Today sees a meeting between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras as the Greek Prime Minister visits Germany. As he does so we find ourselves singing along to the rock band Muse.
Our time is running out
Our time is running out
You can’t push it underground
You can’t stop it screaming out
How did it come to this?
There are genuine fears now that Greece will run out of money and these have been reinforced by the letter that Alexis Tsipras sent to Chancellor Merkel last week.
What did the letter say?
The crucial part involves a combination of putting pressure on the European Central Bank to provide more liquidity for Greece and in the part I emphasise a statement that Greece could run out of money. From the Financial Times.
Given that Greece has no access to money markets, and also in view of the ‘spikes’ in our debt repayment obligations during the Spring and Summer of 2015 (primarily to the IMF), it ought to be clear that the ECB’s special restrictions [see (a) above] when combined with the disbursement delays [see (b) above] would make it impossible for any government to service its debt obligations.
That is a threat of default in anybody’s language and is reinforced by the fact that Greece’s creditors are now in essence official ones so it is a threat to Euro area taxpayers and at the limit to world taxpayers via the International Monetary Fund. As Euro area minister set up their “rescue” vehicles on an off-balance sheet basis any sizeable losses would pose a problem as they bring them back into the national accounts. Ouch! For example earlier this month Handelsblatt raised the issue with the head of the main two rescue vehicles.
Handelsblatt: Mr. Regling, the euro rescue fund EFSF has lent around €142 billion to Greece and is thus by far Greece’s largest creditor. Are there realistic chances that this money will ever be repaid?
Regling: Greece has to repay that loan in full. That is our expectation, nothing has changed in that regard
As you can see he has a mantra to chant. What was the saying that if you owe one Euro to a bank it owns you but if you owe 142 billion you own it? Even back then Klaus Regling was irritated I wonder what he is now?
That is one of several recent statement that have irritated me.
The Klaus Regling View
The view of the Euro area establishment was given by Klaus Regling in that interview too.
Economists who claim this have not done their homework. It is true: the Greek debt level of around 175% of GDP is very high. But this does not burden economic development because the debt service is very low. The EFSF has suspended interest payments for Greece for 10 years and the average maturity of our loans is around 32 years.
So as long as the interest-payments are low you can borrow as much as you like! There is no allowance here for the size of the capital burden or feeling out of control of events.
Klaus let the cat out of the bag when he stated where the bailout money had gone.
Handelsblatt: The Eurozone and the International Monetary Fund have already granted loans to Greece in the volume of around € 240 billion. Where did all this money go?
Regling: With financial volumes of this magnitude at stake this is a justified question and the answer is no secret: around three-quarters of all the loans for Greece have been used to serve the country’s debt to private and public creditors.
So much for helping the Greek people as claimed! The reality as I have often pointed out on here is that it was a rescue operation for Greek, German and French banks in the main. The ordinary Greek was sold very short and not told the truth.
What about the economy?
The other side of such arrangements is the economy. A large debt burden can indeed be affordable if an individual,company or nation manages a fast rate of income growth. Unfortunately the austerity medicine prescribed for Greece made the illness worse and not better. As the boom ended in the latter part of 2007 then Greek Gross Domestic Product rose to 65.2 billion Euros per quarter (2010 prices) and by the last quarter of 2014 it had fallen to 46.6 billion. Even worse the official chorus proclaiming that a “Grecovery” was in place had to face this reality.
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.
Also the rate of growth compared to a year before slowed as opposed to the surge you might expect after declines equivalent in economic terms to something of a nuclear winter.
This is the other side of the debt burden coin as Greece faced not only a lack of economic growth – remember the original bailout forecasts involved economic growth returning in 2012- but a contraction which peaked at 10% per annum. Thus the national debt to GDP burden which was supposed to be reduced from 170% to 120% by the 2012 private-sector default or PSI is now at 175%.
The Greek Banks
These are part of the rescue mechanism proposed by Alexis Tsipras and the Greek government as it wants them to be allowed to buy Greek sovereign debt. Greece is still issuing short-dated debt called Treasury Bills. Frankly nobody else shows any particular inclination too! The catch is that permission is needed and this looks like debt monetisation mostly because it is on a road to it.
However the Greek banks in spite of all the money that has been poured into them are in a bad way as deposits flee. In December and January some 16 billion Euros or just under 10% left the Greek banking system taking it back to levels last seen in 2005. Bloomberg estimates that another 1.6 billion Euros left the system last week.
In response the European Central Bank has allowed the Greek central bank to stabilise the system via Emergency Liquidity Assistance or ELA. But it is doing so on a short leash as it only allowed an extra 400 million Euros last week and in itself it hardly inspires confidence that the Greek banking sector now requires some 69.8 billion Euros of ELA.
Credit Crunch Alert
Greece faces two types of potential credit crunch right now. The first is being faced by its banks as they see deposits flee the country. This in my view was exacerbated by an extraordinarily stupid statement by Dutch Finance Minister Jerome Dijsselbloem made six days ago.
capital flows within and out of the country were tied to all kinds of conditions, but you can think of all kinds of scenarios.
Bank depositors in Greece have clearly constructed one or two scenarios of their own and decided to flee! You would have thought a muzzle would have been put on “Dieselboom” after he regularly put his foot in his mouth over Cyprus, but apparently not.
The second capital crunch is for the Greek government which has to pay out around 2 billion Euros before the end of April and around 5.7 billion Euros according to Bloomberg by the end of the second quarter of 2015.
The irony of all this is that with monetary policy so loose and the impact of much lower oil and commodity prices feeding into the system Greece should be finally seeing springlike economic conditions. Yet in something of an anti-triumph the latest business survey reported this about Greek manufacturing.
February saw a further contraction in Greece’s manufacturing sector, with the rate of decline in production the fastest seen since October 2013.
Another very important metric is again showing signs of struggling and it gets even harder to express how grim this must be.
The unemployment rate was 26.1% compared
with 25.5% in the previous quarter, and 27.8% in the corresponding quarter of 2013
Employment fell compared to the previous quarter as well. Added to this has been yet more grim data from Greece today.
The Turnover Index in Industry (both domestic and non-domestic market) in January 2015 compared with January 2014 recorded a decline of 16.0%.
Thus we see a situation where the economy is struggling in spite of favourable developments and both the banking and government sectors face a credit crunch. To the Greeks it must seem that.
You will suck the life out of me
Of course I suggest that they take a route which involves default and devaluation which the actual position sadly looks more like this.
I wanted freedom
Bound and restricted
I tried to give you up
But I’m addicted
Want to help?
The Bank of Greece does have an account for this.
Pursuant to Bank of Greece Governor’s Act 271/4.3.2010, an account entitled “SOLIDARITY ACCOUNT FOR REPAYMENT OF PUBLIC DEBT” (No. 24/26132462) has been opened at the Bank’s Head Office, Public Entities Accounts Section, for voluntary deposits, to be used exclusively for the repayment of Greece’s public debt.
The details of the solidarity account are as follows:
IBAN: GR 04 010 0024 0000000026132462