For a pdf version of the paper, containing the relevant figures, please click here.
What follows is an outline of the Greek sovereign debt crisis from a perspective that is certainly not mainstream - at least not in the sense of what every major political, economic, and media outlet loves to hate nowadays. For my interpretation as to how the crisis came about will be neither structural nor cultural. Of course, national economies do grow or decline because of social and economic substructures, political institutions, and cultural traits. Yet, these refer to long-term processes whereas serious sovereign debt crises usually evolve over relatively short (often too short) periods of time. Sovereign bankruptcies, much like those of large private companies, occur because three unfortunately too human factors are allowed to carry the day in the highest echelons of strategic decision-making. These are irresponsible greed, incompetence, and irrationality (a term which many a time is meant more as an euphemism for stupidity).
In this sense, the case of Greece qualifies as a prototypical example. Starting at the beginning of the last decade, the country underwent a series of regime-changing events that altered some of its most fundamental socio-economic relations. Yet, our political, economic, business, and public-opinion-making elites, carried away by the euphoria of an illusion, were unwilling and unable to discern what was really happening and, more importantly, to foresee its entire spectrum of medium- and long-term consequences.
Figure 1: The evolution of the stock of public debt (percentage of GDP). Source: IMF.
The most monumental such event was obviously our admission into the Eurozone, the first act of which entailed nothing but a change in the denomination of economic value. At the time, this was viewed as a straightforward, one-off, currency exchange with no repercussions for the real economy other than a jump in the real price of some commodities. Such price jumps are bound to occur as suppliers, being called upon to set prices in a new currency, may see a great opportunity for instantaneous profits. The required method is so simple and the underlying incentive so irresistible that the authorities were compelled to essentially regulate prices by dictating their translation into Euros at the official exchange rate each country was using to abandon its national currency.
The decision was taken in Brussels as the problem was expected to afflict every single member of the Euro zone. The enforcement mechanism, however, was to be implemented nationally and meant to be short-lived. Its aim was to contain what was regarded as a simple discontinuity in the time series of prices during the transition period until the forces of market competition converge to Euro-denominated price equilibria. In fact, from the outset and throughout the Euro zone, the focus of the monetary authorities has been uniquely (and one could argue, especially in the light of recent events, obsessively) upon controlling inflation, the rate of change in absolute prices.
Yet, as any economist should tell you, it is the relative prices that matter the most. For they determine the relative profitability of the various economic activities and, thus, the allocation of resources amongst the various sectors of the economy. And precisely because it necessitates a re-allocation of economic resources, a dramatic change in relative prices, even if a unique discontinuity in an otherwise smooth time series, can have grave consequences for the structural character of an economy. This is bound to happen, moreover, when suppliers get to set prices in a new currency as the extent to which they can profit from doing so differs greatly between the non-tradable and tradable sectors, the latter being subject to competition in world prices.
Regarding the Greek economy, in particular, the introduction of the common currency brought about changes in relative prices which had much more significant and wide-ranging effects than in other Euro zone members. The discrepancy with what typically took place elsewhere was due to the very low nominal value of the Euro/drachma exchange rate, the existing trading patterns and relative comparative advantages between Greece and the rest of the Euro zone, and the concurrent introduction of other policies (originating from Athens as well as Brussels). The effects were to be manifested in a dramatic structural re-balancing to the advantage of non-tradables (especially banking, health care, construction, and real estate), the detriment of tradables (in particular, the erosion of competitiveness in tourism and agriculture), and the favor of imports.  They resulted in a three-dimensional macro-economic adjustment with devastating effects on the country's current account.
Figure 2: The current account and (general) budget deficits (percentage of GDP). Source: IMF.
Figure 3: Changes in the index of house prices.
Economic resources such as capital tend to flow towards the direction in which profit is easiest and quickest to be made. Hence, the changes in relative prices marked the set of economic activities Greek businessmen would view as most attractive. As a result, they switched their emphasis from manufacturing and exports (in which they had never been particularly keen anyway) onto banking, health care, advertizing, consultancy, construction, real estate, and imports (especially of luxury goods which allow for higher profit margins). And, as I will argue in what follows, their efforts were supported strongly and continuously by governmental initiatives (favorable policies, direct or indirect subsidies, even money handouts). Indeed, the sectors in question are precisely those that drove the Greek economy onto the unsustainable growth path of the last decade. They are also those that now suffer the most from excess supply, generated by too many (and, consequently, on average too small) producers.
Of course, being able to increase one's profitability by charging higher prices presupposes the availability of adequate demand, willingness and ability on the part of consumers to buy one's product. The Greeks’ willingness to consume commodities like housing, automobiles, electronics, or imported pharmaceuticals ought to be given and not at all surprising. Their consumption had been stifled for generations via interest rates high enough to prohibit the functioning of mortgage markets (and necessitate that home-ownership required the savings of a lifetime) or via import duties as high as 50% in some products (e.g. automobiles and electronics). The Greeks’ ability to buy, on the other hand, was supported by two different sources of real consumer wealth, which ended up operating in timely succession.
Initially, the pillars of household consumption were the savings the middle class had accumulated throughout the 80's, as the fiscal expansion Andreas Papandreou's governments pursued at the time (primarily via generous real increases in wages and more modest ones in pensions and benefits) met the then very high real interest rates. However, this type of aggregate private consumption generator would soon disappear in the aftermath of the Athens stock market crash of 2000, the second critical event in our saga.
The preceding bubble (1998-2000) has been the subject of many a political speech or article in the public press. And quite characteristically for our public arena, the ensuing debate has been as much unintelligent as uninformed. As usual, the leading actors have preferred to focus single-mindedly upon uncovering the latent political scandal given that the first and second axioms of the typical Greek public debate are that a scandal of some sort ought to (i) be sine qva non for, and (ii) consume entirely the analysis of every major event. Yet, both the size as well as timing of the bubble render it rather ordinary within the contours of the world financial history - especially with respect to a very small economy about to encounter a macroeconomic shock as unprecedented in size and strongly positive as joining the Euro zone was viewed at the time.
In fact, a stock market bubble acting as the harbinger of a small economy’s promotion from developing to emerging has been so commonly observed that what should be regarded as scandalous is not the event per se but the spectacular failure of the Greek financial authorities at the time (the Ministry of Economy and Finance, the Bank of Greece, and the Capital Market Commission) to monitor its evolution and anticipate its socio-economic consequences, two of which were of particular importance for our story.
On the one hand, there was dramatic dispersion of ownership in firms that were essential players in key sectors of the economy. Their principal shareholders rushed to take advantage of the soaring valuations, which were compounded by the absence of any taxes on capital gains. On the other hand, there was mass participation from all but the lowest strata of the wealth and income distributions. It stemmed from an ill-conceived association between the state of the stock market and that of the real economy was initially allowed and later deliberately promoted to take over the psyche of the public.
Either property had significant long-term effects on the real economy. The former resulted in the impediment or delay of consolidations amongst and structural changes by strategic firms, which were necessary before and have become imperative during the crisis. The latter altered fundamentally the map of household savings, making its distribution significantly more skewed and its basis substantially smaller as the rather widespread savings of the middle class became the gains of whoever was able to time the market - mostly institutional players with quite a few of them based abroad.
Even though the crash of 2000 eroded most of its savings, the Greek middle class was nevertheless able to maintain its purchasing power due to an unprecedented reduction in the most important perhaps of prices, the rental cost of money. In anticipation of its participation in the Euro zone and following its almost complete liberalization of capital flows, the country saw a substantial fall in its risk premium (Figures 4-5). In fact, it was precisely during the year 2000 that this reward from sharing its currency risk with much larger and more productive economies materialized into much lower interest rates at which the Greek banks could borrow and subsequently lend funds.
Figure 4: Inflation and long-term interest rates (percentages). Source: IMF and Bank of Greece (respectively).
Now, it does not take genius to guess what will happen if a middle class without savings, and facing substantially lower import prices in real terms, suddenly obtains access to cheap money. Irrespectively of institutional structures or cultural traits, it will borrow its way into current account deficit. And it is equally straightforward to anticipate that once a credit boom is set in motion in this way and left unchecked, it would not be long before it turns into a credit bubble – after all, more often than not financial markets tend to overdo it in following beliefs themselves have created. Quite as ought to be expected, therefore, the Greek households went on a spending spree following the introduction of the Euro and the abolition of import duties. During the period 2003-2010 (for which I managed to find data), annual household expenditure in Greece was 70% of GDP, as opposed for instance to 60% in Italy, the United Kingdom, Germany, France, Spain, and for the OECD average or 50% in Austria, Belgium, Denmark, Sweden, and Ireland. That is, only within the span of these eight years, Greek households consumed between €168bn and €336bn more relative to what they would have should their spending patterns had followed the norm amongst OECD countries. 
Of course, strong household consumption is not necessarily undesirable – more often than not, it is the main component of aggregate consumption and, thus, a major element of GDP. In the Greek case, however, the excess household consumption in question seems to have been diverted almost exclusively on imports. Indeed, the country’s average current account deficit during the period 2003-2010 exceeded the extraordinary 10% of GDP. Given the nearly negligible net foreign direct investment, the required corresponding capital account surpluses cannot but have had their origins almost exclusively in loans from abroad. And to make matters worse, in an economy cursed with a plethora of small family businesses, aggregate negative savings and overconsumption gets reflected also in the average firm retaining too little of its profits. Instead of using it for investment or as insurance against adverse cash flow shocks, the owner prefers to finance her own private consumption. This would come back to haunt the Greek economy once the credit glut turned into drought.
Paradoxically at first sight, however, household debt in Greece remained extremely low compared to other OECD countries. Even at the end of 2010 (after two consecutive years of falling GDP), it did not exceed 65% of GDP, one of the lowest figures amongst the OECD countries (Figure 5). Yet, this should not be puzzling at least after some thought. Even though an economy as a whole is over-borrowing from and over-spending abroad, it does not have to be the case that either careless act is undertaken by the same sector. And as in our case the households were doing the latter but clearly not the former, the borrowing actors cannot but have been the private firms (which would have passed the acquired funds onto households in the form of higher wages or larger profits) or the general government (which would have paid out wages, pensions, benefits, and subsidies).
Figure 5: Total national debt in OECD countries. Source: Bank for International Settlements.
In fact, a quick comparison of debt to GDP ratios across OECD members for the year 2010 is quite revealing in placing the onus squarely on the government. At the year’s end, the total national debt (which includes the debts of households, firms, and the government) to GDP was 262% in Greece, again one of the lowest amongst the members of the OECD (Figure 5). By contrast, the government debt to GDP ratio for Greece was 149,1% compared to Italy’s 126,1%, Portugal’s 103,6% or 100,2% for Belgium, 95,2% for France, 82,2% for the U.K., and 67,1% for Spain. Evidently, the government was over-borrowing and households over-spending, with the handout of the underlying funds from the former to the latter sector more or less direct, given that the final consumption expenditure by the Greek government remained (perhaps surprisingly) under control. Equally important for our story, though, is the way in which the corresponding governmental budget deficits came to be. Here, one ought to pay particular attention to three underlying processes, each having had deteriorating effects on the budget in different but substantial ways.
The first had to do with the method via which additional supply of Euros may be created. Contrary to what the central bank of each member of the Euro zone used to do in the past, the European Central Bank cannot just print money. Its printing press is legally constrained to allow itself into action only if the balance sheet of the ECB can be expanded by the corresponding amount. This requires of course that the ECB acquires financial assets which in turn, again by legal constraint, it can do only through transactions with other banks. In other words, within the Euro zone, it is the banking sector and no longer any government that has the exclusive rights to money creation. Regarding now the Greek economy, the very fact that its runaway current account deficits were financed by borrowing from abroad indicates that its overall position was funded by net increases in the money supply. And given that this position was initiated almost exclusively by governmental budget deficits, there cannot but have been a direct link between budget deficit and money creation.
Put differently, during the period 2000-2009, the evolution of the Greek public finances, even though an obvious time-bomb weighting to explode, was underwritten explicitly by the banking sector. The reason was the quest for fat and fast profits, the eternal mother of financial crises. To get a rough idea of the pertinent amounts, consider that the Greek government bonds were paying a premium relative to the ECB lending rate which on average exceeded 2% per annum. Given this, a back of the envelope but I believe not too inaccurate calculation indicates that investing in these bonds using funds borrowed by the ECB would have delivered cumulative profits for the period in excess of €41bn.
And when government debt can be funded this profitably, it should not come as a surprise that Say’s law came to apply: supply of credit does create its own demand. Contrary to what the banking lobby has tried hard to make policy-makers and the public accept, the Greek debt crisis of the last decade has been as much the making of bankers as that of the Greek governments. For instead of exercising their central role in the efficient allocation of funds (which, almost by definition, includes the monitoring of their use), the banks set the autopilot on too easy a route for the management to show returns and the government to register economic growth.
The readily available credit permitted significant increases in GDP to materialize via direct additions both in aggregate demand as well as national income. The former method obtained via ambitious and over-stretched public works programs. The latter through new or higher subsidies, more generous schemes of pensions and benefits, salary increases and employment expansion in the public sector and state-controlled enterprises, but also direct as well as indirect (by turning a blind eye on tax evasion or pardoning past tax offenses) alleviations of the tax burden. And, again contrary to what the public opinion has come to be, it was the income increases that did the bulk of the work in setting the public finances on the road to disaster. The remaining two of the three underlying processes I view as most integral in the last decade’s saga both aimed at raising incomes.
The first was a significant change in the composition of the tax revenues. Since the end of the 90’s, successive Greek governments have consciously shifted the tax burden from direct towards indirect taxation as surcharges on petrol, cigarettes, and alcohol, the VAT, but also levies on stock and real estate transactions have become more and more important sources of revenue. As an outcome, this has been motivated mostly by politics rather than economics. On the one hand, the abruptly expanding middle and upper classes - the main recipients of the dividends of our recent economic growth - have successfully pushed for more favorable income tax regimes. Under at least consent from Brussels, on the other, a globalization wave that has been characterized more than anything else by immense cross-national capital flows, introduced intense profit tax competition amongst the countries on the ever expanding periphery of the EU.
Yet, apart from increasing inequality due to their regressive nature, indirect taxes provide also a government with the wrong incentives regarding the desirability of fostering higher productivity and competitiveness, the two pillars of long-term economic growth. An increasing reliance upon indirect taxation makes it is cheaper to maintain GDP growth via raising domestic consumption rather than exports. This is because €1 spent on domestically-sold output generates more tax revenue than €1 brought home from abroad via exports, with the relation applying even to the consumption of imports as long as sufficient market value is added inside the country (and with high-end luxury goods featuring predominantly amongst Greek imports, the often outrageous importers’ profit margins do correspond to an awful lot of added market value).
More importantly perhaps, the appeal of indirect taxation is seductively strong during an economic boom that is taking place mainly due to money flowing almost freely within a country in which tax evasion is pervasive. As firms have ready access to cheap credit, taxing cash flows seems a strictly more preferable method of replenishing the treasury coffers than the politically as well as technically (especially in an economy with a plethora of small family businesses) more cumbersome alternative of crusading against income and profit tax evasion. And as added bonus, the periodic collection of indirect taxes provides the public treasury with frequent cash flow whereas the payments from income or profit taxation come typically in lump sums.
Alas, taxing cash flows will turn into an act of self-destruction when, as it is bound to sooner or later happen, the credit bubble bursts and the availability of cash becomes the economy’s most binding constraint given that, in the absence of the printing press, the money supply can be augmented only through (the nonexistent) current account surpluses or (the now prohibitively expensive) collateralized banking operations. In this sense, the excessive reliance upon indirect taxes entails important opportunity costs by making it optimal for cash-hungry firms to tax evade and by exacerbating the procyclicality of government revenues with respect to macroeconomic shocks. And this is particularly costly when these shocks (in conjunction with the virtual absence of taxes on wealth, property, or capital gains) have resulted in the creation of substantial and substantially unequally-distributed wealth which could have been instead the focus of the taxing effort.
In the Greek case, the vulnerability of revenue generation to adverse shocks turned out to be the straw to break the camel’s back given the already critical state of the public finances. This was in large part due to the last of the three processes I want to underline: the substantial increases in wages, benefits, and retirement packages that occurred during the decade under investigation - especially in the public sector and even more so in state-controlled enterprises. The increases in question were introduced in two waves, each with its own distinctive political underpinnings. The first begun shortly before 1999 (essentially, as soon as our accession into the Euro zone was secured) and continued more or less unabated until 2004. It was motivated by pressing social demands. Having spent the best part of the 90’s under successive austerity plans meant to secure our place in the Euro zone, the Greek society was calling for the promised convergence in living standards towards the European average. It was something the political, economic, and public-opinion-setting elites had advertized extensively as occurring almost by default upon arrival at the Promised Land.
The second wave materialized in the second part of the last decade. It had to do primarily with what in my view amounts to certain groups being allowed to capture parts of the state and strip its assets. This entailed, on the one hand, an intense proliferation of entities that were funded by the Greek state (often with additional funds from the European union) and which, under the pretence of more flexibility to attract high-quality staff, were deliberately kept outside the reach of whatever official controls the public sector had in place with respect to hiring and spending. On the other, it was characterized by successive episodes in which, brazenly pushing the envelope of legitimacy or even legality, decisions that often required no more than a ministerial or general secretarial signature raised wages, benefits, and retirement packages for entire groups of public employees. The magistrates, the members and employees of parliament, the employees of the Ministry of Finance, of the Piraeus’ Port Authority, as well as of Olympic Airlines are by now infamous examples.
Of course, the types of political and institutional shortcomings outlined above had been observed before in the Greek history, too many times. Even so, the toll on the public finances during the last decade turned out to be singular to an extent that ought to have been foreseen. Since 1992, the public debt to GDP ratio had reached levels that should have constrained any reasonably long-sighted government into avoiding even orders of magnitude smaller fiscal expansions of such kind. In this respect, the irresponsibility of Kostas Karamanlis’ governments is appalling (more on this shortly) but no small blame belongs also to those of Kostas Simitis.
At the apogee of his political career, the latter enjoyed such a reputation as trusted force of modernization that his main political opponent, Mr. Karamanlis, had to invent a (confusing as much as confused) new term altogether (επανίδρυση) in order to brand himself also as a reformist. Mr. Simitis’ appeal rested mainly on putting the public finances in some order by achieving successive structural budget surpluses. These allowed his governments to embark upon what was identified above as the first wave of increases in wages, benefits, and retirement packages. They did so seemingly without straining the country’s ability to honor its public debt - especially as Greece could now borrow at smaller risk premia and subsequently pay off old debt which carried much higher coupons.
Alas, this kind of fiscal expansion constituted a latent but significant addition to the effective stock of public debt. For it amounted to assuming new obligations towards future retirees since one’s retirement package is linked directly to one’s remuneration while working. And as the former is funded throughout but determined solely by the very last years of one’s working life, the obligation in question was quite a bonus for whoever was to retire in the near future. And to make matters as bad as they could be, the near future meant a decade of rapidly falling interest rates (Figure 6) whereas whoever meant a most populous generation.  What came to be known as the “generation of the Polytechneion” consisted by our baby boomers: they were many, got to retire on average way too early and almost without exception too generously. By some estimates, their own contributions into the social security system do not suffice to cover more than 40% of their retirement packages so that the public treasury had to contribute as much as €150bn during the last decade alone. Given the size of the country, the figure was large enough to turn any pay-as-you-go system into borrow-as-you-go.
Figure 6: Returns paid by the Bank of Greece to the pension common fund (percentages). Source: Bank of Greece.
Yet, at least for some time, the problem could be kept under the carpet as the booming economy allowed seemingly enough contributions to be made by an ever expanding immigrant labor force, no matter how poorly-planned and badly-executed its integration. Now, however, as adverse demographics have joined forces with recession and unemployment, the strain on the public finances shows in all severity and begs for another event to be added on the list of critical chapters in our story. Namely, the decision to succumb to the near universal public outcry against the Yanitsis proposals for the pension system, and abort what was probably the sole attempt at major reform our country saw during the last decade.
The next event to mark our public debt saga was the Olympic games of 2004. Greece being by far the smallest ever host and the requirements more or less fixed (an immortal axiom of the modern Games being that hosts buy certain goods and services from certain companies and people), the Athens Games were in orders of magnitude the most costly relative to GDP. Yet, like many of our historically fateful national decisions, it was taken with a lot of enthusiasm or pathos but without any serious cost-benefit analysis, strategic planning, or even informed discussion. It is telling in fact that, at the time of our hosting bid, the cost had been estimated at about €1bn whereas at the end it exceeded €12bn.
Of course, contrary to what many might have come to believe, the latter figure is not excessively large as the expenses for hosting the Games in the 21st century go. More importantly perhaps, a significant part of the overall expenditure corresponded to desperately-needed infrastructure which, save for large subsidies to the tourist industry, was for the most part public and, with nearly half of the country’s population living in Athens, had its benefits distributed widely and evenly. But the fact remains that, once again, the short-sighted personal, political, or economic ambitions of its elite meant that the country embarks upon a national endeavor which should have been known to be prohibitively costly given that the stock of public debt was already at par with GDP.
The Games notwithstanding, however, the year 2004 turned out to be historically critical for another reason: Kostas Karamanlis and his government assumed office, an event which by now everyone should have come to recognize as a national disaster of epic proportions. His two consecutive terms resulted in the structural budget plunging into deficit (after registering a surplus in 2002 and a deficit of €1,2bn in 2003) by the extraordinary amounts of €11,4bn in 2008 and €24,3bn in 2009. The figures are such that one might as well assume that Greece has hosted not only the Athens but also the Karamanlis Games, the latter venue being three times as expensive as the former. In fact, during the period 2004-2009, the sum of €109,5bn was added to the stock of public debt. To put things in perspective, this is more than the entire stock outstanding in 2001 and more than two thirds of that outstanding just prior to the 2004 elections (and, as if by magic, also matches exactly the bailout package of 2010).
Figure 7: Outstanding public debt by year of issue (€billions). Source: Hellenic Ministry of Finance.
These are performance statistics that speak for themselves. Nevertheless, there were aspects of the legacy Kostas Karamanlis and his governments left behind which had serious adverse effects not only on the finances of the Greek state but also on its relations with its citizens. Recall that one of the foremost elements in Mr. Karamanlis’ 2004 electoral campaign was the call for an almost revolutionary alleviation of the tax burden, to be realized through substantially lower tax rates for income and profits and, more importantly, to be justified by nothing less than the principle that the citizens shouldn’t pay taxes. This was one of the two electoral promises he did meet, after dismantling the rather successful by Greek standards system against tax evasion and fraud the previous government had set up. It was to be replaced by another that was never meant to function, inaugurating an era in which the state were to watch passively as not only its tax revenues but also its very ability to tax and function were collapsing at irreversible rates.
The second electoral commitment Kostas Karamanlis and his governments tried hard to respect was that on decadence - opulent aggregate consumption, well beyond the economy’s productive capacities, to be funded by public debt. For the first time in the country’s modern history, the only raison d’être of structural budget deficits was the augmentation of household disposable income, without any underlying strategic consideration other than short-term electoral gains. This was attempted via unprecedented increases in public sector employment (especially by local authorities and state-controlled enterprises), salaries, pensions, and benefits (in particular, for groups of employees in the public sector and the state-controlled entities who were already at the higher end of the earnings distribution), decreases in the tax burden (favoring almost exclusively property and wealth, self-employment, capital gains, and dividends), and direct subsidies.
Equally importantly, it required measures that were completely counterproductive in terms of the state building a reputation for consistency and determination in enforcing the distribution of responsibilities across its citizens equally and effectively. Even though the latter is most fundamental given that our extremely short and tumultuous modern history has left us with a far from complete process of state-building, the signals that were sent couldn’t have been more wrong. Lest not forget some of the bigger acts of the Karamanlis period of government. One was to pardon some €150mn certain hotel owners were liable for in unpaid fines and taxes. Another was the by now infamous auditing of public finances (απογραφή): a politically-motivated witch-hunt for embezzlers of public money, which achieved nothing but a huge blow to the country’s reputation abroad given that its sole deliverables were (i) a (soon to be reversed) change in the public accounting practices from one accepted set of rules to another, and (ii) a favorable re-evaluation of the GDP based on new estimates of output from black economic activities (in particular, prostitution!!).
Yet another was the subsidization of farmers in a way that was to be deemed illegal by the European Commission and to cost the country more than €600mn in subsequent fines. The list includes also a variety of initiatives falling too short of officially authorizing tax evasion and money laundering, such as the consecutive (even though each and every one was supposed to be final) summary approvals of tax declarations (σεισάχθειες) from the self-employed and small business owners, or the decision to not control whether funds were obtained in a legal or at least tax-compliant manner (πόθεν έσχες) as long as they were invested in domestic real estate or repatriated. And last but not least, the tendency to respond to crises with attempts to boost household income or consumption, such as the frantic and almost indiscriminate money handouts in the aftermath of the natural (turned national due to the incompetence of the state apparatus) disaster of the great fires in the summer of 2007, or the abrupt and substantial decrease in the registration tax on luxury automobiles in 2008.
Figure 8: The disastrous years. Source: Hellenic Ministry of Finance/ TA NEA.
Sadly enough, the last example above was the government’s only response to an economic crisis that was about to become the greatest the country has seen in generations. Oddly enough, this was a most predictable crisis even in 2008 as the public debt dynamics seemed already a time-bomb set to explode. The stock of public debt had reached 118% of that year’s GDP while half of that stock was due to mature within the following six years (Figure 9). Alas, no one in power took notice. The gods conspired so that Kostas Karamanlis, in the 2009 early elections, was succeeded by George Papandreou in a two-part tragedy of incompetence, irresponsibility, and oblivion. One set the house on fire and run, the other walked casually into the scene carrying a briefcase stuffed with dynamite.
Figure 9: The maturity profile of Greek Government Bonds on 29/04/2010.
The story could have been very different had decisive measures been taken to address the overexposure of the public sector to (mostly external and almost explicitly private) debt. Precisely because the latter had benefited mostly the domestic households, over the period 2000-2009, the economy had accumulated enough wealth, especially in liquid assets, to be able to undertake the required effort. It had registered moreover substantial improvements in living standards across the vast majority of the population, so that this could have been sustained also politically had it been planned and executed appropriately. And last but not least, our public debt situation was not directly comparable to that of other countries. For ours accounted also for the total economy’s pension and social security obligations. By contrast, in most OECD countries, a large part of the latter is privately funded and, thus, reflected in the total debt. And in terms of total debt, Greece was in a relatively sound position (recall Figure 5).
Yet, the new government drove instead itself and the country into the corner between the promises of fiscal expansion Mr.Papandreou had made during the electoral campaign and the catastrophic shortcomings he and Mr. Papakonstantinou would reveal in their respective roles. Neither man
understood the nature of the problem. And when its extent became obvious, either did the one thing the prime minister and the minister of finance should not do in the midst of a national crisis: show ambivalence. On the one hand, they kept on insisting that their totally unrealistic electoral promises could and would be met. On the other, they were trying to appease the markets by hinting that they will do whatever necessary, which happened to be the exact opposite.
Figure 10: Correlations between public statements and spreads.
Needless to say, at some point they did realize that the most dangerous deficit the country was running at the time was that in credibility. But they chose to respond with a very intense public campaign of claims and predictions, to be refuted by the facts one after the other almost as soon as they were made (Figure 10).  This in turn established as public knowledge either man’s complete misunderstanding of what it means to engage in a game of bargaining with your creditors and signaling to the financial markets (lets not forget the unbelievable "loaded pistol on the table"). Amid irrationally insisting upon excluding the possibility of default (the one threat any lender can credibly make and the one contingency any creditor cannot rule out) and ignoring that the underlying problem had to do also with structural imbalances due to the very setup of the European common market and currency area themselves, being left without alternatives was just a matter of time.
Of course, the typical explanation for the onset of the Greek debt crisis involves also, at least implicitly, the explosion of the subprime credit bubble in the United States. The subsequent propagation of financial shock waves across the Atlantic is supposed to have forced our private lenders into demanding unsustainably high risk premia if they were to continue absorbing our insatiate needs for credit. Yet, the data tells a somewhat different story. Of course, the private sector (banks as well as investment and pension funds), driven by the arbitrage opportunity we described earlier (borrowing funds from the ECB in order to lend European governments at a significant premium), did hold the vast majority of the Greek public debt. But it didn’t stop from being willing to lend us until well into 2010. If anything, it seems to have reacted rather late (Figure 11).
Figure 11: The prices of Greek Government Bonds. Source: Bank of Greece.
This notwithstanding, any sovereign debt crisis must involve some external factors - after all, no sovereign has ever managed to go bankrupt without external debt exposure. In our case, however, what came to really matter was not the external but the exogenous – more precisely, the imposed would be solution. The path towards the mess in which we find ourselves today was signposted by two personal decisions. The first was to include the IMF as an integral participant in the bailing out operation. This was clearly too monumental for the EU affairs a decision to have been taken by our then prime minister or even by the then IMF director. For no small member country could ever be in any position to negotiate with the IMF without the direct involvement of high-brass bureaucrats from Brussels. And no high-brass bureaucrat from Brussels would ever get involved in this kind of negotiation without explicit approval by the German chancellor, whose country would be called upon to provide the bulk of the bailout funds.
Hence, allowing the IMF to be involved must have come down to a decision by Mrs. Merkel. And without doubt, this must have been a difficult decision. After all, she seems to have an almost ideological aversion to the very notion of a bailing out, especially when meant to rescue carelessly-greedy and predominantly-French bankers, along with the lazy, tax-evading citizens of a Southern country and its hopelessly-incompetent political leaders. In addition, Germany has had a long tradition of referring to the will of the ECB when it comes to matters of importance for the Euro zone. And the latter institution was opposing publically an IMF involvement since, apart from the obvious loss of face in ceding partial authority to an outsider; there was also the potential for fundamental conflict of interest. The ECB's principal goal is always price stability within the Euro zone whereas one of the main concerns of the IMF is to ensure the repayment of its loans, with interest. It was the latter goal, however, along with the expertise the IMF was supposed to carry in the design and management of sovereign bailouts, to be in alignment with the need for ensuring that the funds the German tax-payer would be called upon to provide would be repaid, with interest.
The second personal decision that paved the road to where we stand today had to do with the method via which the IMF involvement and consequently the contractual agreement itself were accepted by the Greek government. It is by now more than obvious that the two men in charge, George Papandreou and George Papakonstantinou, were oblivious (to an extent that defies logic or even benefit of doubt) to the socio-economic as well as political consequences. Not only they did not play any substantial role in the negotiations that led to the first bailout memorandum but failed to grasp even its core implications. Yet, either adopted the bailout itself as a personal crusade to redeem the country from all past and present economic, political, and social ills. This set in motion an irreversible process. On the one hand, the PASOK members of parliament had learned too well under Mr. Papandreou not to descent from the official line. On the other, the possibility of even a temporary freeze in our debt payments was spreading panic throughout the ranks of the political, business, and media elites, in Greece as well as abroad.
Hence, the country was led to agree upon a bailout memorandum which many of the members of parliament who approved it did not agree with, understand, or even read - at least according to the (admittedly absurd) claims they now make. It entailed a salvation plan whose very inception suffered from fallacy. Fooled perhaps by the international bond market's relatively slow pricing response (recall Figure 11), the core diagnosis was not that of excessive leverage. It described instead a temporary cash flow problem, stemming from the structural budget deficits which were to be reduced quickly by cutting expenditures and increasing tax revenues. The method of choice was to cause “shock and awe” through wide-ranging and deeply-reaching structural changes, a typical but also typically unsuccessful IMF favorite. For the central objective was to signal towards the international bond market a confident commitment in addressing the problem and, more importantly, in guaranteeing the interests of the current bond holders. Most unfortunately, however, this was understood as requiring an enormous amount of new short-term debt, an oxymoron the markets soon came to recognize. After all, net increases in debt and deficits being more or less equivalent concepts, there is no real benefit in trying to stop water overflowing from a bucket by opening holes on its side.
Another fallacy in the bailout plan’s composition was the premise that exorbitant debt may be paid out of economic growth. And even more of a fallacy was the belief that the required rate of growth can result from increases in competitiveness due to scorched-earth wage reductions or so-called structural changes. I am afraid we will have to wait for another life before registering tangible economic growth due to having more taxis, longer opening hours for pharmacies, and smaller lawyer or architect fees. And as my overview has tried to point out, I do believe that the country’s true socio-economic problems lie elsewhere: in the gross misallocation of resources towards the non-tradable sector, the over-accumulation of wealth and property with no reasonable prospects for income generation, the unproductively unfair distribution of the tax burden, the abused role of the state as the lender of last resort and of most subordinate debt to the small firms and the self-employed, the misunderstood nature of market competition in a small economy with a plethora of family businesses, but also the mistaken idea of what ought to be the costs and benefits from being the weak member of a common currency area.
All these combined into a roadmap towards turning a dramatic but manageable cash flow problem into an unmanageable solvency one. To make matters worse, the plan was expected to be implemented by a state apparatus in complete disarray. Its implementation was to be supervised by men with little if any understanding of the Greek economy but an amazing ability to be at the same time certain of and absolutely wrong in their calls (Figure 12). At the end, the only structural measures that were implemented had to do with taxing property (real estate and other tangibles such as cars, boats, etc.) and reforming the pension system, whereas some improvement in the structural budget deficit came from almost uniform wage and pension reductions in the public sector and cuts in public investment.
Figure 12: Being certain and certainly wrong.
Indeed, government spending fell by 9,1% in 2010 with the biggest contributors being cuts in government consumption and investment (accounting for 18,8% of the total), wages (11,6%), and pensions (3,7%). However, government spending had been so high before that still its level exceeded 49% of GDP in 2010 - when during the period 1988-2007 for instance it had averaged about 45%. Given, moreover, that the tax revenue relative to GDP was not much different in 2010 than in most previous years (Figure 13), there was really no effective reallocation of GDP in favour of the public finances.
Figure 13: Tax revenues (percentage of GDP). Source: OECD
Not surprisingly, therefore, we arrived at a more or less amicable default, the PSI agreement, which seemed surprisingly orderly given that it was, at least for Commerzbank CEO Martin Blessing, “as voluntary as a confession during the Spanish Inquisition.” The restructuring allows for the repayment of €100bn from €207bn the country owes to private creditors, the remaining €107bn written off. In conjunction with a second bailout that has foreign taxpayers lending Greece another €130bn, there will be changes not in the total stock of public debt but (i) in the composition of its pool of creditors, which now consists primarily of sovereign entities, and (ii) in its maturity profile, which gets prolonged well into the foreseeable future (Figure 15).
As far as default and restructure of sovereign debt go in the world financial history, this was unprecedented in size and done obviously to avoid an alternative with mostly unknown but certainly much worse consequences for all parties involved. Not so obvious, however, are the outcomes to which this second bailout would lead. More specifically, how exactly a country in state of default will be able to repay a stock of debt that is now higher by more than 10% of its current GDP. Of course, the immediate debt burden is no longer the same. But the total burden being now higher, the alleviation means that the bulk of the onerous obligations have been moved forward, onto my generation and the ones that follow. And both the current state as well as the prospects of the economy, not to small part due to the bailout programs themselves, do not leave much room for hope that it will be able to cope with a long future of debt overhang. The discounts on the restructured Greek government bonds already imply that the international bond market thinks it will not (Figure 14).
Figure 14: And the market says... still in default.
Figure 15: The post-restructure maturity profile of the Greek debt (€billions). Source: Hellenic Ministry of Finance.
At present, not only the economy but the country itself is in free fall. The “benefits” of memorandum-style austerity have yet to become apparent, while the economy contracted by 0.2% of GDP in 2008, 3.3% in 2009, 3.4% in 2010, 6.9% in 2011, and god knows how much in 2012 (the fourth quarter of last year saw a fall of 7.5%). These figures correspond to a cumulative loss of 13,21% in less than four years while unemployment has risen to 20%, reaching 50% among young people many of whom have started leaving the country. And what is worse is the absence of anything on the horizon to suggest things might turn around any time soon.
The second bailout agreement will not improve the economy as it requires even more reductions on wages and government spending or the sell-out of public assets, and as before all of the wrong kind. It continues, moreover, to place the emphasis upon an all or nothing crusade for Greece to return to the international bond market. This might well be what makes the foreign taxpayers, who unwillingly have found themselves holding most of the country's public debt, sleep better at night. But it is a don quixotic quest: standing at 160% of GDP after restructuring, our public debt situation precludes more borrowing - even if it were to become possible, it would only make a very bad situation worse.
It should be noted also that the improvements in the country's medium-term financial position are neither as large nor as obvious as it appears at first sight. The government bonds that were subjected to restructuring included ones that were held by domestic pension and social security funds. And as the latter will have to be supported financially by the government for the foreseeable future, this is not really a net reduction in the public future financial obligations. It represents rather a temporal smoothing, by transferring some of them onto future generations of tax payers.
In addition, a large part of the second bailout package has been earmarked for the recapitalization of domestic banks. Given that the bailout is not aid but loan, this is another wealth transfer from future generations of tax payers, now to the bank shareholders. Recall, moreover, that this kind of transfer occurred also under the first bailout agreement (the estimates for that amount range between €20-40bn) while now gets enhanced by the provision that the losses of the domestic banks from the debt restructuring may be counted against their profits for the next 30 years. And even worse for the future taxpayer, the recapitalization favours the privately- rather than the state-controlled banks (Figure 16). This only adds to the moral hazard of minimizing the costs of the banking sector from a debt crisis they played a pivotal role in creating.
Figure 16: The recapitalization of Greek banks.
In fact, the central theme of the second bailout memorandum seems to be the transfer of the bulk of the debt obligations from the current to future generations of tax payers and retirees. The commitment of the so-called stability pact for no budget deficits has been advertised as means to avoid future debt crises. To the extent though that the current crisis will be paid mostly by future generations, this is but a credit constraint to preclude their insurance against future adverse shocks. Similarly, the restructuring of the privately-held debt and the new more favourable terms of repayment for that held by sovereign entities have been saluted as allowing vital breathing space for the public finances in the short- to medium-run. But the requirement for what under the currently abnormally-low valuations amounts to fire-sale of state assets calls for striping wealth from future generations, unless the proceeds are to fund investments guaranteed to generate appropriate returns for the country’s treasury.
These concerns loom even more worrisome once we take into consideration that the generations currently in or close to retirement do not bequeath the future ones only with debt overhang. For too long, the Greek society has been ripping the ephemeral benefits of cheap and predominantly illegal immigrant labour, having chosen to ignore the economic but also social costs of its presence as well as underestimate the country’s ability to cope with them in the long run. The problem has recently surfaced in all its severity as the deteriorating Greek but also European economic fundamentals restrict either region’s absorbing capacity. More importantly, the relevant numbers of immigrants are vast relative to the resident population (especially that of working age) and press against an already severely overstretched and underfunded public system of health care, education, and social security provision.
This is taking place at a time in which, for there to be any hope of ever getting out of the debt trap, the country’s foremost imperative cannot be other than improving its public finances. The latter necessitates structural budget surpluses and, thus, transfers of wealth from the households to the state, to an extent that would be without precedent in our modern history. Unfortunately, the country’s most frightening deficit seems to be in political, intellectual, and cultural leadership: at present, the Greek people lack inspiration to make sacrifices. Even more unfortunately, this is what our latest generation of political leaders, and their extensive courts of consultants/technocrats, leave behind. In their desperate attempts to hide their mediocrity behind hyperbole about their political opponents’ ethos and conduct have made it public belief that the country’s socio-economic and political systems have failed; hence, any effort to save any part is unjustified.
Paradoxically, however, fundamental parts of these systems have supported the building of a democratic society in which the average individual has been given too many rights and too few obligations and enjoyed radical improvements in living standards, and they have done so in record time. Many societies have made sacrifices for systems that had benefited them much less. And all of them had to do so because of systemic failures, brought about by the shortcomings of individuals in key positions of power. Until the last quarter of the 20th century, most chapters of our national history were written by ordinary people making sacrifices, not just economic but even larger than life, under leaders whose abilities were smaller than their egos.
Even more paradoxically, our political, economic, and public-opinion-making elites, rather than delineating the time horizon and the extent of sacrifice, have embarked upon creating false public expectations - that the worse could be already behind us or that things could be made easier. Consider for example the recent and very popular calls for alleviating the tax burden. They advocate lower taxes, particularly on capital-income, on the basis that this would enhance economic growth - a view that, especially in our case, makes little sense both in terms of public accounting but also of economics.  The general tax burden in Greece is actually low compared to other countries (recall Figure 13), and way too low given the budget surpluses our debt repayments require. It is also unfairly and unproductively distributed across the economy (Figure 17), overemphasizing indirect taxes and overburdening labour with the onus of sustaining an impossible pension and social security system (Figure 18).
Figure 17: Tax revenue by sector in 2010 (percentage of total tax revenue). Source: OECD
Figure 18: The decline in wages and the burden of taxes vs. social security contributions. Source: OECD/Η ΚΑΘΗΜΕΡΙΝΗ
The political underpinnings of the campaign for less taxation are to be found in the inability of the lower and middle classes to cope with the current economic reality after the indiscriminate and almost uniform wage reductions the fist bailout agreement brought about. Yet, the campaign itself is expressed in terms of tax changes that will actually increase inequality. Almost certainly, they are bound to further increase our overreliance upon indirect taxation. This will hurt even more those who already suffer the most, especially the swelling ranks of the unemployed. And it will do nothing to address the other reason for the inability of ordinary Greeks to meet the required tax obligations. It is telling that the most unpopular of the new taxes, those on property and real estate, still fail to even approach their counterparts in other countries. The strong public resentment indicates precisely that the original tax levels were too close to zero (hence, a small increase appears infinite in relative terms), the taxable assets are grossly misallocated (given their actual income, many Greeks would not even think about owning their current property under most other countries’ tax regimes), and the economy overexposed to real estate without adequate prospects for income returns.
In fact, resentment against everything has grown among ordinary Greeks, assuming apolitical characteristics and political momentum that are dangerous. In the aftermath of two decades of successive strategic mistakes, the debt crisis has exposed the extent to which our collective economic resources and socio-political rights and obligations have been as much misallocated as unproductively and unfairly distributed. This has come to haunt the Greek society as it gets constantly called upon to make yet more sacrifices along a road that doesn’t seem to lead anywhere and under the orders of international creditors. Which naturally compounds the pain, especially since the primary objective seems to have been that of buying time: for the Euro zone to weather a much bigger sovereign debt crisis, but also for our current political, economic, or public-opinion-setting elites to retire and the privileged amongst our current retirees to die, either in relative peace.
Like the vast majority of the western world, Greece has lived well above her means for decades. Unlike most of the western world, however, the corresponding gains in economic well-being have been more readily identifiable with specific distorted socio-economic relations, between the state and the society but also within the latter as well as across generations. Hence, now that the bill has become due, the agonising but necessary reappraisal of our collective lifestyle and expectations cannot be achieved without dramatic redistributions of power, wealth, rights, and obligations. This implies that the challenge is ethical as much as political, economic, and social. It means also that neither the state nor the current or future working generations should assume the responsibility by themselves. For no society can reform its structures and relaunch its economy without a state strong enough to play central role, while no democratic society can do so without the consent of its lower and middle classes.
Give all of the above, I am afraid I will have to conclude on a pessimistic if not alarming note. In the midst of a regime-changing economic program, which is certain to restructure the economy yet not unambiguously for the better, the country has been forced into radically rewriting and reinterpreting its socio-economic contract. The undertaken abrupt and unjust redistribution of wealth and the attempted reallocation of economic and, hence, also socio-political rights and obligations would leave any society between a rock and a hard place. And in our case, it entails an intra-generational transfer of the bulk of the onerous obligations that has put my generation, the one that follows, and quite possibly even that of my newborn son between what may well be too rough a rock and too hard a place.
Theodoros Diasakos, Collegio Carlo Alberto
For the GPPF Nottingham Forum, March 2012
 Consider some anecdotal but nevertheless typical examples. In the immediate aftermath of the transition to the new currency, the prices of many agricultural products remained the same absolute numbers but were quoted in Euro cents rather than in Drachmas. Relative to those commodities for which the price conversion remained at the official Euro/drachma exchange rate, this constituted a 345% price increase. And this corresponds more likely than not to a lower average bound. For the EU attempt to assist economic growth in third world countries meant a dramatic decrease in the duties on agricultural produce imported from the latter to the former. And this made it in turn even more profitable to import third world agricultural products in order to sell them in the Greek market as of local origin, an illegal but commonly observed strategy. One can also think of the fact that the daily rental for a standard seaside vacation apartment in high season went from 5000 Drachmas to €60, a 314% increase in price. Observe, moreover, that more than half of the relative price increases in question is in real terms since, during the decade 2001-2011, the average price increase due to inflation was only 140,3%. By contrast, the relative prices of most imports decreased dramatically. Notice for instance that the price of a BMW 3.16 went from 7mn Drachmas in 1993 to €35000 in 2011. This is a 72,5% increase in the price when the average price increase due to inflation in the same period exceeded 318%. Not surprisingly, there was an explosion in car sales while the Greek importers’ profits were sustained also by the more or less constant world car prices during the period in question (Figure 19) and the ever shrinking duties for car imports.
Figure 19: The evolution of the US price index for new cars. Source: US Bureau of Labor Statistics.
 An example that comes immediately to mind has to do with consolidations in the banking sector. Merging two of our three largest banks has been regarded as desirable if not necessary for the entire last decade but the relevant saga consisted of several unsuccessful attempts as the management rather than the shareholders were setting the rules. Equally, if not even more, telling is the fact that Greece is probably the only country in which the federation of industrialists is headed by someone who technically is not one, having cashed in the control as well as a long family history at the helm of one of our industrial jewels.
 Recall the then minister of Finance predicting that the ASE index would reach 6000. The 2000 elections approaching, it was an obvious attempt to sustain the stock market rally and, hence, the public euphoria about how well the economy was supposed to be doing. Not so obvious is the fact that he did remain in office after having made this kind of prediction.
 According to data from the Bank of Greece, that year witnessed the interest rate for overnight transactions falling from 9,4% (the monthly average for January 2000) to less than 6,2% (the monthly average for December 2000).
 Source: OECD. From amongst the OECD countries, the Greek performance matches only those of Turkey and the United States (each registering also a ratio of 70% throughout the period) and partially those of Mexico and Portugal (each championing the same ratio but for three of the years in consideration in which it was only 60%).
 The implied GDP levels were calculated using data from the OECD. This is given in current USD and was converted in current Euros using the yearly average Euro/USD exchange rate. Notice also that these expenditure figures underestimate the true opportunity costs. Had these amounts been instead invested, the sums would be compounded with the rate of return.
 To put things in perspective, amongst the OECD countries, only Iceland managed a higher annual average deficit for the period (-14,2%) while only Portugal and Estonia (with -9,8% and -8,4%, respectively) came close. The next worse performer was Spain with an average deficit, however, of less than -6,8%.
 According to data from the OECD, during the period 2003-2010, annual net foreign direct investment registered on average an outflow of approximately €189,3mn. By contrast, average annual net foreign direct investment in stocks exhibited an inflow of €3,76mn (of which the near total for the period originated in 2007, by far the best year for the ASE).
 Source: the Bank for International Settlements. In fact, amongst the 18 most developed of the OECD members, Greece outranks only four countries: Germany (63%), Austria (57%), Belgium (56%), and Italy (53%).
 The picture remains similar also for the year 2009 in which the government debt to GDP ratio for Greece was 133,5% compared to 127,1% for Italy, 100% for Belgium, 93,3% for Portugal, 90,8% for France, 72,4% for the U.K., and Spain’s 62,9%.
 For instance, during the period 2003-2010, final government consumption expenditure remained constant at 20% of GDP per annum (according to data from the OECD 2012 key tables). The same ratio was recorded for the vast majority of the OECD members.
 My estimate is based on cumulative returns at the rate of 2% per annum with the time-profile of the underlying invested amount matching that of the current Greek government debt stock (see Figure 1 and Endnote 6). I arrived at the 2% average premium by comparing the weighted (by the outstanding face value in a given year) average discrepancy between the coupon rates on the Greek bonds (using data from the Hellenic Ministry of Finance) and the average for that year fixed rate from the ECB’s main financing operations (when no such data was available, I used the minimum bid rate form the variable tenders, and when neither the latter data existed, the marginal lending rate). Of course, this exercise entailed the additional assumption that the entirety of the debt was held by private institutions with direct access to the ECB lending facilities, which of course cannot have been entirely true. Nevertheless, almost certainly, the vast majority of the debt was held by financial institutions with adequate access to credit so that a leveraged investment on the Greek debt could guarantee an equivalent premium. It should be noted also that at the time of the PSI, the private sector was in possession of approximately €207bn in Greek government debt. This corresponds to only 68% of the total stock (€304,7) outstanding at the end of 2009, just before the onset of the crisis and the first bailout. We may safely assume, however, that the remainder had been held also by the private sector and passed onto the ECB during the purchases of government bonds the bank has been undertaking recently as extraordinary measures to counter the debt crisis.
 Two very simple numerical examples suffice to illustrate the point. Suppose that the sales tax rate is λ whereas direct taxation of profits and employment income amounts to a tax rate µ on the price domestic suppliers receive. The tax receipts per €1 the domestic economy spends of domestic output outweigh those per €1 of export revenue since is the same as. Observe that the left-hand side of the last inequality (which depicts the difference in tax revenues per €1 of GDP between the two sources) is increasing in λ and decreasing in µ. Let now θ be the rate at which value is added domestically per €1 of the final price of imports. The tax revenues per €1 of import versus export final price differ by. Once again, this is increasing in λ (as well as θ) and decreasing in µ. Moreover, it is certainly positive for large enough values of θ (as θ approaches unity, the difference in this example tends to coincide with that in the previous one).
 Let me remind you that, at the height of the 199-2000 stock market bubble, some prominent by Greek standards analysts were advocating essentially the abolition of income taxation. Their claim was that a relatively small increase in the surcharge on stock market transactions would generate at the time revenues that would dwarf those from income taxes.
 Throughout the last quarter of the 20th century, Greece undertook several and severe austerity programs (1974-77, 1985-87, 1990-93, and 1994-2000) in what seems to have been a tradition of excessive structural budget deficits followed by corrective surpluses. This tradition was abandoned upon entry in the 21st century and the Euro zone.
 Consider an individual who is planning to work foryears and be in retirement for years thereafter. For, let also and be, respectively, the average rates of return on her pension fund account and growth of her wage or pension during the corresponding periods. Suppose finally that the average rate of contribution towards her pension fund out of her wage is κ while her first pension upon retirement will be given by a portion µ of her final wage. The scheme is sustainable if and only if. Equivalently, if and only if. Obviously, what matters is the rate of return on the pension fund relative to the rate of wage or pension growth.
 In current prices, the recent Games had the following final cost: Atlanta (1996) $1.8bn, Sydney (2000) $11bn, Athens (2004) $15.6bn, and Beijing (2008) $43bn. The cost for those to be held in London this year is expected at $18bn.
 The preferential treatment of investment in real estate applied to construction companies and households purchasing their first home (subject to very mild constraints on the value of the house).With respect to the repatriation of funds, the preferential treatment in question was granted in exchange for the ridiculously low tax of 10%.
 In fact, given our already congested main cities and excessive per capita consumption in cars, car parts, fuel, health care and pharmaceuticals, any benefits from increasing the equilibrium consumption of taxi and pharmacy services are more likely than not to be outweighed by the costs, be them externalities or current account deteriorations. Similarly, in a country in which the legal system is already under serious strain and its citizens are famous for taking each other to court for little reason while too many resources have been allocated in construction and real estate, the problem is certainly not how to reduce prices and, thus, increase consumption in these sectors.
 More than 75% of our public debt is now held by sovereign entities - the ECB and the Euro zone (which has 16 other member states), and the IMF (which has 169 other contributing states) - while the actual effects of the PSI/second bailout package on the public finances can be summarized as follows. The new bailout is a loan of €168bn, of which €130bn is new funds and €38bn what we hadn’t received yet from the €110bn of the first bailout. The PSI leaves the private sector with a €107bn debt write off and a remaining €100bn. This is to be settled via new bonds amounting to €70bn (with maturity between 15 and 30 years and interest rates 2% until 2015, 3% thereafter and until 2020, and 4,3% henceforth) and €30bn in cash. To the latter figure, one should add € 38bn that has been earmarked for other immediate debt repayments (replacing short-term debt with longer-term one, setting money aside for those bond holders who will not participate at the PSI etc.). It follows, therefore, that there is no net change in the stock of public debt due to the PSI/second bailout package. Nevertheless, the second bailout loan comes with a grace period of ten year and interest rate 3,5%, which is smaller by 200 base points to the one for the first bailout loan. Now, from the €100bn of the new funds from the second bailout, as much as €50bn will be allocated for the recapitalization of Greek banks, while another €12bn will cover payables the Greek government has overdue to private suppliers (VAT returns, bills etc.). The rest of the loan is meant to cover the interest payments on the debt and the budget deficits until 2015. Evidently, therefore, the gains in terms of net present value of the public debt will be realized predominantly in the short-term. The benefits for the future generations are because (i) €38bn from the first bailout loan now carry smaller interest rate, (ii) €100bn of privately-held debt are replaced by funds from the second bailout (assuming of course that the former had an average interest rate greater than 3,5% ), and (iii) the remainder of the privately-held debt caries on average lower interest rates than before (which must the case given than the actual haircut has been estimated at 53,5% and this exceeds 107/207). It should be noted, however, that the extent of the gains in (ii)-(iii) above is restricted by the very fact that the new repayment horizon is longer.
 I am referring of course to Greece defaulting on its public debt and having to negotiate its restructuring without the backing of the ECB, the IMF, and the EU. The absence of another alternative is obvious given that in 2012 the expenses of the general government are €127,8bn out of which €87,4bn represent debt payments.
 Given that the accepted estimates place the haircut on the original bonds at 53% of net present value, the prices in the figure ought to be multiplied by 0,47. They imply, thus, discounts that range between 86,5% and 90%, depending on the length to maturity.
 Let for instance the tax rate fall from 35% to 25%. Other things being equal, the tax revenue will fall by 34,28% and, in order to be replenished, the corporate profits will have to increase by 140%. For the tax revenue to be replenished in real terms, this requires that for ten years profits ought to grow at average rate of 3,5% over an above the discount rate. For economics analyses of the optimality of high corporate taxes, see Conesa J.C., S. Kitao, and D. Krueger (2009) “Taxing Capital? Not a bad idea after all,” American Economic Review as well as T. Pikety and E. Saez (2012) “A Theory of Optimal Taxation”, NBER Working Paper or Farhi E., I. Werning, and S. Yeltekin (2012) “Non-linear Capital Taxation without Commitment,” Review of Economic Studies.
 Notice that the graph for the US economy is rather deceiving as it accounts only for the federal taxes. For instance, the top corporate tax rate (including state and local taxes) reaches 39,2% - it is the highest in the rich world. The US tax rate on capital gains is 15%. This is 150 basis points higher than the Greek one.