The Dictionary of Debt (V): GDP, Haircut, Inflation, Labour Cost, Liquidity


Gross Domestic Product, GDP:

The total value of all goods and services produced within a country during a given year, including those produced by units owned by people who live abroad. The Greek GDP in 2010 amounted to €230 bln, with a real fall of 4.5% in comparison to 2009. In 2011 the fall approached 7%, whereas the Troika predicted 3%. The fall for 2012 is predicted to be between 2.8 and 6.5%. A reduction in GDP means that goods and services of smaller value have been produced in comparison to the previous year. The Greek economy is now in its fifth year of recession. A cumulative loss of Greek GDP that may surpass 20 % renders this financial crisis one of the largest in recent decades.

Haircut (see PSI):

If a borrower country can’t pay creditors, then it can, unilaterally or in accord with creditors, decree that only a portion of its obligations will be paid. Usually this amount is around 70% or 80%, but there are cases, like the recent Greek one, where the borrower agrees to pay only 40%. The amount that the investor loses is called a ‘haircut’. In Latin America during the last decade, for example, creditors were repaid on average 75% of obligations. Such a legislative intervention, most often involving bonds, shuts out the borrower from capital markets for some time.


The increase in the general price level in the economy during a specific time period. In Greece in 2010 it reached almost 5%, whilst 2011 ended with inflation close to 3%. Inflation causes suffering mainly for wage earners, pensioners, and ‘vulnerable’ groups, whose income dissipates in value, as they have few chances to tie it to inflation. The poor become poorer, but creditors also lose, because the value of their loans decreases with inflation. Trying to guard the value of their loans, they support policies of inflation targeting, hence their commitment to price stability. They also move to make central banks independent of electoral control. Not too democratic a choice, is it?

Labour Cost:

The amount that employers pay for the use of their employees’ labour. According to the Troika ‘experts’, it is the basic  reason for the low competitiveness of the Greek economy. However, in Greece after the Memorandum we have seen large cuts in labour costs (-6.5%) without competiveness being aided in the slightest, and the same holds for Ireland, Portugal, and Hungary. By the summer of 2011, in relation to 2010, wages were on average down by 11% in the private and 14% in the public sector.

Liquidity (money from the ECB):

In June 2009, when the crisis intensified, banks stopped lending to one another in the interbank market, fearing bank defaults that might lose them money. Then the ECB intervened, lending to the private banks at very low interest (1%). Banks however lent to the state or to individuals at much higher interest rates, ranging from 5% to 15%. The ECB also lends money to banks for lengths between one week and twelve months, on presentation of collateral. The ECB foresees even three-year lending, but claims that gradually these ‘facilities’ will be curbed, and talks of raising the interest rates. A problem for the Greek banks, that made big use of the ECB, is that they have to return the money they had borrowed, but they are by now essentially bankrupt.

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