek GDP 2013 266 Billion Dollars (Source: Athens News, 6.8% reduction 2011, 4.7% 2012 & 1.4% 2013)

Greek government deficit in 2010 as percentage of GDP 10.8%  0r 32 billion dollars/24 billion Euro (Source: OECD)

Greek government deficit in 2013  as percentage of GDP 5.3% or 14 billion dollars/10.8 billion Euro (Source: OECD)

Interest payments in 2010 5.7% of GDP or 17.32 billion Dollars /13.3 billion Euro.

Interest payments in 2013 7.5% of GDP or 19.95 billion Dollars/15.3 billion Euro.

You will notice that the interest payments in 2013 is greater than the forecast government deficit.

This is due to the OECD under estimating falls in Greek GDP. If the OECD figures reflected the most recent data the Greek government deficit in 2013 will be at least 7.5% assuming the government runs a balanced budget excluding interest payments.

So best case scenario, assuming the Greek government can get its books in order, the government budget will be balanced by 2013 saving the government around 1.6 billions Dollars/1.2 billion Euros a month in interest payments.

Given that a default would force the Greek government to balance its books immediately, it would only be only be the difference of 1 year ie balancing its books in 2012 rather than 2013. (You could argue that the it is highly unlikely that the Greek government will balance its books in 2013, default or not but that is for another article, we will assume they will for the purpose of this article).

1 year, hardly unimaginable.

So what other problems would Greece have assuming the Troika reimbursed savers and the government balanced it’s books.

The trade deficit is the next major hurdle.

In 2010 the country’s trade deficit with the rest of the world was 10.26% (Source: Google)

Ekathimerini forecasts this figure to be 9.4% for 2011.

What does a trade deficit of 9.4% mean?

It means every year Greece sends 9.4% of it currency outside of the country. Given that Greece cannot print Euros, this is a major issue. Losing 9.4% of the currency in circulation every year is not a sustainable situation.

How can the government address this major issue and how much will it cost?

The good news here is that it will probably save the Greek government hundreds of millions of Euros a year to balance the trade deficit?

First of all, why does Greece have a trade deficit?

It is cheaper for Greeks to purchase products from abroad than it is to purchase products made in Greece

Why is it cheaper to purchase products from countries outside of Greece?

It is cheaper for businesses to do business in place like Germany so companies can produce goods and offer services at a reduced price.

Why is it cheaper for businesses to operate in Germany than Greece?

Regulations, paperwork and taxation. There are less regulations on businesses in Germany than in Greece. Regulations cost the government money to implement and police, regulations cost the business money in labour and resources to comply.

Reducing regulations saves the government money and it saves the business money.

Paperwork. Paperwork has to be administered by government AND the business. Reducing paperwork not only saves the government money but also the business.

If a regulation or administrative procedure does not make the government money directly then it should be abolished.

Taxation. Taxation costs the government money to implement and police. It also costs the government money by reducing revenues. Taxation reduces the amount of business that can be done. There is a limit were increasing taxation reduces tax revenue. Greece has passed this point on the Laffer graph by a huge margin. There is huge scope for tax cuts in Greece and at the same time increasing tax revenues.

Taxation also costs business directly. A 20% tax on a business, such as VAT, makes that company 20% less efficient than it actually is, as far as the end consumer is concerned.

If the tax on profits works out at a 5% tax on total sales then that company is 5% less efficient than it actually is.

Reducing taxes makes companies more competitive with companies in countries.

Why are taxes and regulations higher than in Germany?

Socialism. Greece is an extremely socialist country. The state is involved in people’s lives massively. Unfortunately the Greek government is in no way able to meet the obligations it has taken on.

The Greek government currently has a primary deficit.

What does a primary deficit mean?

The Greek government cannot keep the lights on even when it uses the money it is taking to supposedly fund people’s pensions.

Greeks need to acknowledge that the government cannot run their lives better than they can themselves and take charge over their own finances.

So in short, reducing taxes from their current levels will increase tax revenues and also have the knock on effect of multiplying tax revenues to increasing Greek exports.

And this brings us on to the hurdles in the road to the Greek government balancing it’s budget and addressing the trade deficit.

Even if the Greek government were able to balance its books, ie it is able to keep the lights on with the tax revenue it takes in, there is a problem on the horizon where there are not enough Greeks being born to pay for the Greeks that will be retiring. This is a pensions time bomb for the Greek economy.

The solution to the Greek pension problem?

From what I see there is only one solution. The government must get out of the pensions business completely and impose a voluntary tax on younger workers to cover the pension obligations of people who are over 50. While at the same time letting Greeks opt out of the state pension scheme.

So in summary:

Will the Troika/Germany reimbursing Greek bank depositors help the Greek economy?

Undoubtedly.

Can the Greek government balance its books in an orderly way if it were to default?

Yes, the Greek government is already very close to balancing its primary budget.

Will the country be able to operate without new loans from investors in other countries?

Yes, but the Greek government needs to reduce taxes and regulations immediately in order for Greece to be competitive.

What are the bumps in the road that could affect Greece ability to become self sufficient?

Huge pensions obligations. There will need to be a plan to take car of people reaching retirement.

Banks. The domestic banks in Greece, the ones that survive the default could scupper government attempts to boost productivity by not making loans. While this would not be a complete road block it would slow down the recovery of the Greek economy until international banks enter the Greek market to fill the vacuum.

Would international banks want to enter the Greek market?

If the government reduced taxes and regulations massively there is no reason why international banks would want to enter Greece. If Greece were a pro business environment the returns on property price increases alone would more than enough to make Greece a profitable market for international investors.

Other problems to a Greek recovery?

The government could carry on with its current policies of increasing taxes and regulations post default.

The Greek central bank could make it difficult or impossible for international banks to enter the Greek market in competition with the Greek central bank’s, own banks.

Here is an article which I think reinforces my opinion of the severity of the Greek default. There are short term downsides, but the upsides are simply massive if the politicians do the right thing. 

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