As Greek economic output collapses, no wonder Portugal does not want to be “rescued”

One of the themes of my blog is that the commodity price rises which have taken place in the latter part of last year and the early part of this present an inflationary danger to many parts of the world. Not all because mired in disinflation (falling prices) Japan for example may welcome a small dose of price rises. The problem as ever is that even a small dose may build up, a fact ignored these days by many central bankers including the Governor of the Bank of England Mervyn King.

In spite of a recent dip to 484.99 on the Commodity Research Bureau foodstuffs index we still have a rise on this index of more than 20% since the latter stages of November 2010. If at any time we are tempted to ignore the consequences of this change for the economies of the world we only need look at the disturbances in North Africa which have spread to Arabia. We can now add Libya,Yemen and Bahrain to the list and sadly 4 more people have died. This morning wheat and corn prices are rising again and one staple which has risen less,rice, is joining them. Oil from this area is priced in relation to Brent crude oil and has risen to just under US $104 per barrel. The gap between it and the American West Texas Intermediate measure is now nearly twenty dollars for the spot price. This proves an old trading rule that spotted anomalies usually get worse before they improve, no matter how illogical they may be.

Greek economic output falls heavily

Whilst overall economic output for the Euro zone rose by 0.3% in the last quarter of 2010 we received figures for Greece which reminded us yet again of “two-speed” Europe. From the Hellenic Statistical Agency we received this.

Available data indicate that in the 4th quarter of 2010, the Gross Domestic Product (GDP) decreased by 6.6% in comparison with the 4th quarter of 2009 and by 1.4% in comparison with the 3rd quarter of 2010.

The significant decrease recorded in final consumption expenditure has contributed to the decline of GDP, while the improvement in the external trade balance has partially offset the negative effect.

These figures represent a major contraction for the Greek economy and represent something I was concerned about from the beginning of the International Monetary Fund inspired austerity plan. Back on the twelfth of March 2010 when I looked at the experience of Latvia under an IMF austerity programme I wrote this.

So Latvia was in an economic mess and the IMF medicine was an austerity programme. Now here is the real issue GDP was expected to fall by 5% in 2009 but it actually fell by 12.2%. So my fear of a downward spiral for Greece actually happened for Latvia

It may be hard to believe now but the Greek government was forecasting a fall of 0.3% in GDP in March 2010 which was just around the second austerity package. A forecast so wide of the mark that UK readers may be wondering if the Governor of the Bank of England has been moonlighting! Unfortunately if we look back to earlier periods we can see that economic growth was revised down as well in the third quarter of 2010 to -1.7% which makes the annualised fall some 5.7% then.
If we link the rising price trend story with this we can see something for the UK to mull over too. You see Greek consumer price inflation is at 5.2%  as of the latest figures for January,whilst her economic output is dropping at an annualised rate of 6.6%. I take intellectual satisfaction but no pleasure from pointing out that this reinforces an argument I have made for some time that you can have deflation (falling aggregate demand) and inflation at once. Sadly those responsible for Greece have manged to create what is a very toxic mess


This is a very sad state of affairs. I always thought that the very optimistic official scenarios for Greek economic growth in 2010 and 2011 were a type of public relations which if you wish to put it less kindly is another way of saying those making them were either incompetent or not telling the truth. The experience of Latvia which I wrote about eleven months ago indicated a severe adjustment even if one allows for the fact that the world economic recovery that is taking place means that Greece should for example be operating in a more favourable exporting environment.

What this means is that the fiscal figures in terms of her deficit and her ratio of national debt economic output will deteriorate. The annual deficit and the national debt are compared to an economic output (GDP) which is now 6.6% lower than a year ago. Also the shrinking economy will mean that some tax receipts will fall such as VAT and income tax and as unemployment is likely to rise further than public spending will come under upward pressure.

I do not like to present such bad news without offering advice for an improvement and it comes from an area I have been recommending since the beginning of the Greek crisis. That is that the has to be a type of default or more specifically a “haircut” to her public debt. I remember arguing for this to be of the order of 15% originally but now feel that her situation has deteriorated so badly that it would have to be at least 30%. There is a massive irony that a “rescue-plan” has helped lead to this and this partly explains why Portugal is so desperate to avoid being “rescued”. Here is a new definition for a lexicon a rescue which has the opposite effect.

I do not feel that a haircut even of this size would solve Greece’s problems on its own. If you do the necessary calculations it would help but not solve the problem. I always felt that psychology would be its strongest weapon as in it could be used to explain the need for reform in other areas as even bankers were being punished! With it would have to come an even stronger drive for economic reform of the type that Greece so badly needs. As we stand opponents can to easily point to the fact that the banking sector which helped cause the crisis remains essentially unreformed. Put another way the “haircut” buys some time for Greece to reform which to survive without an outright default she will have to take.

Why Portugal does not want to be “rescued”

Yesterday Portugal auctioned some one year debt and she sold a total of 1 billion Euros at a yield of 3.99%, up from 3.71% in the previous equivalent auction on February 2. She also offered to buy back some bonds maturing in April and June and found little demand as only 215 million Euro’s was purchased. However officials who claim this as a “success” might want to remember their own banking stress tests which ignored bonds which were held to maturity! Perhaps the banks took this more seriously than Europe’s bureaucrats. Either way Portuguese ten-year bond yields at 7.45% point to future insolvency.

Having mentioned that Portugal is trying to avoid a “rescue” the government bond yield gives us a clue as to why. The supposedly rescued Greece has a ten-year bond yield of just under 12% and Ireland has one of 9.18%. So if we look at the dent markets the “rescued” are in fact looking like they are worse and not better off. This is one of the reasons I have suggested that Portugal to go only to the IMF if she can. Whilst an austerity programme that has flaws will be deployed the borrowing would be cheaper at maybe half the interest-rate depending on the amount borrowed.

The UK economy: rising inflation and rising unemployment

The Bank of England’s inflation report: same as it ever was

As I have pointed out earlier this week this report is becoming something of a farce for two main reasons. The first is the extraordinary inaccuracy of the inflation forecasts presented and the second is that we always get the same message which keeps proving to be wrong. Here it is from yesterday.

The near-term profile is markedly higher than in November, largely reflecting further rises in commodity and import prices since then. Further ahead, inflation is likely to fall back, as those effects diminish and downward pressure from spare capacity persists.

If you look at the fan chart for expected inflation it shows a sharp fall in the latter part of 2011. This may or may not be true and on the Bank of England’s record is unlikely to be true, although they cannot be wrong for ever! If I may borrow the lyrics of David Byrne of Talking Heads this section is “Same as it ever was.”

One little curiosity in the fan chart is that the upper level for inflation has been 6% for some time. It is perhaps symbolic of the Bank of England’s failure in this area that it now goes up to 7%! Also a journalist from the Financial Times asked the Governor what he had learned from a sequence of very inaccurate inflation forecasts which stretch back to 2005. To which he got no satisfactory reply.

Unemployment Rises in the UK

The Office for National Statistics reported these figures yesterday. What we got was an increase in the unemployment rate of 0.1% to 7.9%. Over the last quarter unemployment rose by 44,000 to now total 2.49 million.Overall employment fell by 0.3% to 70.5%. Perhaps the most disappointing figures was that unemployment for those aged 16 to 24 rose by 66,000 to reach 950,000 which is the highest figure since these figures began in 1992.

If we look for existing themes then one clearly continued. That is that people are leaving the labour force as early retirement and other factors meant that what is measured as economic inactivity rose by 93,000 on the quarter to 9.36 million. The other theme of rising part-time employment reversed slightly as some 65,000 less were in this category when compared with September. Against this involuntary part-time work increased by 44,000 to 1.19 million which is the highest this number has been recorded at since they began to be collected in 1992.


Whilst disappointing these figures are pretty much in line with the way the UK economy is performing and more similar figures can be expected in 2011. The numbers for younger people are particularly disappointing but are in fact below the European Union average so it is a wider problem than just the UK. I saw that there was something of a political race yesterday to declare some measure to help this. I am afraid the political race to look sympathetic and to look like they are doing something is likely to lead to failed knee-jerk responses. What we need is an overall programme which looks at the situation from the beginning of our education system and makes reform to help those who leave it to get a job.

The mainstream media is likely to concentrate on a “cuts,cuts,cuts” agenda on this issue ignoring the inconvenient truth that they really begin in April.Personally the rising rate of economic inactivity bothers me and I feel it should bother others more. We may find some home truths if we ask the question, Why is this happening?


11 thoughts on “As Greek economic output collapses, no wonder Portugal does not want to be “rescued”

  1. The final sentence of yours “We may find some home truths if we ask the question, Why is this happening?” may perhaps be replied by suggesting that during the past several years (even decades) it has become increasingly easier to take money from the government than to do an actual job. Additionally, the incentives for younger individuals to learn new skills and contribute generally has fallen to an abysmal level and part of the blame for this can be attributed to the education system as a whole. I can remember times when to gain an apprenticeship was almost a “badge of honour”; the reverse is now true. It is not a question of ‘who will buy what we produce’ but rather ‘what should we be producing that the global economy needs?’ Once UK was a proud nation; we cannot continue living on past glories – we have to make NEW ones.

  2. Hi Shaun,

    “Personally the rising rate of economic inactivity bothers me and I feel it should bother others more. We may find some home truths if we ask the question, Why is this happening?” I believe it is an example of the Laffer curve effect which results in increasingly falling real economic activity on the upper parts of the profile, and this shows I believe how far in general Western economies are already into the upper profile.

    When total public spending becomes more than 50 % of any economy’s gross real output you have nothing but trouble to look forward to. Northcoate Parkinson summed up the principal quite well in his law. Public spending has a tendency to expand out of all proportion and beyond what can in reality be afforded by any economy, relative to its size and prosperity. When it does it discourages and eventually throttles the real wealth creating process. This results in a fall in total real output and a tendency for some to cease to attempt to find work, but to then exist on what they have accumulated, thereafter with a much lower standard of living. In other words incentive becomes negative.

    The problem with all the fake programmes of cuts in Europe and the UK is that they are not really “cuts” at all, but merely an attempt to stop public spending growing at as fast a rate as it was. That does not solve any of the overall problems, particularly since overall taxation is also then increased and pubic spending continues to increase.

    I believe that until it is properly understood and accepted that this relationship exists nothing will be solved and things will just continue to get worse. It is not a new relationship; it is just now conveniently overlooked because such discipline does not fit in with the objectives of left-wing dogma. Making real cuts in both public expenditure and in taxation at the same time is now anathema! Yet that is what is now necessary to provide real stimulation to these depressed economies. They have become engorged with excessive and profligate public spending, which not so many years ago would have been seen for what it is, and would have horrified even politicians of that day.

    In the case of Greece, Portugal and perhaps some other distressed Euro-zone economies, default may now be the only option of course to restore real economic prosperity. This has all occurred in past history with various empires and dominions after their zenith; if you look at the Roman empire as one example, the profile was similar. The last phase is always excessive public expenditure, particularly on wars, hyperinflation generated to pay for government spending rising out of control, food and staples becoming unaffordable, final insurrection and economic collapse. The ludicrous thing is that modern supposed “experts” believe it will be so different this time!

    • Don’t let’s forget that Portugal (for example) is a significant net recipient of EU funds and has been since 1986. Presumably these subsidies have in some ways been supporting the Portuguese economy but nevertheless things have gone badly wrong, not least because of the huge state sector there. The UK, despite being in a financial hole largely of its own making, remains a significant net payer to the EU and is supporting (albeit much less than Germany) all manner of countries that are also in a mess. While I would not want to stop our payments into the EU, I would like there to be much greater recognition of the role that we have already played in helping our continental neighbours. Discussions with my Spanish and Portuguese (non-economist) friends indicate that they have no idea of the subsidies their countries receive, or, when there is a vague inkling, they think the money comes from ‘Brussels’. Oh dear, we pay out a lot, it shows no tangible benefit for the recipients’ economies and Brussels gets the credit.

      • Hi Carys,

        Exactly so; but that is just an example of what I was referring to. Those subsidies are part of the overall excessive public spending which is now beginning to throttle incentive and real wealth generation. The principle is just as much applicable to an economic zone such as the Eurozone, as to an individual national economy, because the wealth has to come from somewhere to fund those subsidies.

        Once the subsidies are no longer continuing what then. The same problems will still exist in the Greek, Portugese and other disparate depressed economies? That problem is that public spending was and continues to be too great and that taxation is too high, even when it is not producing sufficient revenue to fund that expenditure.

  3. Hello all,

    You know… The Greek state (following the post-junta era starting in 1974, which launched the “political changeover”, or “metapolitefsi” as it is known here), seems to have been corrupt for hundreds of years.

    No, really. It’s just pathetic to think about this, but even the 1821-era loans the newly founded Greek State took, from the “troika” of the time, were so brutal in terms, it’s hilarious to think they were repaid over 150 years later.

    However… While the Greek government does not elect to hurt its most privileged class of public servants, who it refuses to hurt or sack, as long as it can avoid doing so…

    The contraction seems inevitable. Since most of my friends are young, the predominant climate is that someone has to make literally hundreds of applications to find a job, and this job (for graduates) is nothing worthwhile in terms of payment.

    The rest of us, including me, who are employed, are told to “be happy to be employed”, regardless of the circumstances. With this in mind, and with the general setup and stance of the Greek state to matters, staying in Greece for anything apart from its sun and sea, is futile really.

    Imagine having a state which does not know how many employees it has, how much they are paid exactly, why they are paid as such, etc. Enter Greece 🙂

    However – there is a notion reported – The notion that “development” and “growth” are temporarily “banned” by the troika, since these tend to lead to higher costs of employment and / or average salaries, and this is not a desired “effect” at the moment.

    At the end of the day, since Greece lacks the weight to affect the decisions, it’s either a “general EU solution” (aka “My way”) or “random happenings” (aka “The highway”)…

    We’ll see…



  4. As the Greek tragedy unfolds, my mind turns back to a book I once read about the Second World War – and the fighting between Greece and Italy on the Albanian border. Since then I would never underestimate the pride or the fortitude of the Greeks.

    How this will play in current circumstances is anyone’s guess. But there could come a tipping point where political appeals to national pride take over from the current fears of economic meltdown: and the current establishment, and the EU, could be swept away (at whatever cost).

    I would welcome the thoughts of Ioannis and others close to the mood of the Greek people.


    • I agree with you.

      There is a gradual change in the people’s reflection of wishes in the ballot box. From approximately 1980 until today, the 2 major parties (“PASOK”, self-proclaimed “socialist” and our current government, and “New Democracy”, self proclaimed “liberal/new conservative”) always had formed independent governments, with very few exceptions that lasted for too little time (notably, 1989).

      The general populace appears disappointed from the political system, but in the absence of a credible alternative, the situation goes on and on and on.

      The difference, I believe, is that while a politician may still promise to “take care” of, say, a voter’s child, and try to appoint him/her to a civil service, it is now much harder an objective to achieve than in the past. Certainly not impossible, but not an everyday thing either.

      Hopefully, this will convince people to stop voting for idiots 🙂

      I believe that in the next elections, we may see the first coalition government in Greece since before the 1967 junta.

      I also believe that despite the brainwash of the mass media etc, if things continue deteriorating at such a rapid pace, we will see a repetition of Egypt and Cairo happening in Athens.

      However, things must really have gone to hell for this to happen – the average Greek is reluctant to attend rallies and protests, while complaining all day about “the system” or “the government”. I know I haven’t been to a rally, because in principle I believe that what is happening to several “castes” of the Greek society, is well deserved.

      I want Greece to be reformed. I want to be able to open up / register my small company as easily as it happens in the UK, or Netherlands, or Cyprus, or Germany. I want to be able to live in a modern state, with electronic patient files and prescriptions in hospitals, instead of the current chaos.

      And I don’t care if a 50-year old uneducated train operator thinks he should be paid 70,000 EUR / yr because it’s his “right” or “acquis”, when his union negotiated something like that in the 1960’s. Sorry.


  5. Open Europe in their for fee newsletter relates: The Troubling Figures Of The Greek Budget In January

    that Kathimerini takes a closer look at the monthly budget data released yesterday by the Greek finance ministry and concludes that delayed tax income, bond payments and large disbursements of funds will make it increasingly difficult to reach the budget target this year. In January, pension funds and the insurance organisation of self-employed, OAEE, already disbursed 35% of the entire annual budget, making further subsidies later in the year more likely; Hospital suppliers have been paid €3.4bn in Treasury bonds, a practice likely to intensify in the coming months; budget revenues fell short by €271m of its monthly target for this year’s budget, the state received only €5.09bn while the target was €5361bn. No wonder that the troika requested additional measures of €1.8bn this year, the article goes on. The only good news is that on the expenditure side, the budget was roughly on target in January.

  6. Yes, the other name for PIGS is the Cohesion Countries.
    EU grant subsidies helped to create a grant-dependent class, fuel the economic overexpansion, encourage excessive public spending, and overreliance on imports.
    Without the benefit of the FX price signals, the deficit countries kept accumulating external debt to an unsustainable level.

    Rescues may mean many things, from debt forgiveness to debt restructuring, to new money debt on soft terms for the overleveraged borrower.
    But I suspect, most overexposed creditors are hoping for a rescue deal that will enable them to off-load their assets at full value, NOW.

    • Hi PPP Lusofonia and welcome to my part of the blogosphere.

      Many challenges remain for the periphery and the core of the Euro zone and I am afraid that Portugal is currently directly on the front line. I have suggested some alternative courses of action for her and wish her well….

      You may also be interested in my thoughts day on Portugal’s Iberian neighbour Spain.

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