Today I intend to look at something which I and I know from your replies many of you have long feared. This is that the merest flicker of better news from Greece will be used as a way of obscuring the fact that it is still in an economic crisis. At least I think that is what we should be calling an economic depression. So let me take you straight to the Financial Times.
Today, on the face of things, the emergency is over and the outlook is bright. The authorities have lifted capital controls, imposed four years ago. Greece’s 10-year bond yield touched an all-time low in July. Consumer confidence is at its highest level since 2000. Elections in July produced a comfortable parliamentary majority for New Democracy, a conservative party committed under prime minister Kyriakos Mitsotakis to a well-designed programme of economic reform, fiscal responsibility and administrative modernisation.
Firstly let me give the FT some credit for lowering its paywall for a bit. However the latter sentence is playing politics which is an area they have got into trouble with this year on the subject of Greece but I will leave that there as I keep out of politics.
As to the economics you may note that the first 2 points cover financial markets rather than the real economy and even the first point is a sentiment measure rather than a real development. If we work our way through them it is of course welcome that capital controls have now ended although it is also true that it is troubling that they lasted for more than four years.
Switching to Greek bonds we see that they did indeed join the worldwide bond party. I am not quite sure though about the all-time July low as you see it is 1.31% as I type this compared to being around 1% higher than that in July! Perhaps he has not checked since it dipped below 2% at the end of July which is hardly reassuring. As to why this has happened other than the worldwide trend there are 2 other factors. Firstly there is the way that the European Stability Mechanism has changed the debt envelope as the quote from Karl Regling below shows.
In total, Greece received almost €290 billion in financial support, of which €205 billion came from the EFSF and the ESM.
So the Greek bond yield is approaching what the ESM charges. Another factor is they way that it has confirmed my “To Infinity! And Beyond!” theme as the average maturity was kicked like a can to 42.5 years. Next is a factor that I looked at on the 9th of July and Klaus also notes.
The general government primary balance in programme terms last year registered a surplus of 4.3% of GDP, strongly over-performing the fiscal target of 3.5% of GDP.
This is awkward for the political theme of the article as it was achieved by the previous government. Also let me be clear that whilst this is good for bond markets there is a big issue for the actual economy as 4.3% of demand was sucked out of it which is a lot is any circumstance but more so when you are still in an economic depression.
So it is a complex issue which to my mind has seen Greek bond yields move towards what the ESM is charging which is ~1%. Maybe the ECB will add it to its QE programme as well as whilst it does not qualify in terms of investment rating it could offer a waiver.
Greek Consumer Confidence
I have to confess referring to a confidence signal does set off a warning klaxon. But let us add in this from the Greek statistics office.
The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in June 2019, increased by
2.3%, compared with the corresponding index of June 2018……..The seasonally adjusted overall volume index in June 2019, compared with the corresponding index of May 2019, increased by 2.5%.
So there has been some growth. However there is a but and it is a BUT. You might like to sit down before you read the next bit. The volume index in June was 103.5 which compares to 177.7 in March 2008 and yes you did read that right. I regularly point out that monthly retail sales numbers are erratic so let me also point out that late 2007 and early 2008 had a sequence of numbers in the 170s. Even worse this century started with a reading of 115.4 in January 2000.
So we have seen a little growth but not much since the index was set at 100 in 2015 and you can either have a depression lasting this century or quite a severe depression since 2008 take your pick. Against that some optimism now is welcome but does not really cut it in my opinion.
There is a reference to it.
Even before these clouds appeared on the horizon, however, Greece was not rebounding from the debt crisis with the vigour of other stricken eurozone economies such as Ireland, Portugal and Spain.
That is one way of putting a level of GDP that has fallen 18% this decade. In 2010 prices it opened this decade with a quarterly performance of just over 59 billion Euros whereas in the second quarter of this year it was 48.3 billion. I am nit sure that “clouds on the horizon” really cover an annual growth rate struggling to each 2% after such a drop. Greece should be rebounding but of course as I have already pointed out the dent means that 4.3% of economic activity was sucked out of it last year. So no wonder it is an L-shaped and not a V-shaped recovery. At the current pace Greece may not get back to its previous peak in the next decade either.
There are some references to ongoing problems in Greece as for example the banks.
A second factor is the fragility of Greece’s banks. By the middle of this year, they were burdened with about €85bn in non-performing loans. To some extent, however, liquidity conditions are now improving.
Not mentioned is the fact that according to the Bank of Greece more than another 40 billion Euros needs writing off. From January 19th.
An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).
That brings us to another problem which is that the debt was supposed to fall from 2012 onwards whereas even now there are plans for it to grow. So whilst the annual cost has been cut to low levels the burden just gets larger.
Also there has been a heavy human cost in terms of suicides, hospitals not being able to afford drugs and the like. It has been a grim run to say the least. The ordinary Greek did not deserve anything like that as they were guilty of very little. The Greek political class and banks were by contrast guilty of rather a lot. The cost is an ongoing depression which looks like it will continue for quite some time yet. After all I welcome the lower unemployment rate of 17% but also recall that such a rate was considered quite a disaster on the way up.
Is this the real life? Is this just fantasy?
Caught in a landslide, no escape from reality
Open your eyes, look up to the skies and see ( Queen)