Lesson from Greece : sovereign risk and its productivity


Greece has a lot of difficulties about financial conditions now. Banks are shut down. There is no cash beyond the limited amount when people withdraw money from ATM there.  Capital control is already imposed. People in Greece cannot obtain enough cash to pay the bill. No one knows exactly what happens in Greece in the future.  This kind of risk is sometimes called “sovereign risk“.  Simple lesson from Greece is ” Do not have too much debt compared to earnings”. It is so simple that we can apply this lesson not only to counties, but also to individuals and companies.


Let us consider it in more details.  The key things are “Debt” and “Earning”.  It is easy to measure the size of debt as long as financial statements are accurate. On the other hand,  earning is a little different.  Earnings should be interpreted as the ability to earn money in the long run because some of corresponding debts are also long term debts.  This makes things a little complicated.  It is rarely said that “My company or my country is in danger because of huge debts” as the statement of responsible personnel.  The size of debts can be assessed only by comparing with its earnings.  If  companies or countries have the ability to earn money,  there is no problem to have debts because debts can be repaid by future cash flows generated by companies or countries.


The problem is that it is very difficult to predict the ability to earn money in the long run.  Economists may use “productivity” in order to measure the ability to earn money quantitatively. If productivity is high,  we have more outputs from less inputs at the result of economic activities, vice versa.  If the company has high productivity,  it has more revenue and less cost.  It means that the company generates enough money to repay debts. It sounds good.


Then the question arises “How can productivity be increased?”.  It is very difficult to answer.  Someone says educations are important and others say investments are needed.  Legal system and financial system are sometimes mentioned.  But situations are different between countries, so there is no concrete answer yet.  Greek debt crisis happened in 2009.  I imagined that since then a lot of discussions have been made to improve productivity of Greece.  Unfortunately, situations are not changed enough to convince the creditors to keep supporting this country.  Now people all over the world realized that “It is very difficult to increase its productivity enough to repay debts”.


Figure : Growth in labor productivity (GDP per hour worked, total economy, percentage change at annual rate, GRC:Greece)

Source :OECD Productivity database, January 2015


Therefore, I always worry about Japan in the future. This country is going to aging society rapidly. Debt to GDP ratio of Japan is worse than the ratio of Greece.  Some people say Japan is OK as it is different from Greece in terms of  the size of GDP,  technologies  and so on.  But I can not agree with this opinion because sovereign risk can be emerge in the same way as Greece. Just like Greece, it is very difficult to increase its productivity in a short period. Although the Japanese government says “Japanese fiscal condition is sustainable”,  I am not so sure that financial markets will continue to agree with that in the future.




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