A continual feature of the Greek economic crisis has been the official claims that the economy is just about to turn the corner. What can forget the promise in the original Euro area documents that there would be economic growth of 2% in 2012? This was replaced by a reality where the year on year growth rates in Greece in 2012 varied between -4.4% and -7.8%. At that point the bailout was doomed but the fantasists who are responsible for official Euro area programs soon switched to the concept of what became called “Grecovery”. This too did not happen when they promised but there was a little flicker last year when there was positive economic growth in the first three-quarters of 2014.
If you look at the plunge of the Greek economy where the annual rate of contraction of the economy rose as high as 9.9% then in the normal course of events you would expect also a sharp bounce back when the situation stabilises. This is what is called a “V shaped” recovery and again there were promises of this in the Grecovery theme. So as 2014 developed we saw the annual rate of economic growth reach 1.5% in the third quarter of 2014 and that should have been the launchpad for much better things.
A cold hard reality
Instead the last quarter of 2014 saw yet another quarterly contraction in Greece’s economy. This was ominous as in fact at -0.4% it was a larger decline than the same quarter in 2013 and yesterday it was followed by this announcement.
Available seasonally adjusted data indicate that in the 1st quarter of 2015 the Gross Domestic Product (GDP) in volume terms decreased by 0.2% in comparison with the 4th quarter of 2014, while it increased by 0.3% in comparison with the 1st quarter of 2014..
So Grecovery has in fact morphed into yet another recession in Greece and if we look at the overall pattern it is clear that rather than a V-shaped recovery the economic depression has continued. It could be a form of a L-shaped recovery which as you can see from the shape of the letter itself is extremely disappointing to say the least. It just gets worse when you realise that the Greek economy in spite of the chorus of Grecovery claims was some 26.6% smaller in the first quarter of this year than it was at the peak for Greece in the second quarter of 2007. Some recovery!
A Lost Decade and Some
The latest bulletin does take us back to 2005 and from it we can see that Greece has indeed experienced a “Lost Decade” . However the lost decade that Japan experienced was more of lost opportunities as the economy stagnated whereas the Greek experience has been much worse as the economy is some 18% smaller than it was then. Who could possibly have foreseen that back in 2005? They would have been derided as some form of Cassandra.
Due to its highly elevated status this is quite a problem for Greece and last week’s update highlighted the scale of the continuing problem.
The seasonally adjusted unemployment rate in February 2015 was 25.4% compared to 27.2% in February 2014 and 25.6% in January 2015.
Whilst the numbers are improving they are doing so slowly and if we factor in an economy which is now in recession there are fears it could rise again. Let us hope for a situation like the UK one where the labour market outperforms the economic growth numbers.
More than half of young people (50.1%) are still unemployed as we consider the implications of not only a lot of long-term unemployment but that it is applying to youngsters whose knowledge of what it is to work must be very limited or perhaps zero.
The Greek banks
These are being kept on a life support system by the Greek central bank as funding from it replaces the deposits which have fled. The total funding on the Bank of Greece balance sheet was 112.8 billion Euros at the end of April of which 74.4 billion Euros was of Emergency Liquidity Assistance. As this rises and deposits fall then there is a clear risk that they will cross-over.
Bloomberg has reported that some 7 billion Euros of deposits left the banking system last month and we know that on Tuesday the ECB raised the ELA limit to 80 billion Euros. Accordingly the beat goes on in this area although not according to Daniele Nouy the chairwoman of the ECB’s bank supervisory department. From the Wall Street Journal.
“These banks have gone through important restructuring, important recapitalizations and a redefinition of their business models,” Ms. Nouy said. She added that, even though the lenders are going through a difficult period, “they have never been better equipped to go through this kind of stressful situation.”
I guess she took the red pill.
The International Monetary Fund
The Bank of Greece balance sheet shows assets of 1.02 billion Euros in respect of the IMF. These were presumably what were partly used to help make the repayment to the IMF earlier this week. I wait to see if on the next balance sheet update if some of these funds appear on the other side of the balance sheet as well!
What happens next?
Raiding the IMF Special Drawing Rights poses its own problems. You see if Greece was going to play a game of chicken with its creditors in the manner in which Syriza is proceeding 2015 is not a good year as there is a continual stream of repayments to be made. There are repayments to the IMF to be made on June 5th 12th,16th and 19th as well as on July 13th. They total just over two billion Euros and as Greece has recently been raiding both municipalities and the IMF the portents are not good. Even if it somehow scrapes together the cash it needs some 3.4 billion Euros to repay the ECB on the 20th of July.
The only way Greece can do this is by a form of round-tripping where its creditors give it more money which enable it to repay past borrowing. Could you imagine trying that with your bank manager? We can link in the economic failures discussed above with this because these repayments are the original bailout borrowing. It was all supposed to be better now with Greece able to repay its borrowings which sadly became like this from Earth Wind and Fire.
Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky
On our ship, fantasize
Finance Minister Varoufakis
It has been a troubled period for the Greek Finance Minister and it escapes me why he thought appearing in Paris Match would improve anything. However he has this morning spotted the issue with the looming ECB repayments. From Reuters.
About 27 billion euros of those bonds are still left, which should be repaid in the next months or years. These bonds should be pushed back to the distant future. This is clear.
How far into the distant future as this sounds like “Too Infinity And Beyond” to me? according to Bloomberg he carried on.
Quantitative easing would have been especially positive for the facts of the Greek debt-deflationary problem if we were participating in it,” Varoufakis told lawmakers in Athens Thursday. “It essentially would have allowed us to return to markets faster. Of course, Mr Draghi is not proceeding with quantitative easing to solve our problem.”
An odd description of returning to markets is being provided here. You issue something and then buy it back does not quite fit with a markets solution at all. Also there is something of a lie at the bottom of this which is that the troika bond purchases which began in May 2010 were in fact QE. As some 80% of Greek debt is now in such hands Greece has in fact had much more QE than anyone else! Does Varoufakis want all of Greece’s debt to be subject to QE as that would be clear debt monetisation. Maybe the clearest form of all as who right now can project any time when Greece can even begin to repay such borrowings?
This sad story has covered pretty much the lifespan of this website and today sees a repeat of a familiar attempt to cloud and obscure the real issue. Finance Minister Varoufakis has ironically mimicked the Euro area establishment by saying that Greece has a “liquidity” issue when the truth is that it is a matter of solvency.
Nearly five years ago to the day (May 17th 2010) I discussed the analysis below from Daniel Gros has turned out to be on the button.
His analysis leads him to believe that for each 1% of GDP decline in Greek government spending, economic output in Greece will fall by 2.5% of GDP. So if you put in a fiscal adjustment of 10% you get a fall in GDP of 25%. Now the analysis is a little simplistic but it is revealing as to the depths of recession we can expect and I feel it will be worse much worse than is being factored in now.
That is why Greece cannot repay and that is why despite the occasional flickering of life such as the March industrial production figures Greece is insolvent by pretty much any definition you choose. After all the overall Euro area has responded to the combination of a lower Euro exchange rate and lower oil prices so why not Greece?To return to my original question a complete debt monetisation would clearly clear up a lot of liquidity issues but solvency also require a lot of economic reform and if they were going well we would not be where we are now.