Wednesday, September 28, 2011

Greece: The sudden stop that wasn't

by Aaron Tornell and Frank Westermann


September 28, 2011

With economists’ eyes fixed squarely on Greece, this column tries to solve a puzzle. Since 2008, tens of billions of euros have fled Greek bank accounts. Yet somehow the country still has a current-account deficit. Where has this money come from?

Normally, things don't work like this for nations in crisis. Greece has experienced severe capital flight yet its current-account deficit has remained almost unchanged; its international reserves are little changed. On net, €24 billion of private capital left the country between 2008 and 2010, but Greece still managed to accumulate a €85 billion current-account deficit – 12% of GDP.

Where has the money come from? The answer can be found by looking at the balance of payments statistics. Mainly from fresh loans provided by Eurozone central banks to the Greek central bank. These amount to €76 billion. This figure is almost 90% of the cumulative current-account deficit during this period, and it is increasing fast. It reached €110 billion in June 2011.

Although these Eurosystem loans are channelled via the ECB, the funds involved are over and beyond those used in the ECB's government bond-purchase programme – a programme opposed by Juergen Stark, Germany's top representative at the ECB, who has recently resigned. Furthermore, they are different from the EU rescue package to Greece, which is scheduled to be ratified by the German parliament on 29 September.


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