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.
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.
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?