European Money Doesn’t Like Greece
Greece and its creditors may have averted a crisis by agreeing on the release of another dose of bailout money, but the deal does little to address a deeper problem: Europeans still don't want to put their money there.
The flow of capital between the rest of the euro area and Greece offers a useful indicator of confidence in the integrity of the currency union. It can be tracked by looking at the Bank of Greece's liabilities to other central banks in the currency union -- a number that rises, for example, when concerns that Greece will abandon the euro prompt people to move currency out of the country.
The ascendance of Prime Minister Alexis Tsipras's leftist Syriza party to power, and its prolonged standoff with creditors, prompted an exodus: During the year through June 2015, an amount equivalent to more than 40 percent of Greece's annual economic output fled the country. This stopped after Tsipras did a U-turn in July, agreeing to harsh deficit-reducing measures in return for more loans. Not much private money, though, has come back since then -- reflecting both the effect of capital controls and persistent concerns about whether Greece will remain in the euro area.
Here's a chart showing the three-month cumulative flow of capital between Greece and the rest of the euro area (negative numbers indicate outflows):
It's hard to see how Greece's economy can recover unless private capital starts returning in a much bigger way. That isn't likely to happen until investors believe that the country's finances are sustainable. As the International Monetary Fund has made abundantly clear, the biggest obstacle is the government's unbearable debt: Until it is addressed, Greece will inevitably fail to meet its commitments to creditors, doing further harm to the economy and leading to yet more damaging standoffs.
The relatively wealthy European nations that are Greece's main creditors have held out the possibility of debt relief, but don’t plan to act until mid-2018 at the earliest. Meanwhile, Greece must endure more of the same crushing austerity that has helped keep its unemployment rate well above 20 percent. As long as the creditors insist on pretending that this approach will somehow lead to a desirable outcome, keeping one's euros elsewhere makes unfortunate sense.
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