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Friday, April 12, 2024

5.4 Trillion Dollars In Wealth Gone Because Of Greece?

By Clayton Browne. Originally published at ValueWalk.

In finance circles, Greece rises to the top of the list of concerns.

Unsurprisingly to debt market observers, the Greek debt crisis has been years in the making.

Here’s a brief review and some quantitative speculation on how much paper wealth is missing because of Greece.

Greece - the 1980s

The beginnings of the Greek debt crisis started in the 1980s.  The Greeks, like many other nations, were loose with money.  The Greeks, in particular, showed an abnormal love of government spending.  The government spending boom happened under both the center-left PASOK party or the center-right New Democracy.

As empirical background, here’s a look at the Greek debt over the past 15 years.

The explosion continued until the end of 2009.

Greek Debt

Here’s another look at the Greek debt issue in context.

The following graphic compared growth in debt by select countries.

Interestingly, Greece and Spain were the biggest offenders.

As with every debt era, the debt explosion eventually comes to an end.

For Greece and Spain, the occurred in the latter half of 2009.

Growth in Debt Since 1999 Greece

Greece – The EU era

At about two-third of the way into the Greek debt era, the country opted to join the European Union.

Initially, the door to EU-membership was closed.  Greece’s government finances were not strong enough to meet the Maastricht criteria for acceptable debt levels.

Fascinatingly (and probably with a blind eye turned), Greece managed to make its balance sheet “strong” enough to gain membership in the EU.

It likely comes as completely unsurprising that Greece didn’t continue to improve its debt problem.

Instead, Greece’s government debt-to-GDP ratio never came close to the 3% criteria.  The most recent figure was 12.9%.

Fast Forward to this Decade

Shifting to the current Greece attention, the Greek debt crisis began in 2009, when the government indicated that its debt wold be 12.9% of GDP.

Spooked, credit ratings agencies lowered the Greek government’s credit rating, causing rates to spike.

Greece had to response to the credit downgrade.  It did.  The Greek government made assurances that it would reform its spending picture and improve its balance sheet (i.e. austerity).

If you’re a student of European history, especially recent history, it’s probably unsurprising that the actual reforms failed to live up to what was promised.

In the latter half of 2010, Greece indicated that their economy was still in trouble and likely would not be able to pay its debt.

The EU and IMF responded by allowing a €240 billion bailout allocation.

The Greece situation continued to deteriorate, with the unemployment rate rising to 25%.

The weak economy prompted the European Financial Stability Facility to authorize another €190 billion to the Greek government in 2011.

In 2012, Greece became the largest ever perpetrator of a sovereign debt default.

A Period of Silence

A well-needed break occurred in 2013 and 2014.  The Greek economy improved and the government somehow managed to run a structural surplus for two years (revenues less expenditures were positive when one excludes debt payments).

The short respite ended.  In the fourth quarter of 2014, a fourth Greek recession shocked the economy.

The situation worsened recently, when on June 30, 2015, the Greek government became the first so-called advanced economy to fail to make payment on an IMF loan, at €1.6 billion.  At the end of June 2015, total Greek debt stood at €323 billion.

With this Backdrop, How Has Greece Affected Global Equity Markets?

Every market observer knows that Greece jitters are affecting global equity markets.

Estimating how big of an effect Greece has had is technically difficult.  With that said, here’s a simple linear regression of global equity values against employment, retail sales, industrial production, consumer confidence, and the variable of interest, Greece mentions.

Greece mentions is simply the number of times, on a index basis, Greece shows up in the headlines.

Here’s a look at the two overlaid.

Mentions of the Greek debt crisis experience some volume from February to July 2015, January 2010 to June 2010, and May 2011 to July 2012.

Unsurprisingly, in instances when the Greece Mentions Index jumps, global equity markets generally take a beating.

Greece Mentions and Global Equities

Here’s the simple linear regression results (again, just as an initial check on the Greece effect).

The coefficient of interest is the -0.1268 on Greece Mentions.  the -0.1268 equates to a drop in global paper wealth of $5.4 trillion.

Now, some of this wealth has come right back, but some hasn’t.  The actual figure might be somewhere around $1 to $2 trillion, on a total global equity value of about $80 trillion.

It’s a reasonably large chunk of change.

Dependent variable = Global Equity Values
Variable Coefficient p-value
Greece Mentions -0.1268 -2.10
Employment -0.0003 -1.25
Retail Sales 0.0002 3.80
Industrial Production 0.4452 1.59
Consumer Confidence 0.2682 4.99
Constant -43.3439 -2.24


Overall, the Greek debt crisis may have cost the world, at least so far, between $1 to $2 trillion in lost paper wealth.

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