Greece: the road to Insolvency

Kindly translated by Anne-Marie de Grazia

The news arriving from Greece are becoming ever and ever more tragic. If an example were needed for the failing of austerity policies, this country would provide a shining one. But Greece is not an “example.” It is made up of 10 million people who are suffering without any hope of rescue. Greece is on a dead end road which can lead to nothing else than to default on its remaining debt, part of which has already been restructured under conditions akin to an orderly default. Clearly, between now and June, Greece will find itself insolvent.

The last agreement signed in fall between the government and the Troika, i. e. the IMF, the ECB and the European Union, foresaw that the interests on the Greek debt would be paid by the way of loans from said Troïka, with the provision for the Government to engineer a current account Budget surplus (what is called a “primary surplus”). But this goal is ever more receding. Receipts from VAT and tariffs on imports have diminished by 8.7% during the second quarter of 2012 and by 10% during the third quarter1. Income and property taxes, who had experienced a strong increase during the second quarter of 2012 in comparison with the same period in 2011 (+29%) saw their annual rate of increase tumble during the third quarter (+10%). The first indications available about the 4th quarter of 2012, and above all about the month of January 2013, show that these receipts too are diminishing in the absolute. For the month of January, the budget was 246 million Euros short of equilibrium. The government therefore decided to cut expenses by the same amount in an authoritarian way, thus setting in motion a mechanism beyond its grasp, which will precipitate catastrophe.

Part of these developments is due, evidently, to the continuous degradation of the economic activity of the country. Production (in the sense of current prices GDP, which is the one used as a basis for fiscal pressure), has amounted during the 3rd quarter 2012 to only to 51,7 billion Euros against 55,7 billion during the corresponding period in 2011, that is a drop of -7.1%. The results of the 4th quarter, which have just been released, are even worse. Production has fallen to 47.2 billion, that is a drop of -7.3% in comparison with the figures of the corresponding period in 2011.

Graph 1.

Source: HELSTAT, Quarterly National Accounts (Flash estimates), 14 February 2013, Piraeus

But the evolution of production figures shows a lesser reduction than the reduction in tax-figures. The collapse of production is therefore not the sole cause of the phenomenon. What is henceforth in play is the rupture of fiscal discipline, as much on the side of businesses as on the side of households. From this standpoint, evidence accumulates of the setting up of a parallel economy, a survival economy, outside the euro and therefore outside the possibility for the government to levy taxes, as can be seen on the blog of a Greek anthropologist, Panagiotis Grigoriou, and to which the press also is increasingly bearing witness. Greece has therefore entered the second phase of “super-austerity,” when economic agents, be they businesses or households, massively desert the official economy and stop paying taxes. This phenomenon has already been observed in Russia between 1995 and 1998. The Russian government tried to react with savage cuts in its expenses and by not paying what it owed (for instance the salaries of health workers and teachers, but also the orders of the State to businesses). The result, besides a worsening of the crisis, was that businesses being no longer paid by the State stopped paying taxes altogether. The “super-austerity” policy ended up reproducing the very budget deficit it was meant to fight. This is precisely what is putting itself into place in Greece today. The deficit has amounted to 246 million for the month of January. It should increase in the coming months to reach between 500 million and one billion per month. The government will proceed to new budgetary cuts, which will provoke all at once a worsening of the economic crisis and an acceleration of the centrifugal motion away from the monetary circulation in euro, until such time as the government finds itself insolvent.

In this tragic situation, external trade cannot bring any kind of relief. Deficit remains important, and if it comes to shrink, it is above all because of the collapse of imports and not as a result of the increase of exports. This is of course understandable. Greece exported agricultural products, but also industrial products and industrial services (naval repairs) essentially in the direction of countries of the Balkan and of the Middle East. This implies that a big number of them were in the dollar zone. The increase in the value of the euro since 2003 has killed Greek exports.

Chart 1

Amount of imports and exports in billion Euros.


Source: HELSTAT, Commercial transactions of Greece, 25 January 2013, Piraeus.

Greece is therefore on a trajectory leading to economic collapse in the relatively short term. The drop in investments and in the imports of industrial equipment will fairly rapidly provoke a deterioration of the industrial tool. The economy will continue to sink into depression and the receipts of the government will diminish month after month. The government’s reaction is foreseeable: it will cut into expenses, provoking in fact new drops in fiscal revenue. The vicious circle austerity-deterioration of activity-drop in fiscal receipts-renewed austerity-renewed deterioration of activity-renewed drop in receipts will continue from month to month. Only a political shock, a toppling of the government, as happened in Russia due to the financial crisis, can stop this infernal downward spiral. There is no reason to fear it, but good grounds to hope for it.

Kindly translated from Grèce : Vers l’insolvabilité by Anne-Marie de Grazia


Jacques Sapir, “Greece: the road to Insolvency”, published on the blog Russeurope on 16/02/2013, URL:



  1. Hellenic Statistical Authority, « Quarterly Non-Financial Accounts of General Government », Press Release, 25 January 2013, Piraeus. []

Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s’est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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