Greece is drowning under all the debt its “rescue” brought

After looking at the recent economic success of Spain on Friday, which was confirmed this morning by the official data showing 3.2% GDP growth in 2016 it is time to look at the other side of the Euro area coin. This is a situation that continues to be described by one of the songs of Elton John.

It’s sad, so sad
It’s a sad, sad situation
And it’s getting more and more absurd
It’s sad, so sad
Why can’t we talk it over
Oh it seems to me
That sorry seems to be the hardest word

This is the situation facing Greece which is on its way back into the news headlines after of course another sequence of headlines proclaiming a combination of triumph and improvement. What is triggering this is some new analysis from the IMF or International Monetary fund and it is all about the debt burden. It is hard not to have a wry smile at this as the IMF has been telling us the burden is sustainable for quite some time in spite of it obviously not being so as I have regularly pointed out in here.

The IMF analysis

The Financial Times has summarised it like this.

Greece faces what is likely to be an “explosive” surge in its public debt levels that within decades will mean it will owe almost three times the country’s annual economic output unless given significant debt relief, the International Monetary Fund has warned in a confidential report.

Not that confidential then! Or perhaps conforming to the definition of it in Yes Prime Minister. Worrying after some better news in relative terms from the World Economic Forum suggesting that Greece was a lot further down the list of national debt per person (capita) than you might think. Japan of course was at the head at US $85.7k per person and intriguingly Ireland second at US $67.1k per person but Greece was a fair way down the list at US $32.1k each. Of course it’s problem is relative to the size of its economic output or GDP (Gross Domestic Product).

If we look at the detail of the IMF report it speaks for itself.

The fund calculated that Greece’s debt load would reach 170 per cent of gross domestic product by 2020 and 164 per cent by 2022, “but become explosive thereafter” and grow to 275 per cent of GDP by 2060.

If we switch to Kathimerini we find out the driving force of the deterioration in the debt sustainability analysis.

Greece’s gross financing needs are estimated at less than 20 percent of GDP until 2031 but after that they skyrocket to 33 percent in 2040 and then to 62 percent by 2060.

If we step back for some perspective here we see confirmation of one of my main themes on Greece. This has been that the debt relief measures have made the interest burden lighter but have done nothing about the capital debt burden which has in fact increased in spite of the PSI private-sector debt reprofiling. We can bring in that poor battered can now because the Euro area and the IMF thought they had kicked it far enough into the future not to matter whereas the IMF is now having second thoughts. In short it has looked at the future and decided that it looks none too bright.

The crux of the matter is the amount of the austerity burden that Greece can bear going forwards. Back in May 2016 the IMF expressed its concerns of future economic growth.

Against this background, staff has lowered its long-term growth assumption to 1¼ percent, even as over the medium-term growth is expected to rebound more strongly as the output gap closes.

That will do nothing for the debt burden and will have been entwined with the extraordinary amount of austerity required under the current plans.

This suggests that it is unrealistic to assume that Greece can undertake the additional adjustment of 4½ percent of GDP needed to base the DSA on a primary surplus of 3½ percent of GDP.

As an alternative the IMF suggested something of a relaxation presumably in the hope that Greece could then sustain a higher economic growth rate.

The Euro area view

This was represented last week by Klaus Regling of the European Stability Mechanism or ESM.

I think it’s really important for Greece because it will reduce interest rate risk and improve Greek debt sustainability.

What was that Klaus?

we are dealing here with a bond exchange, where floating rate notes disbursed by the ESM and EFSF to Greece for bank recapitalisation will be exchanged for fixed coupon notes. There are measures related to swap arrangements that will reduce the risk that Greece will have to pay a higher interest rate on its loans when market rates go up………In addition, the EFSF waived the step-up interest rate margin for the year 2017 on a particular loan tranche. A margin of 2% had originally been foreseen, to be paid from 2017 on.

As you can see each time Greece is supposed to pay more they discover it cannot and we need more “short-term” measures which according to Klaus will achieve this.

All this will go a long way in easing the debt burden for Greece over time, according to our debt sustainability analysis. It could lead to a cumulative reduction of the Greek debt to GDP ratio of around 20 percentage points over the time horizon until 2060.

It does not seem a lot when you look at the IMF numbers does it. Also Euro area ministers repeated something which they have said pretty much every year of the crisis, from the FT.

Mr Dijsselbloem, who is also the Dutch finance minister, said that Greece was recovering faster than anyone expected.

Really? What was that about fake news again?

Retail Sales

We can learn a lot from these numbers and let us start with some badly needed good news.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in November 2016, recorded an increase of 3.6%.

Although sadly some of the gloss fades when we note this.

The seasonally adjusted overall volume index in November 2016 compared with the corresponding index  of October 2016 recorded a decrease of 0.2%.

So overall a welcome year on year rise and the strongest category was books and stationery. However perspective is provided if we look at the index which is at 69.7 where 2010 was 100. As that sinks in you get a true idea of the economic depression that has raged in Greece over the period of the “rescue” and the “bailout”. Most chilling of all is that the food beverages and tobacco index is at 55.6 on the same basis leaving us with the thin hope that the Greeks have given up smoking and fizzy drinks.

Also it is far from reassuring to see the European Commission release consumer confidence data for Greece indicating a fall of 3.4 to 67.8.

Comment

There is much to consider here but we find ourselves looking back to the Private-Sector Initiative or debt relief of 2012. I stated back then that the official bodies such as the ECB and IMF needed to be involved as well because they owned so much of the debt. It did not happen because the ECB said “over my dead body” and as shown below what were then called the Troika but are now called the Institutions pursued a course of fake news.

Thanks to Michael Kosmides of CNN Greece who sent me that chart. As we note the fake news let me give you another warning which is that Greece these days depends on its official creditors so news like this from Bloomberg last week is much less relevant than it once was.

The yield on Greece’s two-year bonds surged 58 basis points to 7.47 percent, while those on benchmark 10-year bonds rose 22 basis points to 7.13 percent as of 2:41 p.m in London.

The real issue is that Greece desperately needs economic growth and lots of it. As I pointed out on December 16th.

Compared to when she ( Christine Lagarde of the IMF) and her colleagues were already boasting about future success, the Greek economy has shrunk by 19%, which means that the total credit crunch contraction became 26%

 

 

 

What should we do about the International Monetary Fund?

Yesterday’s events give us an opportunity to look again at one of the longest-running themes of my writing on here. This is the role of the IMF and to do so I would like to take you back to the 8th of June 2010 when I pointed out this.

1. It has plainly changed from an organisation which helps with balance of payments problems to one which helps with fiscal deficits. Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.

This was my response back then to the way that the Dominique Strauss-Khan who was Managing Director of the IMF at the time allowed it to get involved in the Euro area crisis. There was an obvious issue in a French politician doing this and of course the IMF has continued with French political heads. It worried me at the time on various grounds one of which was that poor third world countries were in essence financing a bailout of a much wealthier area overall which could afford to collectively pay for it. In my opinion the reason for this was that whilst Euro area political leaders ( including the French Finance Minister at the time one Christine Lagarde) were proclaiming “shock and awe” in fact the Euro area response was a mess. The so-called rescue vehicle the European Financial Stability Facility (EFSF) was anything but which my updates from back then show. Over time they have proved this as it was later replaced with the European Stability Mechanism or ESM.

But the fundamental point here was that a modus operandi which involved balance of payments problems was replaced by a fiscal one. This line could be covered up to some extent in Greece as it also had a balance of payments problem but not for example in Ireland which has surpluses pretty much as often as the UK has deficits!

Greece

This of course has been a debacle for the IMF where whatever reputation it had for economic competence has come a cropper as Greece was plunged even further into recession and in fact has yet to emerge from the economic depression created. This contrasts with the official view which I pointed out on March 30th of this year.

but from 2012 onward, improved market confidence, a return to credit markets, and comprehensive structural reforms, are expected to lead to a rebound in growth.

There was supposed to be economic growth starting in 2012 and then running at around 2.1% for two years and then pick-up to 2.7% in 2015.. Then once that obviously did not happen we got the “Grecovery” theme which did not happen either. Along the way we got a “mea culpa” from the IMF as well as something of a hand brake turn as the advocate of austerity became a fan of fiscal deficits.

However something was wrong and at least some in the IMF knew it’ Let me take you back again to the 8th of June 2010.

Mr.Boutros-Ghali (Egypt’s Finance Minister) went on to give us some idea of one of the areas he feels that trouble and hence further demands for funds might come from. He told the Reuters news agency that Greece’s problems were not over yet and there were doubts about its ability to implement the reforms demanded by the IMF and European Union in return for a 110 billion euro aid package.

 

“We are not out of the woods,” he said in the interview. “The measures they have been required to implement are fairly tough. And there are in some areas doubts whether they are able to continue implementing such tough measures.”

He was of course correct and it is a sad indictment of these times that official sources are still claiming progress on reforms when reality has been very different. After all Greece would not be in the state it is in if they had worked or even been applied. In my opinion there is something worse than the mistakes which is the way that there has been deliberate dissembling and misrepresentation of not only what is going to happen but what is happening at the time.

The implication that the IMF is free

Another feature of IMF aid is the way that it is presented as a type of SPV and sadly not the Spectrum Pursuit Vehicle driven mostly by Captain Blue in my and many other’s childhoods. These official SPVs ( such as the EFSF) are off-balance sheet vehicles which allow politicians to obfuscate about the state of play. Back to June 8th 2010 again.

Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong. Just to quote the IMF itself there are “doubts” over Greece. Any proper accounting system allows for the possibility of things going wrong. After the experience of the last two years we should know the implication of sticking your head in the sand like an ostrich and assuming there are no problems around…

In other words it is presented as “free” until it isn’t at which point phrases such as “this could not have been reasonably expected” and words such as “counterfactual” are deployed as weapons. Missing from the conversation is how people who were are regularly told are so intelligent and thus need to be paid highly have been wrong again! This of course brings us to the concept of responsibility.

Christine Lagarde

I have been critical of the IMF’s Managing Director quite a few times on the grounds that she has been intimately involved with the disastrous bailout of Greece via her roles as French Finance Minister and Managing Director of the IMF. Not everyone has spotted this as the Financial Time has proved this morning as it reviews her.

a blow to her previously unblemished reputation for managerial competence

But even the FT which appears ever keen to stand firmly behind any establishment vehicle has to admit this.

A conviction for negligence is somewhat at odds with a commitment to “the highest standards of efficiency and technical competence”.

Mind you perhaps something in the past has influenced this.

The Financial Times therefore argued earlier this year that she deserved reappointment for a second term on merit.

Is negligence the new definition of merit? I will have to update my financial lexicon for these times. This next bit is full on internal contradictions and effectively self-critiques.

It found her guilty of negligence because she did not appeal against the eventual decision — but it has not imposed any sentence, and the verdict will not result in a criminal record. Short of full exoneration, this is the mildest possible verdict.

This is an unusual verdict from an unusual court. Politicians who sit on the special tribunal may well have wished to avoid a tougher ruling that would have deterred ministers from making delicate decisions in future.

Comment

There are a litany of issues here. We see yet again that the more important you are the less you are apparently responsible for anything. Someone lower down the scale would have received punishment if they had been found guilty of negligence yet the leader of the world’s major financial organisation apparently can shrug it off. Punishment is for the little people only it would seem.

This leaves the IMF as a whole in an even bigger hole. As the economic world shifts east towards places like India and China it looks ever more like a western and to some extent French fiefdom. At the same time more of its bailouts have gone rogue of which Greece is the most extreme example. The worst part is the way that this is all covered-up and the truth is bent and miss shaped.

The only hope we have is that this statement from the IMF turns out to be like one about a manager from a football club’s board of directors.

In this context, the Executive Board reaffirms its full confidence in the Managing Director’s ability to continue to effectively carry out her duties.

Oh and “outstanding leadership” also needs to go into my financial lexicon for these times. Although we do need perhaps to go through the Looking Glass of Lewis Carroll.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

 

 

6 years down the line and Greece is still arguing with its creditors

A clear candidate for the saddest story and indeed theme of my time on here has been the economic depression inflicted on Greece. If I had my way Christine Lagarde could finish at the current trial she is involved in and then could move onto one with her former Euro area colleagues about proclaiming “shock and awe” for Greece back in 2010. This involved promising an economic recovery in 2012 which in fact turned into an economy shrinking by 4% in that year alone. Compared to when she and her colleagues were already boasting about future success, the Greek economy has shrunk by 19%, which means that the total credit crunch contraction became 26%. I also recall the bailout supporters attacking those like me arguing for another way ( default and devalue) for saying we would create an economic depression which in the circumstances was and indeed is simply shameful. Instead they found an economy on its knees and chopped off its arms too.

A new hope?

We have seen some better economic news from Greece as 2016 has headed towards irs end. An example of this came yesterday.

The unemployment rate was 22.6% compared to 23.1% in the previous quarter, and 24%  in the corresponding quarter of 2015……The number of unemployed persons decreased by 1.8% compared with the previous quarter and by 5.9% compared with the 3rd quarter of 2015.

As an economic signal we need also to look at employment trends.

The number of employed persons increased by 0.9% compared with the previous quarter and by 1.8% compared with the 3rd quarter of 2015.

Thus we see an improvement which backs up the recent information on economic growth.

The available seasonally adjusted data indicate that in the 3 rd quarter of 2016 the Gross Domestic Product (GDP) in volume terms increased by 0.8% in comparison with the 2 nd quarter of 2016…… In comparison with the 3rd quarter of 2015, it increased by 1.8% against the increase of 1.5% that was announced for the flash estimate of the 3rd quarter.

So we have some growth although sadly more of the L shaped variety so far than the V shape one might expect after such a severe economic shock. Another anti-achievement for the program. But there are hopes for next year according to the Bank of Greece.

Specifically, the Bank of Greece expects GDP to grow by a marginal 0.1% in 2016, before picking up to 2.5% in 2017 and further to 3% in 2018 and 2019, supported by investment, consumption and exports.

Let us hope so although we have hear this sort of thing plenty of times before. Indeed those thinking that Fake News is something only from 2016 might like to look back at the officials and their media acolytes who pushed the Grecovery theme around 2013. Also this by the Bank of Greece as its highlight needs to be considered in the light of the economic depression I have described above.

An unprecedented fiscal consolidation was achieved, with an improvement in the “structural” primary budget balance by 17 percentage points of potential GDP over the period 2009-2015, twice as much as the adjustment in other Member States that were in EU-IMF programmes;

Not everything is sweetness and light

The obvious issue is the way that a lost decade ( so far..) has caused something of a lost generation.

the highest unemployment rate is recorded among young people in the age group of 15-24 years (44.2%). For young females the unemployment rate is 46.9%.

Also the Bank of Greece gives us its own fake news unless of course Mario Draghi is wrong at every ECB press conference.

Substantial structural reforms have been implemented in the labour and product markets, as well as in public administration.

Trouble,Trouble,Trouble

One way of looking at this comes from the current trend to issue policy statements on Twitter as everyone apes President-Elect Trump. From the IMF on Monday.

debt highly unsustainable; no debt sustainability without both structural reforms and debt relief

Of course we have known that for years and perhaps it might like to talk to the Bank of Greece about structural reforms! The next day we got this.

Debt relief AND structural reforms essential to make ’s debt sustainable & bring back growth.

The IMF has in effect told us that it is no longer willing to join in with the Euro area austerity fanatics.

On the contrary, when the Greek Government agreed with its European partners in the context of the ESM program to push the Greek economy to a primary fiscal surplus of 3.5 percent by 2018, we warned that this would generate a degree of austerity that could prevent the nascent recovery from taking hold. We projected that the measures in the ESM program will deliver a surplus of only 1.5 percent of GDP, and said this would be enough for us to support a program.

There are two main issues here where we see the path of austerity but also debt relief. The latter is a big issue as you see private-sector creditors took their pain in 2012 but the ECB has been unwilling to allow the official creditors to take their share and at most has been willing only to contribute the profits it made on its Greek bond holdings. Profits out of such pain spoke for its past attitude eloquently I think. Going forwards though this is an official creditor issue as they own the vast majority of Greek debt now.

The European Union’s commissioner for economic affairs was quick to respond.

Writing in the Financial Times, Pierre Moscovici rebuffed claims made by senior IMF officials this week that Greece’s debt is “highly unsustainable” and that the country needs further comprehensive tax and pensions reform.

Monsieur Moscovici has made all sorts of ridiculous statements in my time of following this issue such that it makes me wonder if he has any grasp of the concept of truth, which is quite an irony when he goes on to say this.

In this era of ‘post-truth’ politics, it is more important than ever not to let certain claims go unchallenged,

It may not have been the best of times for the main lending vehicle the ESM (European Stability Mechanism) which of course has produced anything but in Greece, to call 2016 “exciting” and predict this ” 2017 will be another exciting year”. Still it does now have a Governor of the Day and a Wheel of Governors which it is rumoured sees the Italian and Greek ones spin into the distance if you get it right or should that be wrong?

Meanwhile there is something rather familiar about 2017.

Compared to previous announcements, this means an increase of, in total, €7 billion. The EFSF funding volumes are increased by €13 billion to execute the short-term measures for Greece.

To give you an idea of the scale here Greece owes the EFSF some 130.9 billion Euros and the ESM 31.7 billion which is part of an 86 billion Euro plan. This means that these days when you see headlines about yields on Greek bonds they are much less relevant as Greece borrows from official sources. Frankly it would immediately be insolvent if it did not.

Comment

There are lots of issues here but let me use the IMF statement to highlight the crux of the matter.

While Greece has undertaken a huge fiscal adjustment, it has increasingly done so without addressing two key problems—an income tax regime that exempts more than half of households from any obligation (the average for the rest of the Euro Zone is 8 percent) and an extremely generous pension system that costs the budget nearly 11 percent of GDP annually (versus the average for the rest of the Euro Zone of 2¼ percent of GDP).

You see this in essence is where the crisis began. An inability to tax, often meaning the better-off, which combined with a generous pension system was also looking like a car-crash relationship. Yet 6 years of reforms later we are at deja vu which the appropriate sorry seems to be the hardest word of Elton John tells us is.

It’s sad, so sad
It’s a sad, sad situation.
And it’s getting more and more absurd.

Meanwhile the current government has done this as Maria Kagelidou of ITV News tells us.

promises 1.6 million pensioners on less than €850/month will receive one off 13th pension. €300 min. Total €617mil

A nice Christmas gift? In isolation of course but how can Greece afford this? Maria sent me some details which I will omit because they are identifiable but I will simply say that tax payments have been accelerated and it looks like the money has been borrowed from the future one more time.

 

 

 

 

Greece sees its economic depression continue with ever more debt

This morning has seen yet another outbreak of a theme which has been positively shameful so far. That is the barrage of establishment and official rhetoric proclaiming an economic recovery in Greece or Grecovery for short. In some ways it was even present back at the original bailout agreement in May 2010 when the “shock and awe” turned out to be about this.

Just as a reminder Greece was supposed to return to growth in 2012 (1.1%) and then 2.1% for two years before growing at 2.7% until the end of time.

This morning’s Grecovery outbreak has been reported by The Greek Analyst.

Tsipras says is “entering growth stage,” calls on creditors 2 deliver debt relief.

The Prime Minister is also reporting that a 1.7 billion Euro tranche of debt relief will be provided today by the Euro area.

What about debt relief?

The Euro area partners are providing some of this to Greece via the way that their official vehicle the ESM or European Stability Mechanism lends to it so cheaply. Its President Klaus Regling pointed this out on the 10th of this month.

– because our loans have long maturities and very low interest rates, less than 1% for instance from the ESM. This provides savings for the Greek budget of over €8 billion every year in saved debt service payments, and that corresponds to about 4.5% of Greek GDP.

The problem for Greece is that it is piling up foreign debt albeit in the same currency as it uses in this instance. It would like to issue its own but this seems to be something which remains just around the corner. After all Greece can borrow at 1% and at what rate do you think markets would lend to it at?

One possible route where the Euro area could continue to provide help would be via the bond buying QE of the ECB. However that seems to have faded away as well probably due to what is implied by this from Mr. Regling.

but it depends if we get the missing information, the missing data, to be sure that the target on net arrears clearance has really been met by the end of September

For all the promises of reform and steps forward taken this all look rather, same as it ever was.

The debt continues to pile up

The official story was that the debt to GDP ratio would decline to 120% by 2020 but last week’s report to Eurostat told us this.

The deficit of General Government for 2015, in accordance with ESA 2010, is estimated at 13.2 billion euro (7.5% of Gross Domestic Product), while the gross consolidated General Government debt at year-end 2015 is estimated at a nominal value of 311.7 billion euro (177.4% of Gross Domestic Product).

Actually a fall in the total debt burden was reported there but sadly it has risen since to 315.3 billion Euros as of June according to Eurostat. So whilst the interest-rate paid has been slashed the overall or capital burden has continued to rise.

If we move to the fiscal deficit the numbers were affected by yet more banking bailouts to the tune of 7.71 billion Euros. That seems to be an eternally emptying pot doesn’t it? But you may also note that even after over 5 years of austerity there was still a fiscal deficit of around 6 billion Euros.

GDP

This can be summarised simply by reminding ourselves that the economy of Greece was supposed to grow from 2012 onwards and then looking at the actual numbers.

2012  GDP 191.2 Billion Euros

2013 GDP 180.7 Billion Euros

2014 GDP 177.9 Billion Euros

2015 GDP 175.7 Billion Euros

That is about as clear a definition of an economic depression as you can get. Greece was hit by the credit crunch then the Euro area crisis then the botched bailout and then of course saw the run on its banks last year.

Ordinarily a recovery out of this should be both strong and sharp or what is called a V-shaped recovery. However the latest (PMI) business survey was sadly more of the same.

The performance of Greece’s manufacturers during September followed the trend of inconsistency that has so far defined 2016. Again, the sector slipped back into contraction after declines in production and new orders were reported, with goods producers citing a combination of deteriorating demand conditions and a lack of liquidity at firms as the prominent factors behind the latest falls

The monetary position

There is a troubling issue to address and this is the amount of Emergency Liquidity Assistance still being provided by the ECB. Whilst this has fallen it is still at 51.8 billion Euros which reminds us of the E or Emergency part.

If we look at Greek bank deposits (household and business) we see that they nudged higher in August to 123. 9 billion Euros. But this compares to a past peak of above 164 billion Euros in the autumn and early winter of 2014. So a clear credit crunch which has loosened a little but not much.

House Prices

If we move to assets backing bank lending then there is little good news for the banks from this reported by Kathimerini yesterday.

The biggest drop in house prices since the outbreak of the crisis has been recorded in the northern and northeastern suburbs of Attica, and to a somewhat lesser extent in the south of the region, with rate declines exceeding 50 percent against an average drop of 40-45 percent across Athens, according to Bank of Greece figures since 2009.

The impact of the economic depression has been added to by rises in property taxation as part of the austerity measures. Looking at the new index provided by the Bank of Greece I see that the most recent numbers for the second quarter of this year show new properties falling in price by 0.6% and older ones by 0.5% making them 2.5% and 2.3% cheaper than a year before respectively.

If we move to a deeper perspective then the numbers are chilling. The older properties index was based at 100 in 2007 made 101.7 in the third quarter of 2008 and is now 58.5. That is another sign of an economic depression especially as we note that annual growth has been negative every reading since 2009 began.

Tourism

This had been a bright spot for the Greek economy but these latest numbers do not help. From Kathimerini.

August saw a major decline in tourism revenues, which dropped 9.2 percent on an annual basis, according to data released on Friday by the Bank of Greece. This has brought the losses for the economy in the first eight months of 2016 to 750 million euros year-on-year.

Comment

The Greek economic depression continues to inflict suffering and pain on its people as Keep Talking Greece has pointed out this morning.

230,000 children live in households without any income and 39.9% of Greece’s population cannot afford basic goods and services, like food and heating.

According to the latest report published by the Greek Statistics Authority (ELSTAT)

Whilst the Euro area has seen growth return and maybe edge higher if today’s business survey is accurate Greece seems to have been left behind one more time. The industrial turnover figures for August did show a rise of 0.2% on a year before but the previous number had shown a decline of 18%.

Even Japonica who are the biggest investors in Greek government debt admit this.

From 2001 to 2015, Greece added only 10 cents in GDP for each additional euro of debt, compared to EZ peer average 45 cents.

Actually according to them Greece has very little debt at all.

Greece 2015 YE Balance Sheet Net Debt, correctly calculated in accordance with international accounting or statistics rules is 41% and 58% of GDP, respectively.

Meanwhile the best way out for Greece is as I have argued all along as Sheryl Crow reminds us.

A change would do you good
A change would do you good

 

 

Whatever happened to the Carry Trade?

Tucked away at the end of the quarterly review from the Bank for International Settlements or BIS was a reminder of an issue that has been a theme on here for some time but hits the headlines rarely now. Well until the next crisis! This is the Carry Trade which is where borrowers who may be institutional, corporate or most dangerous of all an ordinary person borrow in another currency to which they use every day and more particularly earn in. This poses two clear and present dangers of which the first is the risk to those who do this as they are exposed to currency moves. Ironically if done on a large-scale as happened back in the day with the Swiss Franc and the Japanese Yen it lowers the currency and so not only is the interest cheaper but you have a capital gain. What could go wrong? Well we will come to that. But this same effect turned out to make things uncomfortable for both Japan and Switzerland as their currencies were pushed lower and lower.

What’s going on?

If we ask Marvin Gaye’s famous question we find that the BIS can give us some answers. Here is something which was already known but it does no harm to be reminded of the scale of it.

McCauley et al (2015) have demonstrated that since the Great Financial Crisis, the outstanding US dollar credit to non-bank borrowers outside the United States has increased from $6 trillion to $9 trillion.

Actually initially the US Federal Reserve would probably have welcomed the downwards push on the US Dollar but as we note a stronger period for the US Dollar something of a squeeze will have been put on the borrowers. A real squeeze was put on places like Russia and Ukraine when their currencies fell due to lower oil prices and the invasion of Crimea as they had US Dollar borrowings. The BIS regards this as causing bank deleveraging.

The Euro and QE

According to the new data there was a change when the ECB began its QE program back in January 2015. Not only is there more activity it is concentrated in particular locations.

For advanced European countries outside the euro area, the euro share in cross-border bank lending (32%) is almost equal to that of the US dollar (35%). In emerging Europe, the share of euro-denominated claims (40%) exceeds that of US dollar claims (31%). By contrast, non-European EMEs borrow only a small fraction in euros (6.5%).

As to the exact numbers the BIS records a rise as QE began but then the numbers get confused as there is always so much going on in the fog of finance but we do get a conclusion.

More concretely, higher shares of euro-denominated claims were associated with greater expansions in cross-border bank lending. This result appears to be driven primarily by lending to advanced economies outside the euro area.

Looking at the individual data I note that there seems to be borrowing in Euros going on in what is called emerging Europe again. Greek banks seem to be especially involved in Poland and Hungary which is troubling considering what happened last time around. Spanish banks seem to be active in this area full stop. For a small country Luxembourg seems to be involved a lot. So worrying signs which are just hints at this stage.

As to the players last time around it is harder to say as for example there is activity in what is classified as “others” but Austria is grouped in there with quite a few other countries. The Italian banks seem to be doing less than last time but of course many of them have what might euphemistically be called different circumstances these days.

There are echoes of the past here and whilst the BIS uses neutral language it poses more than a few questions.

The results are particularly relevant for policymakers in borrowing countries that rely heavily on cross-border bank lending.

Also there is this.

For example, euro lending by Swiss banks to Poland can be affected by the ECB’s monetary policy, even though neither country is part of the euro area.

This warning is more general and may even be aimed at the US Federal Reserve for this week.

our findings suggest that policymakers should closely monitor the currency denomination of cross-border bank lending as they assess the potential impact of possible policy moves, both in their own economies and abroad.

It sounds a bit like “Be afraid, be very afraid” ( the film The Fly I think) does it not?

Sweden

On Saturday I pointed out on BBC Radio 4 a consequence of negative interest-rates in Sweden which is not predicted in conventional economics which is increased saving. Well here is Bloomberg from earlier this month on another one.

The G-10 currency is cheap, thanks to the Riksbank’s negative interest rates. Traders have been borrowing in low-yielding kronor and using the funds to invest in higher yielding currencies, such as Australian and New Zealand dollars, according to Royal Bank of Canada.

The Riksbank will welcome this in the same way I described for the US Federal Reserve as it wants a lower currency to help push inflation higher. Of course the ordinary Swedish worker and consumer will not welcome this at all and there is a deeper danger as should this end the experience of Switzerland and Japan shows that it blows up with a painful currency surge.

What could go wrong with this sort of thing?

In the past three months, selling the krona to buy the kiwi and Aussie dollars, as well as higher-yielding currencies such as South Africa’s rand and Brazil’s real, has returned 9-16 percent, beating the 6-12 percent paid by euro-funded deals and the 4-10 percent generated when using the U.S. dollar.

What about mortgages in Eastern Europe?

I decided to take a look at what was something of a disaster last time round as cheap interest-rates on Swiss Franc and Euro denominated mortgages turned into large foreign-exchange driven capital losses. From the National Bank of Poland.

Banks hold a large, long on-balance-sheet FX position related to the portfolio of foreign currency loans.

The information in the latest Financial Stability Report is as shown below as we get flashes of what was the position at the end of 2015.

The direct costs of restructuring, i.e. conversion of the principal of all loans at the KWO rate, can be estimated at about 35 billion zlotys. If, however, restructuring is used only by borrowers from the years 2007-2008, the costs would be approx. 29 billion zlotys.

There were also indirect costs.

The current value of such reduction in revenue, assuming that all borrowers would take advantage of compulsory restructuring, may be estimated at approx. 21 billion zlotys.

An idea of the amount of individual distress is shown below.

The total value of foreign currency loans with LtV greater than 100% can be estimated at around 77 billion zlotys.

Hungary another country where this issue was particularly prevalent there was a socialisation of the issue a while back. From the Financial Times.

Hungary’s government agreed with banks to convert up to €9bn of foreign currency loans into forints at the then market rate.

Those who took out foreign currency mortgages in Cyprus also faced falls in the value of the asset. From the Central Bank of Cyprus.

Given that until 2015Q1 house prices in real terms had dropped by 34,5% from their peak, in order to complete the correction of the bubble they should theoretically be reduced by a further 9,7% in real terms (4,7% in nominal terms). This would bring house prices at levels corresponding to 2006Q2.

Cyprus Property News told us this on the 7th of this month.

Although Swiss Franc loans declined €274 million in the first half of the year, 80 per cent of the remaining €1,778 million are non-performing according to the head of the Cyprus Central Bank’s Supervision Division.

Time for Ms Britney Spears.

Don’t you know that you’re toxic?
Don’t you know that you’re toxic?

Comment

There is much to consider here and we have an issue which is only likely to be made worse by the way that so many countries now have negative interest-rates. Great care is needed with any numbers in this arena as they invariably turn out to be inaccurate but what we do know is that there is great risk here. Also we know that this is a risk exacerbated by all the monetary stimulus that is going on.

Speculating in currencies is a dangerous game for those with lots of capital backing. I fear that in the future we may discover that one more time the unwary have been seduced into it.

BBC Radio 4

I was on Money Box on Radio 4 over the weekend. It was live on Saturday lunchtime and then repeated last night. Here is the clip.

http://www.bbc.co.uk/programmes/b07vjqmq

The Greek economic depression continues to the sound of silence

Today it is time again to look at what has been in my time as a blogger a regular and indeed consistent contender for the saddest story of all. This is of course the issue proclaimed as “shock and awe” by Euro area ministers such as Christine Lagarde back in May 2010 as they sent Greece spiralling into an economic depression from which it shows little sign of returning. This was accompanied by a media operation where those who argued for a different course of action were smeared with claims that they would damage the Greek economy. How shameful that was!

Instead we got austerity and claims of an internal devaluation instead of the old IMF strategy where the austerity was ameliorated by a currency devaluation. Oh and promises of reform which remain in the main just that promises. Eventually there was a default but by then it was not enough partly because the official creditors refused to take part. Drip by drip we have had confessions of failure as the IMF first decided its sums were wrong and more recently has become a fan of fiscal stimulus rather than austerity. Just as a reminder Greece was supposed to return to growth in 2012 (1.1%) and then 2.1% for two years before growing at 2.7% until the end of time.

An economic depression

How do we measure this? Well the first signal is that Greek GDP was 19.5% lower in the second quarter of this year than it was in the second quarter of 2010 when “shock and awe” was proclaimed. So that is a severe depression or Great Depression. There is no other way of putting that.

If we move to the present position then we see this.

Available seasonally adjusted data indicate that in the 2nd quarter of 2016 the Gross Domestic Product (GDP) in volume terms increased by 0.2% compared with the 1st quarter of 2016 against the increase of 0.3% that was announced for the flash estimate.

Sadly even this brief flicker of candle light gets sucked up by the gloom when we look at the annual comparison.

In comparison with the 2nd quarter of 2015, it decreased by 0.9% against the decrease of 0.7% that was announced for the flash estimate of the 2nd quarter on August 12, 2016.

We have other signs of a depression here. Firstly the fact that so far there is no rebound. Ordinarily however bad things are economies eventually rebound in what is called a V-shaped response but here we have a much grimmer L shape as in a collapse and then no recovery. Also numbers in such a situation are mostly revised upwards but as you can see it has in fact been downwards.

Wages

An important signal of these times has been the behaviour of wages and especially real wages well we have seen nothing like this. There is an index for Greek wages for different sectors so let us start with manufacturing which at the start of 2010 was at 95.9 and at the start of 2016 was at 45.5 and had fallen by over 9% in the preceding year. It is not the worst example as the wages of the professional and scientific sector fell from 100.8 to 45.9 over the same time period.

Just so you see both sides of the coin the best number was for the information sector which only and by only I mean comparatively fell from 89.8 to 80.9.

Retail Trade

This sadly is one of the worst examples of the economic depression. You may wish to make sure you are sitting comfortably before you read that on a scale where 2010=100 then Greek retail trade was 69.8 in June. Grimmest of all is that food is at 78.1.

Is it getting any better or Grecovery as some were proclaiming in 2013? Take a look for yourself.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in June 2016, recorded a decrease of 3.6% compared with the corresponding index of June 2015, while compared with the corresponding index of May 2016, recorded an increase of 3.7%.

May must have been dreadful mustn’t it?

The Monetary System

We see regular proclamations of recovery but regular readers will recall the situation last year when Greece saw capital flight on a large-scale. Capital Greece sums it up like this.

Greece΄s banking sector saw a 42 billion euro deposit outflow from December to July last year.

They try to put a positive spin on the data but it tells a rather different story.

Greek bank deposits dropped slightly in July after a rise in the previous two months………Business and household deposits fell by 160 million euros, or 0.13 percent month-on-month to 122.58 billion euros ($138.3 billion), their lowest level since November 2003.

That means the credit crunch is ongoing.

Export Led Growth

One of the ways that the “internal devaluation” was supposed to benefit Greece was via foreign trade. This should impact in two ways. Firstly exports would be more price competitive and rise and secondly imports would fall in sectors where Greek producers can replace them. How is that going? From Kathimerini.

exports of Greek products dropped to their lowest point in the last four years in the first half of 2016, posting an annual decline of 8.1 percent to 11.8 billion euros, against 12.8 billion in January-June 2015. Excluding exports of oil products, the annual decline came to 1.4 percent.

So the oil price fall has had an impact except care is needed here if it was counted when we were being told this was getting better. Especially troubling considering the efforts of the ECB to reduce the value of the Euro came from this.

There was a notable decrease in exports, including oil products, to non-EU countries, where they fell by 14.6 percent compared to June last year.

An area which had shown signs of hope was tourism where I recall better numbers and hope for the future but sadly the Bank of Greece has another tale.

In January-June 2016, the balance of travel services showed a surplus of €2,991 million, down 6.7% from a surplus of €3,205 million in the same period of 2015…….The decrease in travel receipts resulted from a 1.6% decline in arrivals and a 4.9% fall in average expenditure per trip.

Just in case someone wants to deploy the scapegoat of 2016 which is of course Brexit that has so kindly given the poor much abused weather a rest. well see for yourself…

Receipts from the United Kingdom increased by 24.8% to €388 million.

Actually it is people from outside the European Union who have stopped going to Greece for a holiday it would appear.

while receipts from outside the EU28 dropped by 21.9% (June 2016: €469 million, June 2015: €601 million).

Any thoughts as to why?

Comment

As we review the scene there is a familiar austerity drumbeat.From Kathimerini.

Tens of thousands of pensioners will see their auxiliary pensions slashed by between 10 and 12 percent on Friday morning, while in some cases the cuts will even exceed 40 percent…..This second wave of cuts will affect 144,000 pensioners, after a first one hit just under 67,000 retirees in August.

Odd that because we have been told so many times that reform has been completed. Oh and we have been told so many times that the banks are fixed as well.

Greece’s four systemic banks increased their provisions for nonperforming loans by a total of 1 billion euros during the second quarter of the year

By systemic they mean toxic under the Britney definition.

I’m addicted to you
Don’t you know that you’re toxic
And I love what you do
Don’t you know that you’re toxic

Meanwhile the Greek depression continues to the Sound of Silence.

Hello darkness, my old friend
I’ve come to talk with you again
Because a vision softly creeping
Left its seeds while I was sleeping
And the vision that was planted in my brain
Still remains within the sound of silence

 

The ECB faces a stronger Euro and an unbalanced economy

One of the features of this time of year is that the ECB (European Central Bank) is quiet as its Governing Council gets in some research on holiday hot-spots and does its best to boost the economies of the southern countries. However in their absence there is little sign of a summer lull this year so let us take a look at what is happening. Firstly of course we have the deposit and current account rate set at -0.4% and the 80 billion Euros of QE (Quantitative Easing) per month which now includes corporate bond purchases.

Negative Interest-Rates

Standard and Poors has produced a report on this issue and it starts badly for the ECB. From the FT.

Almost 500 million people are living under negative central bank interest rates – an unprecedented policy move which is “a clear sign of desperation” with a host of unintended consequences for the world economy, Standard & Poor’s has warned.

Almost enough to make Mario Draghi choke on his lunchtime glass of chianti. There is more.

It warned of the danger of a “feedback loop”, where negative rates encourage irresponsible and excessive risk taking that could spillover into escalating defaults that would require yet more stimulus from central banks.

There are two further problems which will be familiar to readers of my work.

This has led to concerns for pension funds and insurance companies, “reducing the investment returns these institutions rely on to meet their long-term liabilities”. They could then be spurred to search for yield by investing in riskier assets.

And.

Should negative rates spread across the economy, it could lead to a “cash-only economy”: “This means increased transaction costs and rising risks of theft”

Then suddenly there is some better news for the ECB as Standard and Poors decides that it should fall into line with the IMF and tell us that this is working.

Negative rates in the eurozone are “having the desired stimulative effect”, managing to spur bank lending and leading to a sustained fall in the value of the euro.

Let us look at bank lending vis the ECB August Bulletin.

Loan dynamics remained on a path of gradual recovery………While the annual growth rate of loans to non-financial corporations (NFCs) recovered further in May, the annual growth rate of loans to households has remained broadly stable since February 2016.

Not entirely convincing is it? The truth is that the ECB has stopped such lending from falling but the numbers are barely positive.

The Euro

I was interested in the “sustained fall in the value of the Euro” claim as the Euro has been rising recently. The most obvious rise has been the post Brexit leave vote move against the UK Pound £ which has seen it push forwards to 1.15. However it has also been rising against the US Dollar and has pushed above 1.13 versus it this morning after the US Federal Reserve Minutes showed uncertainty last night. I guess it has absolutely surged against the Mongolian Tugrik which has required a 4.5% increase in interest-rates today to try to shore it up!

If we look at the effective or trade-weighted numbers we see that the Euro has been rising since it fell to just below 89 in early April 2015 and it is now 95.6. Or as Sober Look pointed out.

: ‘s tradeweighted euro index now highest since start of QE; has to be frustrating for the ECB –

If you are wondering why? I suspect that some figures released this morning give us at least a partial guide.

As a result, the euro area recorded a €29.2 bn surplus in trade in goods with the rest of the world in June 2016……In January to June 2016  the euro area recorded a surplus of €134.5 bn, compared with +€111.4 bn in January-June 2015.

As you can see whenever we are not in an ouvert crisis phase then there is steady and regular demand for Euros to pay for goods. Actually there is an elephant in this particular room as two thirds of the trade surplus in goods comes from one country Germany which recorded a 89.2 billion Euro surplus in the first half of 2016.  We are back to the view that I expressed some years back that the Euro is a vehicle for Germany to get a lower exchange-rate. The price for the other 18 nations is that they get a higher exchange-rate and this has compromised the economic performance particularly of countries like Italy and Portugal and of course especially Greece.

For all the media rhetoric and talk about Germany being a loser in the various Euro negotiations and bailouts it remains an enormous winner from its original currency devaluation. What it did not know back then was that we would see a post credit crunch era where a German Deutschmark would have soared.

The banks

The problem here is duofold. The first has been caused by the ECB itself and the way that negative interest-rates impact on the banking sector. An irony because of course so many policies are aimed at supporting the banks. Benoit Coeure of the Governing Council put it like this at the end of last month.

In the euro area, the potential adverse impact on bank profitability, if it materialises, would be compounded by low growth prospects and a legacy of high non-performing loans.

In fact virtually his whole speech was about the banks revealing his real interests! In essence on this road they are being given not far off “free money” from the QE program to offset losses elsewhere.

While average deposit rates only decreased by around 0.2 percentage point between June 2014 and May 2016, loan rates decreased by around 0.8 percentage point, effectively reducing the interest margin.

If we return to the lending figures I quoted early on you might reasonably have expected them to have done better in response to this.

The next problem is responded to rather euphemistically.

In the euro area, this translates into geographic differences based on national banking structures,

He means the banking travails of Portugal and Italy for example but does not want to say so explicitly. I note that Algarve News has reported this.

Portugal’s government has spent €14 billion of public money on ensuring the banking sector is ‘robust’ – but much of this money will never be seen again……….This overall €14 billion bill, as computed by the Court of Auditors and the National Institute of Statistics, represents nearly 8% of Portuguese GDP, hence Moody’s recent warning that the Portuguese banking system is one of the most fragile in Europe.

Even the traditionally insular US Federal Reserve is on the case.

However, European bank equities, especially those of Italian banks, underperformed, reflecting investor fears that lower interest rates will continue to weigh on profitability.

Not everywhere is on a downwards spiral as the economic growth spurt in Spain has helped improve things for banks there. This morning has seen a fall in non performing loans recorded although I also note that another consequence of the To Big To Fail strategy has also been seen as national debt to GDP which was 36% in 2007 looks like it has passed 100%.

Comment

There is much to consider for the ECB as it looks at its policies. It did originally manage a fall in the Euro exchange rate but as I have explained above that has been fading. As I have pointed out before both the main QE players right now ( Euro area and Japan) are seeing stronger not weaker exchange-rates these days. Actually one bit of relief for Mario Draghi and his colleagues has been that the Yen has risen even against the Euro.

Also whilst the economy is growing the rate of growth halved in the second quarter of 2016 to 0.3% from 0.6% previously. Whilst Spain has done well and Ireland has recorded some quite extraordinary numbers Italy and France recorded no growth at all in the latest quarter. I think that the ECB if Benoit Coeure is any guide is starting to think that it is struggling.

Fiscal and structural policies should act more decisively to support aggregate demand and productivity, thereby preventing the economy from falling into a low interest rate trap.

Yes especially in the struggling nations. Oh hang on the ECB as part of the institutions or troika has been enforcing exactly the reverse there!

Should the oil price continue to edge higher some of the gains from its lower phase will start to ebb away as well.