The Greek saga has now continued for over five years and it has managed to produce an economic depression to rank with the falls of the Great Depression of the 1920s and 30s. At the beginning the European Central Bank was relegated to the back as Euro area politicians proclaimed their “shock and awe” program which produced the disaster that has unfolded since but very quickly it was required to take action. In the melee which has followed it is easy to forget that a type of Quantitative Easing began in Greece back in May 2010 as the ECB purchased its government bonds. The official view was that it was not QE because there was a weekly sterlisation auction to withdraw the liquidity created but this ignored various effects. Firstly the Greek bond market was supported, secondly holders of Greek bonds (banks for example…) were given a taxpayer-funded exit,and thirdly whilst some funds were withdrawn they were across the Euro area rather than specific to Greece. Also the liquidity withdrawal was of weekly funds as opposed to the 3/4 year maturity of the bonds purchased and that matters. You do not have to take my word for it as the Federal Reserve and Bank of England think so otherwise they would never have instituted Operation Twist style strategies which depend on precisely that.
So there was a time when the ECB was a friend to Greece if I may put it like that. There were also other programs such as the trillion Euro LTROs (Long-Term Repurchase Operations) which indirectly benefited Greece as well as the cut in the main interest-rate to -0.2%. However times have changed and it is now operating expansionary monetary policy elsewhere but has been keeping the monetary sector in Greece on a much shorter leash.
Euro area monetary policy
This is very accommodative right now. In addition to the measures described above the ECB commenced a formal program of QE in January. Up until this date it had a couple of relatively minor programs but the effort since has been expanded to 60 billion Euros a month and now includes sovereign bonds.As of the 19th of June some 182.2 billion Euros had been spent on operations in this area.
Today’s update on monetary data does show how these sums are in some instances flooding into the Euro area monetary system.
the annual growth rate of M1 increased to 11.2% in May 2015, from 10.5% in April.
However as I have discussed before as we move to wider monetary aggregates the impact fades considerably.
The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in May 2015, from 5.3% in April 2015.
If we move to the area of credit the numbers are much lower.
Among the components of credit to the private sector, the annual growth rate of loans increased to 0.5% in May, from 0.0% in the previous month (adjusted for loan sales and securitisation , the rate increased to 1.0%, from 0.8% in the previous month).
Indeed for businesses the situation has in fact deteriorated.
The annual growth rate of loans to non-financial corporations stood at -0.3% in May, compared with -0.4% in the previous month.
As you can see the ECB is making an extraordinary effort which as we go into the wider measures of the monetary system fades away quite fast. It has produced a more clear cut rise in another area but I will let readers decide if this is a success or not.
The annual growth rate of lending for house purchase, the most important component of household loans, increased to 1.4% in May, from 0.1% in the previous month.
Perhaps it is copying the policy of the Bank of England which enjoys pumping up the housing market. As an aside this is an area which is also awkward for the ECB as of course if we look at Spain which has seen official estimates of annual economic growth vary between 3.1% and 4% this week what is does not need is a new housing related boom.
Accordingly we see that even with what would only a few short years ago have seemed an extraordinary effort the ECB is seeing patchy results especially if we recall that it had expansionary policies in place before its new QE effort. However the tap is definitely tuned on.
What about Greece?
Here we have a complete contrast in terms of monetary action especially as this is the Euro area country you might think would most benefit from a monetary boost. This point was made in the Economist magazine by its Finance Minister Yanis Varoufakis back in late January.
Ideally, bond purchases should be proportional to a member-state’s debt overhang and its output gap or investment shortfall.
By all three measures Greece would be at number one in the charts rather than being excluded. There are a couple of awkward issues here because Greece has already benefitted from the QE style purchases by the ECB discussed above which is one of the reasons it is not active there now. Put simply it cannot buy the same bonds twice! Rolling the bonds over on maturity would not only look like debt monetisation it would be.
In spite of the other expansionary monetary efforts we see that the Greek money supply continues to shrink. Todays’s official data brings us up to the beginning of this month and it does not make good reading.
Total deposits at Greek banks which were some 159.6 billion Euros at the end of November had fallen to 125.2 billion at the end of May. If we move to the household sector alone deposits fell from 136.5 billion Euros to 111.8 billion over the same period. If we look at May on its own then the Greek household sector withdrew some 3 billion Euros from Greek banks. Putting it another way this is what economic and finance text books mean when the use the phrases capital flight and deposit flight. Actually we are in fact simply in a faster phase of it because is we look back to the end of 2009 total deposits at Greek banks were 234.5 billion Euros.
Thus if we look at a type of pure monetarism we are left with a very troubling though because the original crisis with its deposit falls was followed by an economic depression. So further falls which we believe have accelerated even more in June point to a grim economic future for Greece.
The ECB has a specific policy to combat this which is called ELA (Emergency Liquidity Assistance). But the way that it grudgingly gave weekly increases to the amount of ELA only made things worse in my opinion because it gave the impression that it could stop doing so. Frankly the ECB undermined its own actions by doing this and something which was supposed to calm the crisis in fact exacerbated it. Indeed in something of an irony it was forced into a volte face with a change to daily announcements and actions. Today was better in the sense that no increase was required but of course the money that can leave probably already has.
The founders of the Euro area left its central bank with quite a list of problems. For example the UK has regions with economic problems but by contrast it is a nation-state with fiscal and political union.Now here is a really dark thought for you which is that some Euro area supporters may not be that upset over the Greek crisis as it provides an opportunity to press for exactly that where fiscal union creates a federal state. As Frances Coppola points out below something along those lines appeared on Monday.
Today, the five Presidents – European Commission PresidentJean-Claude Juncker, together with the President of the Euro Summit, Donald Tusk, the President of the Eurogroup,Jeroen Dijsselbloem, the President of the European Central Bank, Mario Draghi, and the President of the European Parliament, Martin Schulz – have revealed ambitious plans on how to deepen the Economic and Monetary Union (EMU) as of 1 July 2015 and how to complete it by latest 2025
This has been added to by Euro area politicians who put a fiscal squeeze on Greece when it was already in crisis. As I discussed only on Wednesday that seems to be the plan going forwards too.
However if we return to pure monetary policy we find that the ECB is pursuing what it considers to be an extremely expansionary policy except that it is not reaching Greece. Putting it the words of Governor Carney monetary policy there looks “maxxed-out”. It is to use a past analogy “pushing on a string” as fear offsets its efforts. As the chance of capital controls being introduced rises ECB policy gets undermined as what Keynes called “animal spirits” take charge. What a mess!
A Video Version
I was interviewed by Kumutha Ramanathan of World Finance magazine on Tuesday on the subject of Greece and for those who prefer a video analysis it is shown below.