Was Greek crisis a Sovereign Debt crisis or Balance of Payments crisis? (Parallels with India’s 1991 crisis…)

Greece crisis will be studied for a long time to come.

In a recent note, Paul-Adrien Hyppolite (of École normale supérieure) says the crisis was a BoP one and not a sovereign debt one.

 He builds a national balance sheet :
The resulting 1997-2014 series teach us that:
  • The national wealth-income ratio follows an inverted V-shaped curve, culminating in 2011.6
  • The accumulation of domestic capital has been the main driver of national wealth. The concomitant build-up of a negative net foreign asset position has also influenced the trajectory of national wealth, first by limiting its increase prior to the crisis, before reinforcing its decline.
  • Private wealth rose sharply until 2007 before collapsing.
  • The pre-crisis growth in private assets was supported by fixed assets (mostly dwellings), while the increase in private liabilities came from loans granted by domestic banks.
  • During the crisis, dwellings have plunged in value, while deleveraging has remained relatively modest.
  • Despite the well-known increase in public debt, government wealth remained positive until 2013 due to the sustained growth of public assets, namely fixed assets (mostly public infrastructure) before the crisis and domestic corporations’ equity at the beginning of the crisis.7


These findings offer insight into the unsustainable macroeconomic dynamics that preceded the crisis – capital accumulation was artificially driven up by a real estate bubble,10 and was especially pernicious because investments in overvalued assets were financed through external borrowing.

That leads us to depart from the conventional explanation of the Greek crisis, which appears actually closer to a balance of payments crisis than to a sovereign debt crisis, thereby sharing strong similarities with the crises of other periphery countries.11 The key difference between them thus simply comes down to the relative involvement of the various economic sectors in domestic investment, and their financing through external borrowing. In Greece, the government was relatively more involved in this process than domestic firms (Figure 6). Hence, the crisis started as an external public – instead of private – debt crisis.


However, things can hardly be compartmentalised as the national balance sheet is composed of all three: households, government and private sector. So one bleeds, other follows.

One only remembers India’s 1991 crisis which is widely known as a BoP crisis. But scholars say the problems started with fiscal problems in 80s which eventually became a BoP crisis and then banking and so on.  So, one thing leads to another. It is difficult to really saw whether the crisis is via sovereign debt or BoP…


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