The Greek crisis continues on its road to nowhere

Yesterday on my way to looking at the UK Public Finances I pointed out that Greece had a national debt to GDP ratio of 179% at the end of 2016. This came with some cheerleading from the Institutions ( they used to be called the Troika until the name became so damaged) and some of the media about a budget primary surplus of 4.2% of GDP although if we put debt costs back in the surplus shrinks to 0.7%. You may recall that the PSI or Private-Sector Involvement of 2012 was supposed to bring the debt position under control but the ongoing economic depression blew that out of the water as the economy tanked and debt rose.

A consequence of this situation is that as we head to the heights of summer Greece will need yet more funding as it has debt repayments to make. Actually repayments is too strong a word as the debt will in fact be rolled from one Euro area institution to another. Bloomberg updates us on the issue.

The heavily indebted Mediterranean nation needs the next installment of about 7 billion euros ($7.6 billion) to repay lenders in a few months

It always turns out like this as this is a road we have been down more than once.

The IMF says two conditions must be met before it co-finances the country’s ongoing third bailout. First, Athens must agree to a set of credible reforms, particularly of its pension and tax systems. Second, the IMF insists that the euro area ease Greece’s debt burden.

This is all so familiar as we are always told there has been great success on reform yet somehow more is always needed! Also the debt burden needs easing yet again.

Debt relief

The problem here comes from the number below.

The latest figures show Greece’s debt stands at 179 percent of its gross domestic product, or about 315 billion euros….. Currently the country owes about 216 billion euros to the European Stability Mechanism, the euro-area bailout fund (and its predecessor), as well as to other euro-area countries.

At the beginning of the saga Greece faced high interest costs as the theme was as US Treasury Secretary Timmy Geithner pointed out was one of punishment. This only made things worse as the economy shrunk further so the PSI was enacted. The flaw was that the ever-growing amount of debt held by the Euro area and IMF was excluded from any write-down as we muse the first rule of ECB club which is that it must always be repaid. As this ballooned an alternative more implicit rather than explicit debt relief programme was put in place . From the ESM ( European Stability Mechanism).

Moreover, the EFSF and ESM loans lead to substantially lower financing costs for the country. That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment. Greece will not have to start repaying its loans to the ESM before 2034, for instance.

It calculates the savings for Greece as follows.

Thanks to the debt relief measures approved by the Eurogroup, the Greek government saved an equivalent of 49% of its 2013 GDP. This includes savings of 34% of GDP thanks to eased conditions on EFSF loans to Greece.

You may note that Greece is always “saving” money and yet the debt burden gets worse. A clue to that is the section on economic progress which trumpets the current account, fiscal deficit and something which apparently the IMF needs to be told.

Greece has made major progress in carrying out structural reforms – it is the best performing economy in terms of implementing OECD recommendations on structural reforms.

Somehow it misses out what now must be called the Great Economic Depression which has ravaged the Greek economy. Also is this one of the reforms?

The government is preparing to honor a pledge to offer permanent status to civil servants in key posts of the public sector, Kathimerini understands, with legislation boosting their rights expected to head to Parliament soon.


Also a board member showed the confusion with this sentence in a speech on the 6th of March.

As the Eurogroup chairman Jeroen Dijsselbloem said, there is no immediate liquidity squeeze over the next months, but that does not mean that Greece does not need money.


The medicine

In spite of where we stand this remains the same as the FT points out.

Greece agreed this month to adopt measures that would improve its primary budget surplus – before paying debt servicing costs – by 2 per cent of gross domestic product.

It is a bit like the old-fashioned treatment of bleeding the patient where it was reported a success but sadly the patient died isn’t it? As usual the rhetoric is being revved up and last night Prime Minister Tsipras was doing exactly that although I note he has passed the responsibility for the changes to the next government.

The measures would be divided roughly equally between cuts in pensions due to be made in 2019 followed by a sharp reduction of the income tax threshold in 2020. But they could be implemented earlier if the budget surplus target veers off-track.

What is the economic outlook for Greece?

The background is favourable as the overall picture for the Euro area is good. However the business surveys do not seem to have picked this up. From the Markit PMI.

At 46.7 in March, down from 47.7 in February, the latest figure signalled a seventh successive deterioration in Greek manufacturing sector conditions. The rate of decline accelerated from the previous month, and was marked overall. Underlying the latest contraction was a sharp fall in new order intakes

There is a clear difference here with the official data which tells us this for January and February combined.

3.7% (rise) in the Manufacturing Production Index.

The official view is pretty much what it has been for the last five years.

Looking forward, the Bank of Greece expects GDP to grow by around 2.5% in 2017, although a downward revision of the December 2016 forecasts is likely due to the negative carry-over effect of the sharp decline in output in Q4 2016 (attributed mainly to the decline in gross fixed capital formation and government consumption). Downside risks to the economic outlook exist related to delays in the conclusion of the second review of the Programme, the impact of increased taxation on economic activity and reform implementation.

The situation regarding bank deposits in Greece is complex because the definition has changed however I note that the ECB gave Greece an extra 400 million Euros of Emergency Liquidity Assistance last month. So the money which left in 2015 has remained abroad. The latest bank lending survey of the Bank of Greece tells us this.

The demand for total loans remained also unchanged during the first quarter of 2017


This saga has been an economics version of Waiting for Godot. The price of Godot never arriving has been this.

The seasonally adjusted unemployment rate in January 2017 was 23.5% compared to 24.3% in January 2016 and the upward revised 23.5% in December 2016…….

Yes it has fallen a bit but if we compare to the pre credit crunch low of 7.9% you get an idea of the scale of the issue. Also this now defines long-term unemployment especially for the young ( 15-24 ) where nearly half ( 48%) are unemployed.

As the band strikes up a familiar tune and we see claims of reform and progress I think this from Elvis is appropriate for Greece.

We’re caught in a trap
I can’t walk out
Because I love you too much baby

Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

We can’t go on together
With suspicious minds
And we can’t build our dreams
On suspicious minds



15 thoughts on “The Greek crisis continues on its road to nowhere

  1. Hello Shaun,

    Same old story for the poor Greek people

    1. Leave the Eurozone and reinstate the drachma
    2. Pass a lot of rough austerity measures that hurt their economy and anger the voters
    3. Hope that Germany will renegotiate
    4. Default

    well they dont want to reform apparently


    • Hi Forbin,

      same old issues. Tax dodging is the sport of the Greek oligarch class. Austerity is hurting the masses, not the kleptocrats.

      Default is a big scary step, and nobody knows for sure whether pension payments will continue after a default …..

      IMHO Greek default is necessary – an opinion I posted about 7 years ago.

  2. ‘A consequence of this situation is that as we head to the heights of summer Greece will need yet more funding as it has debt repayments to make.’

    I can’t honestly believe anyone out there is surprised by that statement.

    Quite how lending someone the money to pay you back is a solution to the problem,I don’t know.

    • Its there to back hand support the French and German Banks ……

      not to “help” the Greeks I’d say , oh no , can’t do that ……

      ( whispers Iceland…….. winks )


  3. Greek manufacturing ? Exactly how will they compete ?

    Manufacturing either needs investment in innovation to produce premium goods or minimal costs. The corrupt Greek bureaucracy makes investment risky. Minimal costs has at least 2 problems. Firstly they need to compete with Chinese wages, Indian wages and Eastern European wages – finger in the air probably a bigger wage cut than 30% needed. Secondly manufacturing wants quick cheap and efficient freight. But Greece road freight either goes slowly by ferry at high cost to Italy or travels long distances across the Western Balkans including borders (long truck queues, obnoxious bribe seeking border control etc.)

      • Thanks for the link. I prefer MTBs and dirt riding. At £1599 this bike is a premium product – not a low margin mass produced item.

        • You’re welcome. I’m not strong enough for MTbing but have a high power to weight ratio, so I love climbing on a road bike and of course descending the other side!

          Whilst your point re mass production is correct, my point is that there is at least one and probably more pockets of high added value manufacturing in Greece.

          This is something they could concentrate on which would help but would not be the entire solution especially if you consider that buyers of premium products are interested in quality over price so FX movements don’t affect sales to foreigners, although, paradoxically, I am one of those who looks at value for money, albeit at the higher end.

          Having seen Shaun’s comments on the % of GDP devoted to manufacturing, the big answer must lie with services which accounts for80% of the Greek economy –

          Thanks for the insight on Bank’s attitude towards IT staff.

          I subscribed to the theory that Greece would be better off defaulting and exiting the EZ back in 2012 thru 2015. Since 2016 I have changed my opinion and believe they’re in far too much debt to default and leave. I doubt any one would trade with them if they left now.

    • Hi ExpatInBG

      This is a big question. At any sort of first world wage level then some form of innovation is required to compete as otherwise you will soon be swept aside by cheaper 3rd world goods. This from Markit was not optimistic at all about the current situation.

      “Companies also looked to reduce their purchasing
      activity in March, the third time in as many months
      this has been the case. Anecdotal evidence
      suggested that a combination of lower output
      requirements and financial uncertainty contributed
      to the reduction. This led to a further fall in preproduction
      inventories. ”

      Looking further back to 2015 this was not especially optimistic from the EBRD.

      “With only 8.5 per cent of its economy devoted to manufacturing Greece is the least industrialized country in continental EU (except for Luxembourg). Almost two-thirds of the manufacturing sector consists of three subsectors: food, petroleum and basic metals processing.”

      We will have to see how the official data develops in 2017.

  4. Shaun, you comment on the rules of the ECB club that it must always be repaid with an air of derision?
    Are you suggesting that the taxpayer whom ultimately backstops the ECB should be left to finance the unpaid loans?

    • Hi Noo2

      You are right to read some discontent in the way I wrote that. The reason was that if we go back to the PSI in 2012 it was never going to be enough to just haircut the private sector held bonds. The official sector had to join in as well if it was going to work or have a good chance of working. Back then via the Securities Markets Programme the ECB held a large amount of Greek debt and was a blocking ball especially if you add it in with the IMF. In these situations timing matters as well as what you do and the later changes such as handing profits back were too late. Now the ESM is making all sorts of changes such as lower interest rates and extended repayment dates but in many respects the horse had already bolted.

      Remember also that it was part of the Troika that told us that Greece was about to return to 2-3% economic growth which was a fantasy required to justify the debt stance. Thus the combination led to the shambles that now exists.

      • Yes Shaun, the idea that participants in loans to not share in losses is a bizarre manipulation of reality. You are correct to judge the Troika, any money lender adopts ROI on their position. In this case the reputation of the Troika is their forecast of growth following the lending, when their judgement fails them then so too should the haircut fall upon them. A loan without participation is not a loan, it is penury upon the applicant, a debtors prison.

        Paul C

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