Are Greece’s new economic forecasts as rose-tinted as the previous ones?

This week has seen some familiar developments in the economic crisis that has enveloped Greece in the last few years. Yet again we see that optimistic reports including that horrible phrase “on track” -which invariably is a signal for economic disasters to come-are replaced by a much grimmer reality. This creates all sorts of finance problems because the numbers underlying the bailout for Greece depend on the rose-tinted forecasts which are made and accordingly they shatter as the economy weakens. So yet again Greece finds herself on the brink and the phrase deja vu does not do justice to the regularity with which this keeps happening. This may be great for adrenalin junkies but it is certainly no way to run an economy.

June 2011

If we take Kylie Minogue’s advice and “Step Back in Time” to June 2011 we can see a clear example of what I mean. Here is the Medium Term Financial Strategy of the Greek government.

GDP is projected to start flattening up in 2011 (-3.5%) with recently announced provisional estimates for the first quarter showing an increase in GDP compared to the previous quarter (+0.8%, Q/Q-1)…….Thus, a positive carry-over is projected for 2012 (resulting to a growth rate with a positive sign, namely 0.8%), with growth gradually accelerating to reach 2.7% in 2015

If you look back I questioned the numbers for the first quarter of 2011 at the time and pointed out that they were likely to be misleading. However the MTFS made no such allowance and projected a rose-tinted forecast off them.

Meanwhile in the real world

From the Greek statistics office

GDP (market prices) for 2011, calculated at 2010 prices, amounted to 206.4 billion € compared with 222.2 billion € for 2010 (7.1% reduction).

So the Greek economy shrank at double the rate expected. And sadly there was some “positive carry over” but in the opposite direction as compared to 0.8% growth in 2012 we in fact so far have seen it shrink at an annual rate of 6.3% as of the second quarter. As I shall show later such evidence as we have received since indicates continued sharp falls in economic output. Maybe even sharper ones.


Looked at like that it is no surprise at all that the Greek budget is in a mess. One of the issues in targeting a budget deficit is that it is a residual of two large numbers which are spending and taxes with the latter subtracted from the former. We can see that the economic collapse versus the forecast will reduce tax revenue and raise spending meaning that the budget target gets hit on both sides. Even worse the proposed solution to this is more cutbacks and austerity which weakens the economy further and the whole cycle takes one more turn. This is analogous to the image of the wheel of fortune that King Lear rails against on his blasted heath.

If we move to the projected future now we see that it too has seen a heavy downgrade. The Greek government yesterday forecast that her economy would shrink by 4.5% in 2013. This number is chilling enough but if we compare to “growth gradually accelerating to reach 2.7% in 2015” we see the scale of the disaster which is unfolding here.

The consequence of this is that the measures of Greece’s public-sector deficits and debts have moved heavily against her. We see that she “needs” another 13.5 billion Euros of austerity to stay “on track”. We also see that the promised reductions in her national debt to GDP data have disappeared as this is now forecast to reach 189% next year. Remember the debt haircut which was supposed to solve this problem? The so-called Private Sector Initiative was supposed to reduce this particular ratio to 120% in 2020 and instead we find it ballooning away again.

Accordingly it is not a surprise that Greece is asking for a two-year delay in achieving the targets it has been given. The catch is that like pulling a tooth slowly it is likely only to spread the same pain over a longer time period. It will for example leave her even more indebted and on this extra debt she will have to pay interest and this beast of burden threatens to overwhelm her. The latest troika report is that an extra 30 billion Euros of funding will be required for Greece but what is pointed out all too rarely is that she will have to pay interest on this funding and so she becomes ever more indebted and even further away from a sustainable solution.

What is the latest information on the Greek economy?

Retail Sales

We see that the pain continues. From the Greek statistics office.

The retail trade volume index, including automotive fuel, decreased by 9.2% in August 2012 compared with August 2011.

When we consider that this is on the back of previous substantial falls we begin to see the scale of the economic collapse being signalled here. the underlying number for the volume index is now 76.6 compared to a base of 100 in 2005, so well below the levels of seven years ago. The sharpness of the contraction is illustrated by the fact that as 2010 began the index was at 105.7.

Greek Manufacturing

This morning has seen the release of the most up to date series we get as the Markit purchasing managers index or PMI has been released. We see that the crunch is deepening as on a scale where numbers below 50 indicate an increasing contraction Greece has fallen from 42.2 in September to 41 in October. In her circumstances a deeper contraction is exactly what is not needed. If we look at the detail of the report we can glean more about the current state of play in here economy.

October data showed another steep decrease in the level of manufacturing output in Greece, which reflected not only lower demand in the domestic economy but also a further marked drop in export orders………In fact, the amount of new work received from foreign clients fell at the steepest rate since January 2009

As exports had been about the only bright spot this is very unwelcome news. Also we see that a more troubled area looks about to get worse.

Employment meanwhile fell at a faster rate, with firms possessing an increasing degree of spare capacity……

We were reminded only yesterday by Eurostat that the unemployment rate in Greece was 25.1% in July and the report highlighted above suggests that this will continue its apparently inexorable rise.


What we see here is an economic disaster which has as a main feature the fact that the main players have learnt nothing at all. All they wish to do is keep applying the same medicine a bit like medieval doctors applying leeches to a seriously ill patient. Either they are not very bright or they do not care much about the consequences. The saddest part of this is that it did not have to be this way. Regular readers will be aware that I have argued since the beginning of the Greek economic crisis that she needs complete reform combined with default and devaluation. Supporters of the official strategy have thrown both mud and stones at this view saying it would cause a disaster but of course it is their policy that has caused the disaster which has been inflicted on Greece. I hope that they will be called to account for their actions.

The Financial Times Alphaville section has quoted some work today from Gabriel Sterne of Exotix which nicely illustrates what has happened. The emphasis is mine.

The IMF forecast for 2013 nominal GDP has been reduced by an astonishing 22% in the two years since Nov 2010. In our opinion it is this unanticipated decline in economic activity that has surprised the Fund, and driven a stake through the heart of the programme. We would be interested to hear if someone else knows of a bigger or more significant 2-year forecasting revision for an industrialised economy.

Well does anyone?

The full article can be found here.


22 thoughts on “Are Greece’s new economic forecasts as rose-tinted as the previous ones?

  1. I doubt anyone does Shaun, presumably because it has never happened. The nearest I can think of – in recent memory at least – is Iceland. But I think they also hold the record for the fastest rebound too! The Troika don’t like to talk about Iceland, I think it’s the bit titled “default and devalue” that seems to upset them…

    Clearly Greeces lenders have boxed themselves into a corner. The IMF has for years bragged it has never lost money on loans. The ECB brags about the profits from it’s holdings of Greek bonds, and Mrs Merkel too; she will now have to play a game of Let’s Pretend with her electorate for the next 12 months and hope to postpone the day the loans column in the Bundesbank Excel turn red.

    I know we don’t do politics on here but sometimes it’s unavaoidable. I just wonder if the whole wretched mess will finally unravel in the weeks and months running up to the German elections? I agree the people responsible should be bought to book. Sanction will never happen officially of course, but if Greece defaults next year and say a “Grecian Spring” then the German electorate will likely punish Merkel and her egregious sidekick Schauble for wasting billions of their money. That would indeed be serendipity man!

    • While I agree default and devalue is the only route out of this crisis Iceland does not really represent how this will pan out for Greece. Iceland is very small (circa 300k population) is pretty much self-sufficient in energy and has a large sugar daddy (in the form of the other Nordics who provided cash to Iceland to cover the worst phase of their crisis).

      Greece has none of these and the amount they owe, in particular to French banks means they have had to go through the mill to prevent a wider collapse of the European (and by dint UK and US) banking sector.

      Never forget the real down-leg of the Great Depression did not come out of 1929 stock market crash but out of the collapse of Credit-Anstalt in 1931. The banksters do not forget this and will not allow another event like this happen never mind what is sacrificed to prevent it (trashing of democracy and destruction of civil society as long as it is in Club O’med that is).

      • Hi Jason, bear in mind I did say Iceland was the nearest I could think of, not that it was the same. Taking away mitigating factors and just looking at the shape of the graph as a stand-alone, Iceland is a big steep V whereas Greece hasn’t hit the bottom yet, let alone rebounded in short order…

        As to your comment about trashing democracy, well here’s the rub. The Greeks just held a couple of elections. And they voted almost unanimously to keep the Euro. Sure, it was never explained that the cost of so doing is going to be a 50% reduction in wages/economic activity, but they’d only need to log in to Shaun’s blog – or hundreds of other similar ones across the web – to discover the alternatives. They want their cake and eat it. And they can’t. The only way out for Greeks is a default/devaluation and a bit of support from those that have ruined their economy.

  2. Shaun,
    It’s almost too painful to read the figures for Greece. Just the one figure of 189% of GDP is enough to tell us that this money will never be repaid and that there is no chance of Greece being able to sort this out.
    Unfortunately, your solution of default and devalue (which I have too been recommending on your blog in my various comments) has the tiny snagette that the people who decide these things are:
    1. Completely out of touch with reality (at what stage does unemployment, for example, become unacceptable as it is already 25% in both Spain and Greece)
    2. Obsessed with the Euro despite a mountain of evidence that it is not suitable for southern European countries. Just exactly who did think that “convergence” could possibly include Germany and Greece?
    3. Occasionally subject to elections, so are incapable of admitting most of the above
    4. Surrounded by fellow europhile sycophants/Brussels freeloaders etc who see default and devalue as tantamount to a collapse of their life’s work
    5. Using every tool known to man to kick the can down the road.
    6. Wholly incapable of admitting that both the policy to adopt the Euro and the rise in government expenditure in the face of competition and demographic changes were plain bonkers (eg Hollande REDUCING the retirement age in France)

    I feel that the only thing that can stop this crazy thing continuing is a sudden event (Lehman/LTCM) which happens too quickly to stop and things unravel.

    On another note, it is incredibly revealing that revealing a list of Greeks who have Swiss bank accounts is:
    1. Fine if you are head of the IMF and do it secretly, resulting in NO action
    2. A criminal offence if you are a journalist seeking to trigger action on tax evasion!

      • He was acquitted yesterday. The judge threw the case out in about five minutes flat! Very embarrassing for the Greek govt.

    • Re 25%. Beware of Greeks and Spaniards bearing statistics. Who says they are correct? In the Spanish case, unemployment is estimated from samples taken (presumably at random) by interviewers. Roughly like this: ‘Is there anyone in your household who would like to work but can’t find a job?’. The real question, though perhaps impossible to ask, is: ‘Is there anyone in your household who would prefer working in a formal job to claiming benefits and working on the side?’ Background info – Spanish black economy generally thought to be in the 22 to 24 range, as a percentage of the total economy. Quite a few undocumented people must be working in that sector. My guess is that real Spanish unemployment is nearer half the quoted figure, though that is bad enough. I don’t know Greece well, but perhaps the same applies there.

  3. Hi Shaun
    As I know you know and Jason has alluded to, Greece is just a ‘pass-through’ mechanism for the funds to support the French/German banks who are the creditors. The Greek ( and other nations) people are the suffering patsies to save the banks. The UK/US politicians are well aware that if the European banks fail the UK/US banks will go under enormous stress, so they are readily compliant in this ‘rape’, despite their rhetoric about the ‘EZ problem’.

    • Hi JW
      The “round-tripping” game continues but as some declare a profit there has to be losses elsewhere in a zero sum game but the losses never seem to be addressed, Instead it is all capitalised up put on Greece’s national debt and they are told they have to pay. Except it is getting ever plainer that they cannot and in the end will not,however that plays out.

      The other group of banks that somehow seems to survive is the Greek ones who may have an even more busted business model than the Irish ones.

  4. Hi Shaun,

    “…I have argued since the beginning of the Greek economic crisis that she needs complete reform combined with default and devaluation”.

    I agree the default and devaluation but what is the reform you speak of? Financial sector for sure but what else? Employment rights? Social Transfers? Medical care? Other reforms?

    • Hi Noo 2

      The needed reforms in Greece could be a whole article on its own but let me give you a flavour.

      1. There remains restrictive practices and closed shops.
      2. The system of government such as MPs pay is expensive.
      3. She could do a lot more about tax evasion as discussed above.

  5. Hi Shaun,

    Another very revealing and excellent blog.

    I’m now going to take stock of the situation by going back to May 2010. The first Greek bailout was €110bn. This was followed by the second bailout of 130bn and €100bn private sector default, so far €340bn or a third of a trillion has been given or pledged to rescue Greece.

    But this is only part of the picture for ‘saving’ the Euro. We also have the Irish bailout of €113bn and Portugal with €78bn. So we are now up to €531bn.

    We had better not forget about the ECB bond buying program which is at about €210bn, so we are now at €741bn or almost €0.75trillion.

    Now we need to add the ECB Bank liquidity program of €1trillion in exchange for all sorts of dodgy bank collateral.

    So after spending the best part of €1.75trillion, the Eurozone has less growth or bigger recessions, higher unemployment, no or very little deficit reduction and higher debts. Now I always thought Monaco was expensive, but a mere €1.75trillion, doesn’t seem to buy anything in the Eurozone, apart from kicking a can down the road for 30 months!

    Now we have looked at the small change, lets get on to the future real spending. The bailout that will be required by Spain, Italy and France, along with more minor spending on the 3rd (€30bn+) and 4th Greek bailouts, a further Portuguese and Irish bailout, oh and Cyprus will also be looking for a bung as well.

    I suspect the future bailout requirements are beyond the borrowing power of the Northern Euro countries, so they will then have to resort to funny money and then it is a case which happens first a stabilized Eurozone or hyper inflation, my wheel barrows of Euros will be on the latter.

    The real moment of truth will probably hit Germany with their TARGET2 liabilities of around €1trillion, when Spain, Italy, Greece, Portugal and Ireland put the IOUs through their shredders.

    This is when the fun will really start. I hope the UK is sensible this time and stocks up on the popcorn and sits this one out.

    Going back to Greece, they are insolvent, bankrupt, bust. There is no alternative but for the lenders to loose their money including the IMF, it is just a question of when and how much. The lenders saying this is unacceptable is like King Canute trying to hold back the tide. If you tried telling this to the EU and IMF it would be like the Monty Python Parrot sketch:

    “My good man, I wish to inform you that the Greek economy is dead”.

    “No its not, it’s just resting”.

    “I telling you it is dead, deceased, no more”.

    “No its not, it is just sleeping, a very deep sleeper is the Greek economy”…….

    So record of the day for the Greek economy and the Eurozone is “Killing Yourself To Live” by Black Sabbath

    • Hi Rods

      I like the use of the dead parrott sketch. If I had thought of it I would have used it. The only catch is that it is comedy and Greece is more of a trajedy.

      As for the rest the debts are higher and the growth is lower which is not a good combination to say the least..

  6. Hello Shaun

    the issue with a greek default is the domino effect to france , britain then even germany.

    the pressure on the greek government must be immense!

    but theres no way out – we can see all the figures and we know iceland and argentina did well after default to a greater of lesser degree depending on who you listen too.

    but greece? the markets would expect spain and portugal again to suffer – club south med has really suffered and will continue to do so …. until an “Event” happens!

    well guys , apart from default what else can be done?
    I do have my reasons btw for saying that growth will not be returning anytime soon – so growth , esp good significant growth , is not on the cards. And anyway how much growth over how many years would be needed anyway to make the debt bubble shrink ??


    • I guess we have to put our faith in the power of compounding which fortunately can be powerful. However we will need to deal with some of the debt as it is unlikely to ever be repaid and the chance to get some of those who should have paid- bondholders in Irish banks for example- was missed.

  7. “The real moment of truth will probably hit Germany with their TARGET2 liabilities of around €1trillion, when Spain, Italy, Greece, Portugal and Ireland put the IOUs through their shredders.”

    Agreed but the iou’s won’t be shredded until all that debt is firmly off the banks balance sheets and squarely on the shoulders of the Eurozone taxpayers.

    Until the banks are saved from a disaster of their own making there can be no default or devaluation.

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