Insolvency dynamics of the Greek private sector during the era of austerity: an empirical assessment

Abstract

This paper examines empirically the impact of austerity on the financial balance of the Greek private sector, with the use of the Dynamic OLS (DOLS) methodology. The standard stock-flow consistent private expenditure function is extended by treating corporate profits separately from the disposable income of the private sector in order to take into account the impact of austerity on distribution and private spending. The empirical findings indicate that the economy is debt-led, with austerity generating insolvency dynamics for the private sector. On one hand, at least since the introduction of the euro currency, private expenditure was heavily relying on the disposable income net of profits in an unsustainable manner, while on the other, the implementation of the Economic Adjustment Programs (EAPs) have intensified these unsustainable conditions, degrading the growth prospects of the economy.

Keywords:

• DOLS
• functional income distribution
• insolvency dynamics
• sectoral financial balances
• stock-flow consistent

Notes

Notes

1 This follows from the financial balance identity, according to which if one sector registers a surplus, the rest sectors ought to jointly list a deficit (Godley 1999a; Zezza 2013). In the case of Greece, the commitment of the Greek government to achieve high fiscal surpluses and the inability of the productive sector to attain a sustainable surplus in the balance of payments necessarily implies that the private sector would be in deficit.

2 The stock-flow consistent methodology is based on the work Godley (e.g. see Godley 1996, 1997, 1999b; Godley and Lavoie 2007b). For a review of the relevant literature see Caverzasi and Godin (2015) and Nikiforos and Zezza (2017).

3 This constellation approximates the work of Bhaduri and Marglin (1990), according to which distribution affects growth, that is, a wage reduction is expected to boost economic activity if the latter is elastic to profits, that is, it is profit-led, and vice versa (for a review of the relevant literature see Stockhammer, 2017). However, in the present case there are specific limitations which are discussed in a later section.

4 Note that the financial balance of the financial sector was increased abruptly in 2013 and in 2015 due to its recapitalization by the public sector.

5 The latter term implies that the newly issued debt will not be used for production purposes, i.e. investment, but for financing the fiscal targets and implicitly the external sector due to the interest and principal payments abroad.

6 See also Papadimitriou, Nikiforos, and Zezza (2016) who consider data from the flow-of-funds account provided by the Bank of Greece. Despite the big discrepancy between the national and the flow-of-funds accounts the financial balance of households eventually turns negative in both datasets.

7 In fact, relevant estimations in the literature suggest that the shadow economy has been shrinking since 2013, despite the increase of the tax rates (e.g. see Barbone et al., 2013; Schneider, Raczkowski, and Mróz, 2015; Board of Labour Inspection 2017; Schneider and Boockmann 2017; Poniatowski et al. 2018).

8 According to INE GSEE (2019), Greek households have become Ultra-Ponzi financing units since the onset of the crisis. For an exposition regarding the transition of units from Hedge to Ponzi financing see Minsky (1992).

9 It should be mentioned that cash and deposits of households, as recorded by the Bank of Greece, include also those which are reportedly held in foreign banks.

10 In 2018 the NPL ratio improved marginally. According to the Bank of Greece (2018) this development is attributed to sales of NPLs to private funds and debt write-offs. Thereby this improvement refers to the balance sheet of the banking sector and not to the insolvency status of households and firms.

11 As typical in the TFM all rows and columns sum up to zero, indicating that there are no “black holes” in the economy (Godley, 1996). Furthermore, the first subscript indicates the sector for which the transaction is an outflow and the second subscript the sector for which the transaction is an inflow.

12 A similar formulation regarding the incorporation of a structural break can be found in Qazizada and Stockhammer (2015).

13 A full list of the dummy variables employed is presented in Table A3 in the Appendix. Initially, all dummies were used in the regressions, though those found statistically insignificant had been gradually removed. As a rule of thumb, those with a higher p-value were removed first.

14 Hayakawa and Kurozumi (2006) argue that if Granger causality is rejected in the case of some regressors, then in the presence of leads the DOLS model likely underperforms. However, such a consideration has not been integrated in the DOLS literature. The results of the Granger causality are only treated as suggestive with respect to the performance of the model.

15 For a definition of financialization and a review of the literature see van der Zwan (2014) and Fasianos, Guevara, and Pierros (2018).

Additional information

Notes on contributors

Christos Pierros

Christos Pierros is a Senior Researcher at the Labour Institute INE-GSEE and a Teaching Fellow at the University of Athens.