The hawk’s talk about Greece

Andrew Sentance tweeted: ‘If Greece now “insolvent” why was UK not “insolvent” in 1945? Public debt/GDP = 200%+ 25 yrs later was <70%!’

The answer is:  it was insolvent.  The Marshall Plan amounted to roughly £3.3bn pounds over just 3 post war years 48-51, which was about 30% of nominal GDP at the time.  I imagine that might have helped us somewhat.

And, there was what sovereign debt researchers have termed ‘financial repression’.  Liquidation of government debt via inflation, sub-market real interest rates, regulation.  Reinhardt and Sbrancia estimate that this liquidated about 3.3% of GDP’s worth of debt on average over 1945-1980 for the UK.  ie about 100% of GDP in total.  Measuring the contribution of these factors is not a precise science.  But still, you get a feel for the magnitudes involved.

So, it seems it wasn’t just ‘growth’.

Roughly 80% of the Greek sovereign debt is owed to the foreign official sector.  So the methods the UK used to steal from its mostly domestic bond holders aren’t so readily available.

Leaving all this aside, what does  Andrew Sentance think would happen to Greece if either the debt were not forgiven, or the generous terms to ‘repay it’ [in quotes because of course no one expects much of it to be repaid] were not extended?

Of course Greece [the murky combination of the public and banking sector] is insolvent.  The Greek banks would collapse instantaneously without the ECB’s ELA.  And that would bankrupt what, 5-10% of the private sector too, over the next 12 months?   More?

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One Response to The hawk’s talk about Greece

  1. THSL says:

    Tony, can i pin you down a bit more on insolvent vs illiquid?
    Without the ELA Greek banks would collapse because of illiquidity, whether solvent or not. Surely it is the same for the public sector – without a programme and without a lender of last resort the public sector would be illiquid. I’m not sure how one would assess solvency for the public sector really – you certainly couldnt construct a meaningful balance sheet – but it isnt relevant. Liquidity is key.
    This answers the UK question – solvency was irrelevant/undefined, but liquidity wasnt an issue (in part thanks to the Bank).

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