Greece: Macro-Fiscal Flows And Investment Markets

Includes: GREK
by: Alan Longbon


Greek macro-fiscal flows have fallen to -3% of GDP due largely to a collapse in private credit creation by commercial banks.

The current account continues to improve.

Unemployment is at catastrophic levels and one cannot expect financial assets such as stocks, bonds and real estate to stay elevated much longer.

The purpose of this report is to look at macro-fiscal flows in Greece to assess their impact on investment markets.

This report was produced using a balance of national accounts assessment of Greece.

One can summarize the national accounts in the following formula:

GDP = Private Sector Spending [P] + Government Sector Spending [G] + External Sector Spending [X]

See the methodology section below for more detail on these formulae.

Each sector will be examined in turn starting with the private sector.

Private Sector

The private sector is where the stock market is, and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks - More loans created than repaid. Credit Money.

  2. Externally from overseas commerce - More exported than imported. Overseas created credit and State money.

  3. Government spending - more spent than taxed out. State money.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow overall even if one or two of the three flows are negative. The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive.

The chart below shows the level of private credit creation entering the private sector through commercial banks.

The flow rate of loans to the private sector from commercial banks in 2017 is -3% of GDP not including the number for December. That is the loans are being repaid or written off faster than new ones generated. GDP shrinks by this much.

Borrowing rates speak to the level of enthusiasm and confidence in an economy for households and businesses to buy and invest and be able to repay loans in the future.

This is important for the EU as the governments are constrained by the Growth and Stability Pact in what they can do fiscally, all are running austerity programs. The EU, IMF and World bank master plan for money growth is that it should come only from private banks at interest and a current account surplus. Government fiscal spending is taboo as there is no interest income attached to it for private banks.

The flow of bank credit money adds to the stock of existing private debt shown in the graph below.

(Source: Professor Steve Keen)

The stock of private debt is about 120% of GDP. This level of debt is relatively high but in decline, as Greeks pay back their loans and bad loans are written off.

External Sector

The external sector is trade and commerce with other countries and is represented by the current account. The current account is exports less imports, and it also includes capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance. The chart shows the current account is breaking about even.

Adding the result for 2017 together and not including December the result is likely to be -0.13% of GDP or -$US0.213B

Government Sector

The government budget is shown in the chart below.

The chart shows the government adding and draining the private sector with deficit spending and taxation.

For 2017 and not including the December result, not in yet, the government looks to be draining -$US0.567B out of the private sector or -0.029 of GDP.

As previously mentioned, the EU Growth and Stability Pact is an EU guideline that applies to all member states. This calls for government deficits of not more than 3% of GDP per year and a total stock of debt of not more than 60% of GDP.

Governments not meeting these standards are required to run austerity programs until compliance is reached. Governments can be fined for not keeping to the rules which further adds to the problem. Greece is in this category.

One could say Greece is in permanent detention and each government budget is dependent on approval from the IMF, World Bank and ECB who make additional loans conditional upon budget measures such as cuts to healthcare, education, infrastructure, and welfare.

Thanks to the troika and Greece's own insistence on retaining the Euro and thus losing both its currency sovereignty and national sovereignty it has 20.7% general unemployment and 39.5% youth unemployment.

These are factors of production the private sector has no use for. The government could bring these idle resources back into production with a combination of lower taxes and fiscal spending. If only it were allowed to.

This shows the folly of nations that give up their monetary currency sovereignty and are controlled for all intents and purposes by a foreign power.

A stock of unemployed people is used as an inflation anchor. This has a dual purpose of:

1. Suppressing domestic aggregate demand to lessen the demand for imports that might create upwards pressure on the currency. A lower exchange rate helps with international competitiveness.

2. Keeping labor costs low which again helps with international competitiveness.

Sectoral Analysis Methodology

Professor Wynne Godley developed the stock-flow consistent sector flow framework of analysis.

Each nation state is composed of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business, and community, and most importantly for investors, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it needs income from one or both of the other two sectors to grow.

The government through its Treasury sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as matching bond issuance with deficit spending is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

Greece is not a sovereign currency issuer so enjoys none of the benefits of managing its money supply to advance the public purpose.

The external sector is trade and commerce with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

GDP = Private Sector spending + Government Sector spending + External Sector spending

These are accounting entities and correct by definition.

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall.

Conclusion, Recommendation, and Summary

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP.

Private Sector Credit Creation


External Sector


Government Sector



















(Source: Trading Economics and Author calculations based on same)

*Estimates pending final numbers.

#Forecast based on present flow rates.

When one double-checks the fiscal flow growth rate against the actual official reported growth rate, shown in the chart above, one sees a fiscal flow deceleration rate of -3% of GDP set off against an overall growth rate of 0.7% of GDP for the year (last quarter result not included as not yet available). Some of the discrepancies can be explained by the exchange rate movements between USD and the Euro. The macro-fiscal flows are a cleaner measure of real GDP as there are no exclusions and massaging of what is and is not included in the calculations; sector totals are merely calculated and added together to produce a sum total using the national accounts.

Over the last year the Euro has gained nearly 20% against the USD, and so GDP for Greece expressed in USDs will appear larger in 2017 even though in Euro it is much the same if not smaller. Certainly, the negative macro-fiscal flows show that money is draining out of the private sector at the rate of -3% of GDP. GDP should contract to leave less fiscal space for financial assets such as stock, bonds and real estate whose value should also contract.

The result of austerity policy in the EU is a falling GDP as the chart above shows. When one does not invest in public infrastructure, healthcare, and education productivity declines overall.

When one deliberately maintains a stock of unemployed people, aggregate demand must fall with income. This is in line with the accounting entity GDP = Gross Domestic Income. When one side of the equation changes, the other must follow. If income falls, then demand falls, and production is not cleared at market.

This does not mean the investment market must suffer. On the contrary, the stock market has exposure to the results of these austerity policies in that:

1. The currency has a lower exchange rate than would be normal for an exporting entity, and so export businesses can sell their products successfully overseas.

2. The stock of unemployed people ensures that labor costs remain low as a business input for the export industry.

At some stage, the long-term effects of austerity will impinge on productivity and lower international competitiveness. This time has not yet come. One can also well question the morality of such Dickensian public policies and the suffering they bring and long-term damage they do.

When one invests in the Greek stock market, one has access to companies that benefit from these public policies in that one is sharing disproportionately in the improving current account surplus income flow.

One can get investment access long Greece via this ETF fund.


Global X MSCI Greece ETF

I first looked at Greece in this article in February 2017 and recommended it as a buy. Since that time, it has made a capital gain of 36.8% and paid a nice 2.01% dividend income. With -3%+ macro-fiscal flows one wonders how long this can be maintained and for this reason Greece is no longer recommended as a buy as the fundamentals do not add up.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.