Why is the Greek economy continuing to weaken?

Yesterday the President of the European Central Bank set out his plans to revive the Euro area economy. Regular readers will be aware that overall I do not think that it needs the inflation boost -do you want to pay more for goods and services?- that he hopes QE (Quantitative Easing) will provide. As I discussed on Tuesday the German economy is doing well and we can add to that Spain and Italy so in fact a version of regional policy would be much more likely to achieve success. This would help the economies which are relative laggards such as Italy which released figures yesterday which showed that its economy had shrunk by 0.5% in 2014 continuing a long run of disappointments. But in particular there is of course Greece which has had the hardest run of all.

But isn’t Greece excluded from ECB QE?

When asked about this matter at the press conference the reply by Mario Draghi was along the lines of Definitely Maybe.

Right now, the ECB cannot buy Greek bonds. The purchase programme doesn’t foresee the purchase of private bonds. It cannot buy Greek bonds for a variety of reasons. First of all, the purchases are not supposed to take place for countries under a contract or a programme during the review period, so in this sense, we wouldn’t be able to buy Cypriot bonds either, or Greek bonds.


Secondly, we can only buy investment-grade bonds, and as such, the Greek bonds are below the threshold of investment-grade, so the waiver will have to be reinstated, and we are ready to do so, as soon as these conditions are in place.


Third, we have a limit of 33% per issuer’s bonds, so we cannot buy more than 33% of the bonds, of the total stock of bonds issued by the same sovereign, and our current SMP holdings are such that this limit is at present overcome, so we wouldn’t be able to buy these bonds.


So whilst trying to be positive Mario got himself into a little bit of a mess first hinting that post review he might buy Greek bonds reinforcing it with the waiver comment and then pointing out he already has enough of them! Indeed he then further dug a hole.

As soon as Greece repays the SMP bonds that are due, they’re coming due I believe in July or August, and if the waiver had been reinstated of course, then we would be able to buy Greek bonds via this new asset purchase programme.


You may have spotted that from a Greek point of view that is simply passing the ball from one foot to another. Also if you think about it then Greece has in effect already received QE by the SMP bond purchases. This is awkward as of course you then have to face up to the fact that the ongoing Greek depression means that it did not work!

This morning the head of the European Stability Mechanism has put some of this into numbers.

: thanks to loans saved €8.6bn in 2013 alone (4.7% of GDP), similar volumes in years to come.


Whilst Greece has saved some money – compared to what though Klaus? – it clearly has not been saved in fact quite the reverse.

Also Mario Draghi made himself something of a hostage to fortune as these words may come back to haunt him at a later date.

our monetary policy decisions have worked


The ECB is a rule-based institution. It’s not a political institution


Has Greece received any help?

If we look at the QE programme it looks as though it has reduced the exchange rate of the Euro so there has hopefully been a gain for Greece here. This morning has seen more headlines about a 12 year low as the Euro has dipped further into the 1.09s versus the US Dollar. But if we look at the overall picture the trade weighted exchange rate has fallen by 8% since mid-December 2014.  Let us hope that Greek exports prove to be relatively price competitive and benefit from this.

Mario Draghi was keen to emphasise these numbers yesterday in his press conference.

The ECB up to today has lent to Greece €100 billion, and more exactly has doubled its lending from €50 billion to €100 billion in the last month and a half, the last two months. The lending to Greece today is 68% of the Greek GDP, which is the highest in the eurozone.


What is happening in the Greek economy?

Last week produced something which was very troubling for those who have pushed the theme of a Greek economy recovery or Grecovery for short.

Available seasonally adjusted data indicate that in the 4th quarter of 2014 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% compared with the 3rd quarter of 2014 against the decrease of 0.2% that was calculated for the flash estimate of the 4th quarter.


So the economy looks as though it shrank by more than expected at the end of 2014 and the growth over the preceding year as a whole fell from 1.7% to 1.3%. So there were other downwards revisions to be found.

Yesterday there was yet more bad news from a crucial metric.

The seasonally adjusted unemployment rate in December 2014 was 26.0% compared to 27.3% in December 2013 and 25.9% in November 2014.


It would appear that the economic growth contraction is being reinforced and substantiated by a rise in unemployment. This is very unwelcome when we consider how high it remains. Regular readers will be aware that employment trends have proved to be a leading indicator in the credit crunch era so let us investigate them.

The number of employed increased by 17,972 persons compared with December 2013 (a 0.5% rate of increase) and decreased by 24,453 persons compared with November 2014 (a 0,7% rate of decrease).


As you can see what was an improving picture has apparently engaged reverse gear. If we look to sum up the employment situation it is that just under one million jobs were lost in Greece from 2009 to now and so it is especially disappointing that the “internal competitiveness” policies are still not showing any real impact.

Looking Forwards

The problematic theme of today was reinforced by the latest survey of manufacturing in Greece.

February saw a further contraction in Greece’s manufacturing sector, with the rate of decline in production the fastest seen since October 2013. New order intakes also fell at a faster rate, partly reflective of a solid drop in incoming new work from abroad.


Factories reported hesitancy among clients at home and abroad to commit to new orders, leading new business inflows to fall at an accelerated rate.


To this we can add the worries and impact of the recent falls in deposits at Greek banks. Of course this relates to the ECB talking about its activities in Greece but central bank funding struggles to replace deposit outflows.


There are factors at play which should be boosting the Greek economy. Firstly whilst the oil price has bounced back from its lows the current price of a barrel of Brent Crude Oil is at US $61 some 44% lower than a year ago. Also the price of iron ore fell to yet another 6 year  low yesterday below US $60. So an economic boost should be provided here which will be added too by the lower Euro albeit that the lower euro will offset some of the commodity price fall seen.

The rub as Shakespeare would put it is that so far there is little of this to be seen actually happening. Some Euro area economies seem to be and yet the supposedly reformed Greece is not seeing this. Also some of the claimed gains seem to be showing signs of eroding.

: : primary surplus in is melting away, I fear there could even be a deficit again






12 thoughts on “Why is the Greek economy continuing to weaken?

  1. I fear that as soon as there is some positive news and a growth trend in the Eurozone the forex markets will over react and reverse the decline of the Euro. This will then choke off the very growth they are so enthusing about! The Eurozone needs a loose monetary policy simply to keep the Euro competitive in a world where currencies are in a race to the bottom. It cannot be a coincidence that when the Euro was strong the zone struggled and now that the forex rates have dropped there are signs (slight, but there) of a recovery.

    I do not believe that Greece will be in the Eurozone much longer. I also believe that their departure will be encouraged to warn Podemos voters of the consequences of moving to the left. There is a bigger political game being played out at the moment. Cynical? Maybe!

    • Whilst I agree with you that Greece will not be in the Euro much longer I don’t think this will be for want of trying by the Eurocracy to keep them in. I think that they believe, despite what tough talk Schauble and Draghi may do, that a Greek exit might well be the thin end of a very substantial wedge and is to be avoided at all costs.

      Quite apart from potential unknown spillover effects the mere fact of exit will show that it is possible and it could precipitate a gradual crumbling of the whole project, via backsliding from Portugal, Spain and Italy, and, in my view, as goes the Euro, so goes the whole European project.

      I say this even on the assumption that such exit is judged a failure; if it was not and, god forbid, the Greeks were finally to emerge from the truly dreadful position they are in and start to grow again, then this would hasten the end of the whole Euro disaster.

      • You have a point and it is a view I subscribed to until only quite recently. I think that the Eurozone now fears radical political parties and their rhetoric has hardened substantially since the Syriza victory. Spain under Podemos would be a very alarming prospect for the Eurocrats and a much bigger threat to ‘the project’ than Syriza. It would not be surprised if they are willing to sacrifice Greece ‘pour encourager les autres’ to toe the line. The Eurocrats are going to have to give a whole lot more than they have even hinted at so far in order to keep Greece solvent. I’m not sure that voters in other countries will wear that. What do you think Shaun?

        • Hi Guys

          i think that the situation has got a lot more complex for the Eurocrats because whilst they have had some success in getting Syriza to toe the line dangers remain. Also pressure is building up in Spain and Italy with Italy more of a danger to my mind as so far there is not even a sniff of a recovery. Cutting Greece loose has the problem that it may encourager les autres but keeping it costs ever more even if it is all off balance sheet.

          Sooner or later it will all blow-up…

  2. “Why is the Greek economy continuing to weaken?”

    because they’re under the thumb of the bloody IMF and EU loonies !

    sooner they tell Merkel and the other vulchas squads to push off the better

    sorry Shaun , they should have jumped ship 3 years ago

    godley and cream – I don’t wanna be under your thumb forever!

    When will the Greek people wake up and see who’s sucking them dry ?

    Iceland – a beacon of reason in a Madde World!! – tell the banks to push off and procecute!


    • Remember that the IMF broke their own rules in order to inflict this pain on the Greek people. At exactly the same time as the leaders of the Euro project violated the Euro treaties in order to inflict this pain upon the Greek people. Greeks – Lagarde, Trichet, Strauss-Kahn and Juncker don’t give a damn about you, but they are happy to break all sorts of rules to protect French banks.

  3. Hi Shaun,
    It looks like Central Banker bedtime stories based on Alice in Wonderland (“How can I have ‘more’ tea when I haven’t had any yet”, said Alice) have been ditched in favour of Hans Christian Andersen’s “The Emperor’s New Clothes”.

    • Hi Eric

      Well as the strategies fail – in the UK Mark Carney has had Forward Guidance of at least 2 types and a disappearing lower bound- the central bankers have to keep trying something else. Fortunately for them but not for the rest of us the mainstream media only has a short attention span.

  4. Until someone informs them that the eurozone are not paying them, anymore, until their citizens cease having tax evasion as the national sport and corruption as evening entertainment, they are only going down the hole they are happily digging for themselves.
    I suggest, for those who think Greece will default, a look at what happens to Greek assets held abroad in the event of default. Asset seizure is a certainty. Doubtless the same fate awaits if they depart the eurozone. Poor for centuries, to remain poor for centuries.

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