There was a link between the two main news stories on Sunday. Those who feel the main aim of the original Greek bailout was to allow European banks to exit the country will have had a wry smile at the ongoing travails of Deutsche Bank. Also the consequences of that bailout are still being felt in Greece which may vote for political change but finds itself continuing to be in troubled economic times. From Kathimerini.
Crucially, asked to what extent the creditors would be open to a reduction to fiscal targets, Regling said the 3.5 percent of GDP target Greece has committed to is a “cornerstone of the program,” adding that it’s “very hard to see how debt sustainability can be achieved without that.”
This was a reminder that via the fiscal target some 3.5% of economic activity each year will be taken out of the economy to help reduce the size of the national debt. A bit like driving a car with the handbrake on. It also gives us a reminder of the early days of the Greek crisis where a vicious circle was set up as austerity shrank the economy which meant that more austerity was required and repeat. Accordingly Greece was plunged into what can only be described as a great depression. Putting it another way the Greek economy is now 18.8% smaller than it was as 2010 opened.
Another disturbing feature is the weakness of the current recovery. I have written throughout this saga about my fear that what should be a “V-Shaped” recovery has been an “L-Shaped” one. So after a better 2017 ( which was essentially the second quarter) we find ourselves reviewing not much growth.
The available seasonally adjusted data indicate that in the 1st quarter of 2019 the Gross Domestic Product (GDP) in volume terms increased by 0.2% in comparison with the 4th quarter of 2018, while in comparison with the 1st quarter of 2018, it increased by 1.3%
So if there is a recovery impetus it is finding that its energy is being diverted away by the primary surplus target.
Yesterday we got the latest trade data for Greece and this matters because it is a test of what has become called the internal competitiveness model. This was produced for the Euro area crisis because there was no devaluation option as the official view is that the Euro is irreversible. Thus the wages of the ordinary Greek had to take the whole strain of whipping the economy back into shape. How has that gone?
The total value of imports-arrivals, in May 2019 amounted to 5,230.9 million euros (5,832.8 million dollars) in
comparison with 4,356.6 million euros (5,130.8 million dollars) in May 2018, recording an increase, in euros, of
20.1%…….The total value of exports-dispatches, in May 2019 amounted to 3,044.6 million euros (3,415.5 million dollars) in comparison with 2,955.0 million euros (3,501.2 million dollars) in May 2018, recording an increase, in euros, of 3.0%.
In itself a rise in the import bill may not be bad as it can indicate an economic recovery on its way. Also in these times of trade wars then an increase in exports is welcome. But we need to look further as to the overall position.
The deficit of the Trade Balance, for the 5-month period from January to May 2019 amounted to 9,421.0 million
euros (10,515.9 million dollars) in comparison with 8,086.2 million euros (9,738.3 million dollars) for the
corresponding period of the year 2018, recording an increase, in euros, of 16.5%.
These numbers do not allow for two of the main strengths of the Greek economy so let is put them in.
The rise in the services surplus is attributable to an improvement, primarily in the transport balance and, secondarily, in the travel and other services balances. Transport receipts (mainly sea transports) rose by 9.8%. At the same time, non-residents’ arrivals and the relevant receipts rose by 0.5% and 22.8%, respectively. ( Bank of Greece)
Those numbers are only up to April but we see that even without the grim trade data for May the overall current account was not going well.
In the January-April 2019 period, the current account showed a deficit of €5.1 billion, up by €335 million year-on-year.
Of course the flip side of Euro membership is that the value of the currency is unlikely to take much notice of this as due to Germany’s presence the overall position is of a consistent surplus. But whilst tourism in particular has done well the idea of a net exports surge is just not happening.
The Bank of Greece told us this at the beginning of this month.
economic activity is expected to increase by 1.9% in 2019, by 2.1% in 2020 and by 2.2% in 2021, mainly driven by private consumption, business investment and exports.
Those numbers send a chill down my spine because throughout the crisis we have been told that Greece will grow by around 2% per annum. This was supposed to start in 2012 whereas in fact the economy shrank at annual rates of between 4.1% and 8.7%. For now growth via exports seems unlikely to say the least.
The private-sector Markit PMI survey told us this.
Operating conditions in the Greek manufacturing sector
improved moderately in June, with the headline PMI
dipping to its lowest since November 2017. Weighing on
overall growth were slower increases in production and new business.
The reading was 52.4 ( 50 = unchanged) so slow growth was the order of the day as we note Greece is being affected by a sector that in the Euro area overall is contracting.
There has been a spate of articles pointing out that Greece now has a ten-year yield which is very similar to that of the United States. Actually that is not going quite so well this morning as at 2.17% Greece is 0.1% higher. But it is being used as a way of bathing the situation in a favourable light which has quite a few problems.
- Rather than a sign of economic recovery it is a sign of a policy ( primary surplus target) which is sucking growth out of the economy.
- Pretty much any yield is being bought these days!
- Greece does not have that many government bonds in issue as so much of the debt is now owned by the two Euro area bailout vehicles the ESM and EFSF. They disbursed some 204 billion Euros to Greece and now hold more than half its national debt. It is also why if you look back at the first quote in this piece it is Klaus Regling of the ESM who is quoted.
So rather than success what the bond yield now tells us is that Greece is in a program that the so-called bond vigilantes would love, otherwise known as the primary surplus target. It also has seen the ESM debt kicked like a can to the late 2050s. That is really rather different.
Why would you pay investors 2% or so rather than 1% to the ESM? A blind eye keeps being turned to that question.
It is also why I find it frankly somewhat frustrating when people like Yanis Varoufakis call for QE for Greece as via the ESM It got its own form of it on a much larger scale. Their real problem is that it came with conditions.
This has been a long sad story perhaps best expressed by Elton John.
It’s sad, so sad (so sad)
It’s a sad, sad situation
And it’s getting more and more absurd
It’s sad, so sad (so sad)
Why can’t we talk it over?
Oh it seems to me
That sorry seems to be the hardest word
There have been some improvements but the numbers below also highlight the scale of the problem to be faced.
The seasonally adjusted unemployment rate in March 2019 was 18.1% compared to 20.2% in March 2018 and the downward revised 18.4% in February 2019.
If we look back to the pre credit crunch era then the employment rate was around 10% lower than that. Also a youth unemployment rate of 40.4% is considerably improved but if we look at the past numbers we see that not only must so many young Greek’s not have a job but they must have no hope of one. Also it has gone on so long that some will now be in the next category of 25-34.
So the new Greek government has plenty of challenges so let me finish with the main two as seen by the Bank of Greece.
This is so because, with a public debt-to-GDP ratio of 180%
Banks have made progress in reducing non-performing loans (NPLs). More specifically, at end-March 2019, NPLs amounted to €80 billion, down by about €1.8 billion from end-December 2018 and by around €27.2 billion from their March 2016 peak