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.
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.
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.