It was only just over a week ago that I examined the state of play regarding Greece and its economic problems. Since then a deal has been “close” more times than I care to count and on Monday night as Euro area leaders gathered in Berlin the hype reminded us of a hit from the band Europe.
It’s the final countdown.
The final countdown
However Monday night came and went as Europe and the International Monetary Fund squabbled over what terms to offer Greece. Of course the IMF has the most immediate skin in the game as its next repayment is due on Friday. Back in the days when Euro area Finance Ministers such as France’s Christine Lagarde were proclaiming a “shock and awe” European Financial Stability Facility (EFSF) of 500 billion Euros that a mere 300 million Euro payment would cause so much trouble?
A factor in the problem is that it is not the only IMF repayment due in June when some 1.6 billion Euros needs to be repaid in total. Rather awkwardly Greece can only do this by borrowing more. The essential cause of this has been the way that the promised economic growth (2% in 2012 lest we forget) turned into an economic depression resembling the Great Depression of the 1930s. The fantasists who made up the original forecasts were then able to give the IMF a timetable to leave which is what is in play now. So here is the first catch in the issue which is that the Euro area is being ever more tied into being Greece’s creditor as it needs more cash and the IMF needs repaying. Eleven months ago we saw a concrete sign of how long this looks like going on as the EFSF did this.
The European Financial Stability Facility (EFSF) placed today a €4 billion 30-year bond maturing on 29 July 2044
Three years had morphed into thirty on its way “too infinity and beyond”. Which reminds us of another set of fantasies protrayed as fact after the 2012 default called PSI (Private-Sector Involvement) which tied Euro area taxpayers ever more tightly into this problem.
The objective is to secure the decline of the Greek debt to GDP ratio with an objective of reaching 120% by 2020. Due to the high take up of the bond swap, Greece’s debt is expected to fall below 120% of GDP in 2020, reaching 117%.
This leaves both Greece and Euro area taxpayers wishing they has taken more note of the advice dished out in the play Hamlet by Polonius.
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
The OECD steps in
In an interesting accident of timing the OECD has released its latest economic forecasts this morning and they do not make pretty reading for those with Greece’s best interests at heart. From Macropolis.
OECD slashes Greek GDP growth estimate to 0.1% in 2015 (from 2.3% before) and to 2.3% in 2016 (from 3.3%).
Even the standard “next year is bright” of official forecasts is fading here and there is a clear consequence for the national debt burden.
OECD ups Greek debt/GDP forecast to 180% in 2015 (from 174.3% before) and to 178.1% in 2016 (from 171.4%.
As you can see the flatlining in economic growth terms has changed the debt to GDP ratio by just over 5% this year and in spite of it then supposedly re-emerging by 7% next year. Also you may note that it is possible to claim the ratio is falling as 2015 moves into 2016 but in fact it will be higher than the original forecast for this year. What was that about lies,damned lies and statistics? Underlying all this is the thought that it was supposed to be 120% or even 117% in 2020.
There is a horrible consequence of all this if we move from the financial to the real world.
OECD increases Greek unemployment projection to 25.7% in 2015 (from 25.2% before) and to 24.7% in 2016 (from 24.1%).
Such forecasts only back up the latest business survey for Greece.
The (Markit) manufacturing PMI continues to point to a downturn in the Greek economy. May’s was the ninth successive sub-50 reading for the headline PMI, albeit the rate of decline as signalled by the index was slower than in April.
Whatever happened to the boost provided by a lower oil price?
It was only on Monday that I looked at the “perpetual war” concept of George Orwell in the novel 1984 and now to those in Greece it must feel like they are facing a “perpetual economic depression”.
What about the banks?
In essence what we are seeing here is what the economics text books call capital flight except this is real and not just fantasy. The other side of this particular coin is that the central bank has to respond. Except this being the Euro area the Bank of Greece needs the permission of the ECB. Back in the days when I was pointing out that there were issues with the “lender of last resort” function in the Euro area this is what I meant. From Kathimerini.
The European Central Bank on Tuesday ensured it maintained Greek banks’ 3-billion-euro safety cushion of unused cash by extending the Bank of Greece’s emergency liquidity assistance (ELA) limit by half a billion euros.
A penny here and a penny there which is being caused by this.
local bank officials said that depositors withdrew much more than 1 billion euros from their accounts last week, while the decline in the balance since the start of the year has exceeded 30 billion.
The ELA total is now some 80.7 billion Euros and as bank deposits in Greece have now fallen below 130 billion Euros (and we wait to see how far below) the situation becomes ever more exposed.
The rhetoric level rises
Both sides continue to make threats. From the Greek side we have seen this already today.
Greece will not make a June 5 loan repayment to the International Monetary Fund if there is no prospect of an aid-for-reforms deal with its international creditors soon, the spokesman for the ruling Syriza party’s lawmakers said on Wednesday.
On the other side there Eurogroup President Jeroen Dijsselbloem saying that the Euro area will not meet Greece “half-way” and that more reforms and more austerity is needed. After his disastrous pronouncements in the Cypriot crisis you might think that someone might have put a muzzle on Mr. Dijsselbloem but apparently not.
Comment
There is much to be learned from the simple fact that after all the boasts and hype from Euro area leaders and officials the latest problem is over what is in these terms a mere 300 million Euros. Apparently it is true that an elephant can be terrified of a mouse. Somewhere there must be a sofa with 300 million Euros down the back of it after all it was not so long ago that European Commission Juncker found a much larger sum down the back of his.
This should allow us to mobilise up to EUR 300 billion in additional public and private investment in the real economy over the next three years.
However whatever the result over the next 48 hours we are back to discussing tactics and can kicking again. What is needed is a strategy to get the Greek economy going again and my view is that Euro area leaders have had more than their fair shot at that and have instead produced a disaster. Not only have they left many Greeks in penury but if we use their own arithmetic they are going to have to tell their own taxpayers that much of the money lent to Greece has been lost. The debt to GDP ratio that is estimated to rise to 180% needs to be cut to more like 100% and that is going to be a very difficult message to give in Dublin,Lisbon. Madrid and Rome let alone Berlin.
Meanwhile my country the UK has over the past 24 hours given an example of what happens if you fail to shake-up and reform your establishment. From IPSA.
to make a one-off adjustment to MPs’ pay from £67,060 to £74,000 a year, to reflect that it had fallen behind;
Ah “fallen behind”! The around 10% fall in real wages, or maybe not?
representing a real terms pay cut of 0.9 per cent during this Parliament.
So in fact they had done much better than the average constituent. Still I guess they are doing their bit for UK real wage growth.
Real Madrid
I wonder if readers can help me out here because even allowing for the byzantine like world of Real Madrid it is hard to figure out why you would replace Carlo Ancelotti with Rafa Benitez?
Notayesmanseconomics's Blog 
As long as “reform” means the same debt-slavery as the rest of us face, the Greeks are RIGHT to resist it, even if that makes it out of step with the rest of the EU.
We all only have one life, and the neo-liberal bastards want us to spend it, cradle-to-grave, serving the 1%.
Just because the craven British accept it, is no reason to believe it’s “right” or “only fair” if Greeks do their best not to.
The only thing you said that is true is that we only have one life.
Rafa Benitez gave Liverpool their last EC, and is revered in Liverpool and is Spanish.
Ancelotti is viewed as a failure in Madrid.
Hi therrawbuzzin
The thrill from winning La Decima did not last long did it? As to Greece it badly needs some reform but needs it to be done by a fresh establishment. This has been a major reason why I have argued for default and devaluation as I believe it would give the whole system a shock and a shake-up.
Hi Shaun, thanks for this piece on Greece as things seemat crisis point and I am following carefully.
It strikes me that Greece may make use of another can kicking tactic and request the payment on Friday be bundled to the end of the month with the othe IMF payments which would buy a few more weeks – what do you think?
Unfortunately, the Troika only want to play politics and tactiocs whilst Greece wants to develop a long term strategy but one that involves compensation for reforms thay should have already implemented withthe net effect being no pain and no gain. Each side seems to live in cloud cuckoo land.
The OECD forecasts are very optimistic, I’ll be surprised iof Greece manages any growth this year or next.
I’m not sure I would want to call Greece’s bluff if I were the Troika as GHreece now owes them so much it seems to me to own them as it could do serious financial damage tothem if it defaults (which of course could be recapitalised overnight in the case of the ECB) but what of Target 2 balances? hen there’s the reputational damage plus political suicide for the main players as the electorate realises the size and cost of the Troika’s folly.
exaclty what choice do you think we have ?
just a colour thats all . You have freedom to choice your coffee, fast food or other meaningless items in our consumer lifestyle
because we’re no longer citizens anymore
big stuff like wars and even now the right to argue about your schools being changed – naw forget it ….
Forbin
“exaclty what choice do you think we have ?” – Revolution, peaceful or armed is what’s required and that choice is always there.
Except there is only a 25% chance of a free democracy surviving over a dictatorship and a free democracy is always preferable as there has to be some political accommodation of the electorate or they will get kicked out.
But if you keep a free democracy then you will probably get what ‘The Who’ sung about in ‘Won’t Get Fooled Again’!
As Churchill said: “Nobody would choose democracy by choice, until they view the alternatives”.
Syriza was a real change – ejecting a corrupt duopoly. The Greek people have been fed lots of nonsense about leaving the euro, and Syriza can’t voluntarily Grexit without poll pain. However they can refuse to repay and if/when TSHTF they can call a referendum on Austerity or GrExit.
Hi Noo2
Whilst there are obvious gains to politicians in kicking the can to the end of June I can see 3 problems.
1. With the IMF late repayment methodology starting with a couple of strongly worded letters this could go on and on which would run over the July payments.
2. The ECB owns a bond which comes up to maturity soon and it has so far insisted on being repaid everything. It could relax the T-Bill limit for this purpose but then what happened to the “rules based organisation”
3. The uncertainty is having a dreadful effect on the Greek economy.
Greece has only bundled for one reason. If it doesn’t get the last trance of 7.2b Euro it will withhold due payments.
Hello Shaun,,
I am quiet happy to pay pollies more as impoverished government leads to corruption
on the other hand the ” we’re in it together” mob have once again shown their true colours !
And oh , what happened to this news during the election ? I mean its not a surprise that this payrise would be awarded ? image the headlines during the election !!
As for Greece I fear the can kicking season is still under way
Forbin
Hi Forbin
I was about to type that unlike football the can-kicking season never seems to end. But these days with post and then pre official season tours I am not so sure that the football season is what it was either!
As to MPs pay I was involved over a decade ago pursuing the issue of their pensions where they had voted themselves a large increase. So not much seems to change in spite of the “independent” new body called IPSA….
Hi Shaun,
At some point even the slowest ECB / EU official is going to realise that the Greek debts are never going to be repaid and we will then move on to ‘debt restructuring’ which will mean how big are the losses to Eurozone and IMF lending taxpayers? Back in 2009 it was how big are the German and French bank losses going to be and that of course would never do! Only €300 million, looking at it in Greek shipping terms, once a ship is holed and taking on water you reach the point when it only needs a small wave so it takes on a little extra water and that makes the end result inevitable!
The reality is that Greece has shown us over the last 7 years that it is incapable of enacting any meaningful economic reforms (to many vested interests) and with debts at 180% of GDP it is bankrupt.
We are back to your medicine, of what, 7 years ago of leaving the Euro, where they are totally unsuited to be a member and bringing back the Drachma which will then find a ‘suitable’ exchange rate and can devalue as much and often as needed to reflect the performance or lack of for the Greek economy. I’m sure very cheap Greek holidays will be very fashionable again and aid their recovery.
Throwing good taxpayers money after bad is never going to solve the problem as we can see other Euro countries beginning to recover where they have taken the painful ‘Euro Austerity Medicine’ and implemented enough reforms so they are starting to grow in this current favourable low energy prices era.
What both sides seem to have sadly forgotten, since 2009, with their geopolitical egos and ambitions is: What about the plight of the people?
Hi Rods
I wrote today about the IMF burden being shifted to Euro area taxpayers. As you point out another major transfer has been going on over the past 5 years which is the shift of sour deals from Euro banks to their taxpayers. In the end it ends up with Euro era taxpayers and somebody will eventually have to come clean about what losses will have to be taken. Remember when I thought that a 15% haircut might work? Look what all the can-kicking has achieved here!
You are right to point out that the Greek people have suffered dreadfully for sins mostly committed by their establishment and not them.
Hi Shaun, I hear Mario has today said the Greek economy can succeed with the right policies… I assume that’s to default and devalue then, or have I missed something?
As to the unstable lifeboat, the EFSF, raising 30 year money to prolong the bailout programmes, would you agree this is effectively official confirmation of the failure of the bailouts?
Hi AndyZ
There have been several extensions on the road from a 3 year program to a 30 year one and each of them have been a form of default. As these organisations are off balance sheet the Euro establishment has tried its best to ignore them although to be fair to Eurostat it blocked some of that. But the road to “infinity and beyond” will be blocked by actual losses…..
As to the “right policies” well it has been 5 years now ,where have they been all this time?
We’re all in it together all right!
Dear Shaun,
Thank you for the thought-provoking and interesting blog.
If we lived in the world of economic theory, the question to be asked would be whether the optimal policy for a Greek government to improve the Greek economy would involve leaving the EZ or not. In the world we actually live in, the questions are political not economic. The first is whether the rest of the EZ is ready to provide enough ongoing funding to enable Syriza to reward its clients just enough to stay in power. If the answer is no, the second question is: who is going to get the blame for Greece leaving the EZ?
Hi Ian and thank you
It is plain that both sides intend to blame the other should matters finally break down. if they could figure out a way that they could both do that then I would not be surprised if that happened! But such avenues look closed as the losses for the Euro area would be too large to hide and of course Greece is trapped in an economic depression.
Then there is the IMF….
Hi Shaun
It seems to me that one of the difficulties is that Syriza was elected on an “anti austerity but stay within the Euro” ticket, something which to my mind is mutually exclusive, politically if not economically. So one cannot completely exonerate the Greeks themselves for this impasse but it is, nevertheless, a game that is most unlikely to end well for anyone.
The Greeks fear what will happen outside the Euro and the EU fears the “collateral damage” resulting from the exit of a member of the Euro club, something which I suspect is far more to the front of their minds than many would admit.
A referendum on any deal is one way for them to leave but the best option for the EU may be to kick them out “pour encourager les autres”. Meanwhile the people become more and more empoverished…….
Hopeless.
Hi BobJ
Syriza flirted with Grexit for a while but then seemed to get pulled back into the reform within the Euro camp. As you point out that means more austerity and presumably more failure.
I suspect that kicking out Greece would encourage others to consider leaving especially if it began to work which in my opinion it is likely to.
Shaun, there is a strange atmosphere in Athens these days. It’s almost ‘party like the barbarians are at the gate’ . Many people have said to me that as they have nothing left then they don’t mind if radical things happen. What have they got left to loose? They also say that Greece has faced many calamities in its long history and has risen again and it will do so again. I suppose there were times over the last 2500 years or so that there were literally barbarians at the gate! I guess that if you live daily ‘on the edge’ then eventually it becomes normal but it does feel like the calm before the storm. The folk I know are no longer concerning themselves about macro economic matters but simply if they are going to get paid at the end of the month or if their pension will be paid. There is however a deep underlying fear about the future on a very basic level – will they be able to afford to eat? Medical issues? What future have their children in Greece?
Back in the UK it is like returning to a different world with problems the Greeks would love to have! What a contrast !
Hi Pavlaki
Somehow the Euro area has managed this as described in an episode of Yes Prime Minister.
Bernard Woolley: What if the Prime Minister insists we help them?
Sir Humphrey Appleby: Then we follow the four-stage strategy.
Bernard Woolley: What’s that?
Sir Richard Wharton: Standard Foreign Office response in a time of crisis.
Sir Richard Wharton: In stage one we say nothing is going to happen.
Sir Humphrey Appleby: Stage two, we say something may be about to happen, but we should do nothing about it.
Sir Richard Wharton: In stage three, we say that maybe we should do something about it, but there’s nothing we *can* do.
Sir Humphrey Appleby: Stage four, we say maybe there was something we could have done, but it’s too late now.
I would say it was always the plan except they have not shown that degree of intelligence elsewhere.
It is also not a little Orwellian..
Perhaps a chnage in approach is required …
http://www.newsbiscuit.com/2015/06/03/greek-economy-requires-sacrifice-to-the-gods-says-imf/
* change * even