Would even complete debt monetisation do Greece much good?

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.

Economic theory

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.


20 thoughts on “Would even complete debt monetisation do Greece much good?

  1. oh well Shaun,

    still some way before Greece is a 3rd world country ( within the empire – imagine that !)

    Oil has increase by 40% since January



    Corn seems to be dropping still

    • If you look at the Bulgarian gypsy ghettos & people scrounging in rubbish bins – the EU already has a third world country member

  2. If Greece was to come up with a plan where, by tackling corruption, and enforcing both tax collection and the payment of all tax previously avoided, it was able to pay off its debts in a year, the troika would still refuse.

    It’s not now primarily about Greek debt; the point is that it would be impossible to abandon austerity in Athens, yet continue its deployment in Rome, Madrid, Lisbon, London…

    There can be no compromise.
    That’s why we continually hear of movement by the Greeks, but none from the creditors; the Greek Govt. has to capitulate, unconditionally, or default.

    • buzzin

      too right , contagion is the risk here , after all , if the rules were applied to Italy ……..

      ooo err missus !

      Greeks could reform properly and collect taxes but I fear all this talk and no action has now lead to Greece being in a far worse position as Shaun says

      if they exit now , could it get worse ?

      IMHO they need to grow some and default and leave the Empire !

      but I dont think they are ready yet ,


  3. in other news – linking back to yesterdays blog

    “Bank of England governor Mark Carney has dismissed fears that cheap foreign labour has hurt UK productivity.”

    Ah right , did I vote for him ?

    why is making political statements then ?

    If ever this powerful unelected post becomes one you can be elected to

    I’ll vote for Shaun !



    • Hi Forbin and thanks for the vote.

      I was following the Carney comments earlier which were from Radio 4’s Today program. However I haven’t seem the transcript as I would love to know if they enquired as to the moral hazard in him pronouncing on foreign labour. For fun one might have thrown in a question about productivity at the Bank of England or why its recent new MPC appointments have all been foreign labour?

      One out for him would be too point about that neither he nor his colleagues are cheap foreign labour but that would have its own dangers….

  4. Hi Shaun

    I must admit I did not realise that ELA had to be doled out in tranches and could be with held by the ECB. How is this consistent with the CB being the (unconditional) lender of last resort? To me it makes no sense unless you think that the banking system is totally dysfunctional and they have resolutely refused to countenance reform, in other words are refusing to help themselves. Is this right?

    Surely debt monetisation would be inclined to increase inflation which would put up interest rates which would compromise asset values which would exacerbate solvency, although it would improve liquidity?

    • Hi Bob J

      ELA is a complex issue which in its origination had few if any rules which I reminded of every time Mario Draghi says that the ECB is a “rules based organisation”. It started at the Central Bank of Ireland and has developed since but has the clear implication that the national central banks remain the lenders of last resort. Except of course that they need ECB permission. Sometimes you really couldn’t make it up!

      It would be interesting if a national central bank went rogue and issued the ELAs anyway……

    • As I understand it ELA provided by the ECB is underwritten by the CB’s of the member countries proportionately according to their country’s GDP via Target 2 transfers. This means that Greece owes a lot of money directly to the CB’s of the EZ. If Greece defaults the balance sheetsof the member country CB’s will be seriously eroded which can be re capitalised soon enough as Greece is’nt that big but unlike most MSM and indeed most on this blog I feel the second order effects are likely to destroy the EZ and may spread to the US money markets at which time it will be time to copy Captain Kirk in Star Trek requesting “Beam me up Scotty”.

  5. Hi Shaun, Apologies for my absence, work is pretty hectic as you can imagine, combined with the recent death of my step father, but hopefully I should now start getting a bit more involved again.
    Interesting to see the comments of Ms Nouy of the ECB, and those of other ECB officials who appear (at least) not to understand the awful gravity of the situation. This reminds siruation me of a comment made once by the famous hangman Albert Pierrepoint. After being pinioned for execution, John Christie (of 10 Rillington Place) complained that his nose itched. Pierrepoint assured him that “It won’t bother you for long”. It cannot be long now until Greece takes the drop.

    • Hi Andy Z

      Firstly please let me offer my sympathies and condolences as after recent events I understand the impact all too well. Many of the replies on here said that I should do my best for my mum and they were right as it has been a hard and difficult road for her so let me pass that on too.

  6. To add to Andy’s point,why would anyone in their right mind,keep Euro’s in Greek banks if they’re over deposit limits.
    In fact why would anyone keep savings in Greek banks.They’re clearly FUBAR.

    • dutch ,

      the trouble is even today the Banks dont trust EACH other !

      Why should they , they full well know nothing change since the 2008 crash except now Governments are upto the hilt with them ….

      here have some popcorn , the show that never ends* 🙂


      PS: * ends nicely that is …..

  7. Wages in theory trend toward productivity. They also compete vs an organisation’s/country’s trading partners, neighbors & competitors. Sadly for Greece, wages in Bulgaria / Serbia / Romania / Ukraine are much lower. Greek productivity isn’t that much higher.

    IMHO this large currency imbalance would be much less painfully corrected by a currency devaluation. The alternative seems like a 75% (a rough estimate) internal devaluation in 2007 terms. Mission Impossible ?

    • Hi ExpatnBG

      There is no way that internal devaluation is going to get Greece to those sort of numbers as a revolution would happen first. I wonder if those in charge hoped that trade would be with the Euro area and the like at its prices like a closed economy. It has not turned out to be anything like that and I too think that a default and a devaluation are the only way out.

  8. Hi Shaun
    As you have said many times quoting TPTB reality
    is not currently in their thoughts but shortly it will be.

    Buffalo Springfield

    There’s battle lines being drawn
    Nobody’s right if everybody’s wrong
    Young people speaking their minds
    Getting so much resistance from behind

    I also note that Sharp have had a second bailout roughly
    equivalent to last years losses.


    • Hi JRH

      When I first saw the Sharp news I half wondered if the Bank of Japan had done it directly! In a way I was a little surprised as I recently replaced my 20 years old Sharp microwave combi oven with a new one. Although perhaps there was the catch as in did they make their kit too well? Also if my memory serves me right it was half the price now. So I shouldn’t have been surprised at all really…

  9. Hi Shaun
    I’m on musical overload tonight.

    Foo fighters

    Keep you in the dark
    You know they all pretend
    keep you in the dark
    and so it all began


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