The economic problems of Greece are multiplying

Today is a case of hello darkness my old friend, I have come to talk to you again, as we look at Greece. Yet again we find a case of promised economic recovery turning into another decline although on this occasion it is at least nit the fault of the “rescue” party. The promised recovery was described by the Governor of the Bank of Greece back in February.

According to the Bank of Greece estimates, the Greek economy grew at a rate of 2.2% in 2019 while projections point to growth accelerating to 2.5% in 2020 and 2021, as the catching-up effect, after a long period of recession, through rises in investment and disposable income is projected to counterbalance the effect of the global and euro area slowdown.

Apart from the differences in the years used that could have been written back in 2010 and pretty much was. Maybe no-one should ever forecast 2% or so economic growth for Greece as each time the economy then collapses!

Also Governor Stournaras told us this.

The main causes of the crisis, namely the very large “twin” deficits (i.e. the general government and current account deficits) have been eliminated,

So let us take a look.

Balance of Payments

This morning’s release tells us this.

In June 2020, the current account balance showed a deficit of €1.4 billion, against a surplus of €805 million in June 2019.

So the Governor as grand statements like that tend to do found a turning point except the wrong way. Anyone with any knowledge of 2020 will not be surprised at the cause of this.

This development is mainly attributable to a deterioration in the travel balance and, therefore, the services balance, which was partly offset by an improvement in the balance of goods, as imports of goods decreased more than the respective exports. The primary and the secondary income accounts did not show any significant change.

Let us get straight to the tourism numbers.

The travel surplus narrowed, as non-residents’ arrivals and the corresponding receipts decreased by 93.8% and 97.5%, respectively. Moreover, travel payments dropped by 81.3%. The transport balance also declined, by 39.7%, due to a deterioration in the sea and air transport balances.

Nobody will be especially surprised about this falling off a cliff although maybe with restrictions being eased from mid June the numbers may not have been quite so bad. Also there is the kicker of the impact on Greece’s shipping companies.

Switching to the half-year we see this.

In the first half of 2020, the current account deficit came to €7.0 billion, up by €2.9 billion year-on-year, as the deteriorating services balance and secondary income account more than offset an improvement in the balance of goods and the primary income account.

That is awkward for out good Governor as we note a deficit last year but for our purposes there is something ominous in the goods balance improvement.

The deficit of the balance of goods fell, as imports decreased at a faster pace than exports.

Whilst some of that was the oil trade which was affected by the price fall there was also this.

Non-oil exports of goods declined by 3.9% at current prices (-3.4% at constant prices), while the corresponding imports fell by 10.1% (‑9.5% at constant prices).

Which suggests via the relative import slow down that we have a possible echo of what happened in 2010.

Government Deficit

This was the benchmark set by the Euro area authorities and the IMF. Back in the day they were called the Troika and then the Institutions which provides its own script for events. After all successes do not change their names do they? As for now we see this.

In January-July 2020, the central government cash balance recorded a deficit of €12,767 million, compared to a deficit of €2,432 million in the same period of 2019.

Unsurprisingly revenues are down and expenditure up.

During this period, ordinary budget revenue amounted to €22,283 million, compared to €25,871 million in the corresponding period of last year. Ordinary budget expenditure amounted to €32,423 million, from €29,870 million in January-July 2019.

That does not add up as we note the weasel word “ordinary” which apparently excludes public investment which is over 2.5 billion higher so far this year. Also debt costs are about 700 million higher mostly to “The Institutions”. That looks a little awkward but it seems they have decided to give it back.

(Luxembourg) – The Board of Directors of the European Financial Stability Facility (EFSF) decided today to reduce to zero the step-up margin accrued by Greece for the period between 1 January 2020 and 17 June 2020, as part of the medium-term debt relief measures agreed for the country in 2018. The value of the reduction amounts to €103.64 million.

Additionally, as part of the debt relief measures, the European Stability Mechanism (ESM), acting as an agent for the euro area member states and after their approval, will make a transfer to Greece amounting to €644.42 million, equivalent to the income earned on SMP/ANFA holdings.

The air of unreality about this was added to by ESM and EFSF head Klaus Regling who seems to think the Greek economy is recovering.

This is necessary to further support the economic recovery, improve the resilience of the economy and improve the country’s long-term economic potential.

What is he smoking?

ECB

It has stepped in to help with the Greek finances as these days Greece is issuing its own debt again. The ECB is running two QE programmes and the “emergency” PEPP one ( as opposed to the now apparently ordinary PSPP) had at the end of July bought some 10 billion Euros of Greek government bonds,

There was always an implicit gain from ECB QE for Greece in that its bonds would be made to look relatively attractive now it is explicit with the ECB purchases. Indeed it has so far bought more than Greece issued last year.

During 2019, the Hellenic Republic has successfully tapped the international debt capital markets through 4 market
transactions: 3 new bond series (5Y, 7Y, 10Y new issue + tap) for a total amount of € 9bn have been issued, ( Greece PDMA)

Greece was also grateful for the lower borrowing costs.

The average cost of funding for 10-year bonds has decreased from c. 4.4% to c.1.5%, while yields on 3m and 6m T-bills
have recently reached negative values

But I have never heard the ECB being called an insurance and pension fiund before, although it is in line with my “To Infinity! And Beyond! ” theme maybe the longest of long-term investors..

The investor base for Greece Government Bonds (GGBs) has significantly strengthened and broadened with an
increased share of long-term investors, notably insurance and pensions funds.

Just for clarity the PEPP purchases had not begun but the PSPP had.

Debt

The numbers here apparently have changed little but that is because Greece borrowed extra to give itself a cash buffer. So if we allow for that another 7.4 billion Euros were added to the debt pile in the second quarter of this year.

Comment

The saddest part of this is that the present pandemic has added to what was already a Great Depression in Greece. At current prices a GDP of 242 billion Euros in 2008 was replaced by one of 187.5 billion last year. At this point the casual observer might be wondering how a central bank Governor could be talking about a recovery?

But there is more as Greece arrived at the pandemic under another depressionary influence as it planned to run a fiscal surplus and I recall 3.5% of GDP being a target. Now you may notice that the same group of Euro area authorities seem rather keen on fiscal deficits as they have been taking advice from Kylie it would appear.

I’m spinning around
Move outta my way

To my mind the issue revolves around out other main indicator which is the balance of payments. This used to be the role of the IMF before it had French leaders. At the moment the Greek numbers have been hit hard by something it can do nothing about via the impact of lockdown on tourism. Sadly with the rise in cases of Covid-19 elements of that may return, although one of my friends is out there right now doing her best to keep the economy going. We will never know how much better that trajectory of the Greek economy would have been if the focus had been on reform and trade rather than debt and punishment, but we do know it would have been better and maybe a lot better.

 

How much do the rising national debts matter?

Quote

A symptom of the economic response to the Covid-19 virus pandemic is more government borrowing. This flows naturally into higher government debt levels and as we are also seeing shrinking economies that means the ratio between the two will be moved significantly. I see that yesterday this triggered the IMF (International Monetary Fund) Klaxon.

This crisis will also generate medium-term challenges. Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies.

Firstly we need to take this as a broad-brush situation as we note yet another IMF forecast that was wrong, confirming another of our themes.

Compared to our April World Economic Outlook forecast, we are now projecting a deeper recession in 2020 and a slower recovery in 2021. Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below our April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021.

It is hard not to laugh. At the moment things are so uncertain that we should expect errors but the issue here is that the media treat IMF forecasts as something of note when they are regularly wrong. Be that as it may they do give us two interesting comparisons.

These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion from this crisis………Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

Being the IMF we do not get any analysis on why we always seem to need economic support.

What do they suggest?

Here come’s the IMF playbook.

Policy support should also gradually shift from being targeted to being more broad-based. Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. To protect the most vulnerable, expanded social safety net spending will be needed for some time.

Readers will have differing views on the green washing but that is simply an attempt at populism which once can understand. After all if you has made such a hash of the situation in Argentina and Greece you would want some PR too. That leads me to the last sentence, were the poor protected in Greece and Argentina under the IMF? No.

The IMF has another go.

Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.

Would the “wasteful spending” include the part of this below that props up Zombie companies?

and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants.

Now I know it is an extreme case but this piece of news makes me think.

BERLIN (Reuters) – German payments company Wirecard said on Thursday it was filing to open insolvency proceedings after disclosing a $2.1 billion financial hole in its accounts.

You see the regulator was on the case but….

German financial watchdog #Bafin last year banned short selling in its shares, and filed a criminal complaint against FT journalists who had written critical pieces. .. ( @BoersenDE)

Whereas now it says this.

The head of Germany’s financial watchdog says the Wirecard situations is “a disaster” and “a shame”. He accepts there have been failings at his own institution. “I salute” those journalists and short-sellers who were digging out inconsistencies on it , he says. ( MAmdorsky )

As you can see the establishment has a shocking record in this area and I have personal experience of it blaming those reporting financial crime rather than the criminals. I raise the issue on two counts. Firstly I am expecting a raft of fraud in the aid schemes and secondly I would point out that short-selling has a role in revealing financial crime. Whereas the media often lazily depict it as being a plaything of rich financiers and hedge funds. Returning directly to today’s theme the fraud will be a wastage in terms of debt being acquired but with no positive economic impulse afterwards.

Still I am sure the Bank of England is not trying to have its cake and eat it.

Join us on 30 June for an interactive webinar with restaurateur, chef and The Great British Bake Off judge, @PrueLeith . Find out more and register for your place here: b-o-e.uk/2CsGokX

Debt is cheap

The IMF does touch on this although not directly.

monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases.

It does not have time for the next step, although it does have time for some rhetoric.

In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.

Then it tip-toes around the subject in a “look at the wealth effects” sort of way.

This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened.

Let me now give you some actual figures and I am deliberately choosing longer-dated bonds as the extra debt will need to be dealt with over quite a period of time. In the US the long bond ( 30 years) yields 1.42%, in the UK the fifty-year Gilt yields 0.43%, in Japan the thirty-year yield is 0.56% and in Germany it is -0.01%. Even Italy which is doing its best to look rather insolvent only has a fifty-year yield of 2.45%

I know that it is an extreme case due to its negative bond yields but Germany is paying less and less in debt interest per year. According to Eurostat it was 23.1 billion in 2017 but was only 18.5 billion in May of this year. Care is needed because most countries pay a yield on their debt but presently the central banks have made sure that the cost is very low. Something that the IMF analysis ( deliberately ) omits.

Comment

So we are going to see lots more national debt. However the old style analysis presented by the IMF has a few holes in it. For a start they are comparing a stock (debt) with an annual flow (GDP). For the next few years the real issue is whether it can be afforded and it seems that central banks are determined to make it so. Here is yet another example.

Brazil may experiment with negative interest rates to combat a historic recession, says a former central bank chief who presided over some of the highest borrowing costs in the country’s recent history ( @economics)

That is really rather mindboggling! Brazil with negative interest-rates? Anyway even the present 2.25% is I think a record low.

If we go back to debt costs then we can look at the Euro area where they were 2.1% of GDP in 2017 but are expected to be 1.7% over the next year. Now that does not allow for the raft of debt that will be issued but of course a few countries will be paid to issue ( thank you ECB!). The outlier will be Italy.

Looking further ahead there is the capital issue as this builds up. I do not mean in terms of repayment as not even the Germans are thinking of that presently. I mean that as it builds up it does have a psychological effect which is depressing on economic activity as we learnt from Greece. Which leads onto the final point which is that in the end we need economic growth, yes the same economic growth which even before the pandemic crisis was in short supply.

 

Where next for UK house prices?

Today we are going to start by imagining we are central bankers so we will look at the main priority of the Bank of England  which is UK house prices. Therefore if you are going to have a musical accompaniment may I suggest this.

The only way is up, baby
For you and me now
The only way is up, baby
For you and me…  ( Yazz0(

In fact it fits the central banking mindset as you can see below. Even in economic hard times the only way is up.

Now we may not know, huh,
Where our next meal is coming from,
But with you by my side
I’ll face what is to come.

From the point of view of Threadneedle Street the suspension of the official UK house price index is useful too as it will allow the various ostriches to keep their head deep in the sand. This was illustrated in the Financial Stability Report issued on the 7th of May.

As a result, the fall in UK property prices incorporated in
the desktop stress test is less severe than that in the 2019 stress test.

Yes you do read that right, just as the UK economy looked on the edge of of substantial house price falls the Bank of England was modelling weaker ones!

Taking these two effects together, the FPC judges that a fall of 16% in UK residential property prices could be
consistent with the MPR scenario. After falling, prices are then assumed to rise gradually as economic activity in the
UK recovers and unemployment falls in the scenario.

Whether you are reassured that a group of people you have mostly never heard of forecast this I do not know, but in reality there are two main drivers. The desire for higher house prices which I will explain in the next section and protection of “My Precious! My Precious!” which underpins all this.

Given the loan to value distribution on banks’ mortgage books at the end of 2019, a 16% house price fall would not be likely to lead to very material losses in the event of default.

So the 16% was chosen to make the banks look safe or in central banking terms “resilient”

Research

I did say earlier that I would explain why central bankers are so keen on higher house prices, so here is the latest Bank Underground post from yesterday.

Our results also suggest that the behaviour of house prices affects how monetary policy feeds through. When house prices rise, homeowners feel wealthier and are more able to refinance their mortgages and release housing equity in order to spend money on other things. This can offset some of the dampening effects of an increase in interest rates. In contrast, when house prices fall, this channel means an increase in interest rates has a bigger contractionary effect on the economy, making monetary policy more potent.

Just in case you missed it.

Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.

So even the supposedly independent Bank Underground blog shows that “you can take the boy out of the city but not the city out of the boy” aphorism works as we see it cannot avoid the obsession with house prices. The air of unreality is added to by this.

 we look at the response of non-durable, durable and total consumption in response to a 100bp increase in interest rates.

The last time we had that was in 2006/07 so I am a little unclear which evidence they have to model this and of course many will have been in their working lives without experiencing such a thing. Actually it gives us a reason why it is ever less likely to happen with the present crew in charge.

When the share of constrained households is large, interest rate rises have a larger absolute impact than interest rate cuts.

Oh and is that a confession that the interest-rate cuts have been ineffective. A bit late now with Bank Rate at 0.1%! I would also point out that I have been suggesting this for some years now and to be specific once interest-rates go below around 1.5%.

Reasons To Be Cheerful ( for a central banker )

Having used that title we need a part one,two and three.

1.The UK five-year Gilt yield has gone negative in the last week or so and yesterday the Bank of England set a new record when it paid -0.068% for a 2025 Gilt. As it has yet to ever sell a QE bond that means it locked in a loss. But more importantly for today’s analysis this is my proxy for UK fixed-rate mortgages. So we seem set to see more of this.

the average rate on two and five year fixed deals have fallen to lows not seen since Moneyfacts’ electronic records began in July 2007. The current average two year fixed mortgage rate stands at just 2.09% while the average rate for a five year fixed mortgage is 2.35%. ( Moneyfacts 11th May)

2. The institutional background for mortgage lending is strong. The new Term Funding Scheme which allows banks to access funding at a 0.1% Bank Rate has risen to £11.9 billion as of last week’s update. Also there is the £107.1 billion remaining in the previous Term Funding Scheme meaning the two add to a tidy sum even for these times. Plus in a sign that bank subsidies never quite disappear there is still £3 billion of the Funding for Lending Scheme kicking around. These schemes are proclaimed as being for small business lending but so far have always “leaked” into the mortgage market.

3. The market is now open. You might reasonably think that a time of fears over a virus spreading is not the one to invite people into your home but that is apparently less important than the housing market.  Curious that you can invite strangers in but not more than one family member or friend.

News

Zoopla pointed out this earlier.

Buyer demand across England spiked up by 88% after the market reopened, exceeding pre-lockdown levels in the week to 19th May; this jump in demand in England is temporary and expected to moderate in the coming weeks

Of course an 88% rise on not very much may not be many and the enthusiasm seemed to fade pretty quickly.

Some 60% of would-be home movers across Britain said they plan to go ahead with their property plans, according to a new survey by Zoopla, but 40% have put their plans on hold because of COVID-19 and the uncertain outlook.

Actually the last figure I would see as optimistic right now.

Harder measures of market activity are more subdued – new sales agreed in England have increased by 12% since the market reopened, rising from levels that are just a tenth of typical sales volumes at this time of year.

Finally I would suggest taking this with no just a pinch of salt but the full contents of your salt cellar.

The latest index results show annual price growth of +1.9%. This is a small reduction in the annual growth rate, from +2% in March.

Comment

So far we have been the very model of a modern central banker. Now let us leave the rarified air of its Ivory Tower and breathe some oxygen. Many of the components for a house price boom are in place but there are a multitude of catches. Firstly it is quite plain that many people have seen a fall in incomes and wages and this looks set to continue. I know the travel industry has been hit hard but British Airways is imposing a set of wage reductions.

Next we do not know how fully things will play out but a trend towards more home working and less commuting seems likely. So in some places there may be more demand ( adding an office) whereas in others it may fade away. On a personal level I pass the 600 flats being built at Battersea Roof Garden on one of my running routes and sometimes shop next to the circa 500 being built next to The Oval cricket ground. Plenty of supply but they will require overseas or foreign demand.

So the chain as Fleetwood Mac would put it may not be right.

You would never break the chain (Never break the chain)

We should finally see lower prices but as to the pattern things are still unclear. So let me leave you with something to send a chill down the spine of any central banker.

Chunky price cut for Kent estate reports
@PrimeResi as agent clips asking price from £8m to £5.95m (26%). (£) ( @HenryPryor)

Me on The Investing Channel

Is it the ECB which is the Euro area bad bank?

A feature of the credit crunch era is that some subjects have never gone away in spite of all the official denials. Another is that establishment’s use crises to try to introduce policies which they would not be able to get away with in ordinary times. As today we are looking at a central bank this is of course about the subject closest to their hearts which is “The Precious! The Precious!” which for newer readers is the banking sector. So let us get straight to the issue in the Financial Times which has taken a brief holiday from its role as the house journal of the Bank of England to bid for the same role for the ECB or European Central Bank.

European Central Bank officials have held high-level talks with counterparts in Brussels about creating a eurozone bad bank to remove billions of euros in toxic debts from lenders’ balance sheets.

After my reply I somehow doubt I will be getting the role.

But they already have Deutsche Bank?

Indeed this is quite a different message from the one given to the European Parliament by Mario Draghi in February 2016.

However, we have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole. Banks have built higher and better quality capital
buffers, have reduced leverage and improved their funding profiles.

I have emphasised the use of central banking language as I have picked out that word for some time. He emphasised the point later.

In the euro area, the situation in the banking sector now is very different from what it was in 2012……….making them more resilient to adverse shocks.

Indeed the non performing loans we are now supposed to be worried about were apparently fixed.

There is a subset of banks with elevated levels of non-performing loans (NPLs). However, these NPLs were identified during the Comprehensive Assessment, using for the first time a common definition, and have since been adequately provisioned for. Therefore, we are in a
good position to bring down NPLs in an orderly manner over the next few years.

Er, well we have had a few years since so…..

Geography

The article gives us a good idea of one of the countries pressing for this.

“The lesson from the crisis is that only with a bad bank can you quickly get rid of the NPLs,” Yannis Stournaras, governor of the Bank of Greece and member of the ECB governing council, told the Financial Times. “It could be a European one or a national one. But it needs to happen quickly.”

I have no idea how you could form a Greek bad bank but anyway that would have even less of a life than a May Fly so let’s not worry too much. If we switch to the state of play it does not seem to have progressed as Mario Draghi told us four years ago.

Greek banks have by far the highest level of soured loans on their balance sheets of any eurozone country, making up 35 per cent of their total loan books — a legacy of the 2010-15 debt crisis that pushed the country to the brink of exiting the eurozone.

Yes the numbers are down but the crisis started in 2010 so we are a decade on now. When will it ever go away?

But plans by Greece’s big four lenders to sell more than €32bn of NPLs — almost half the total in the country — are likely to be disrupted by the coronavirus crisis,

We could have a quiz as we wonder how much would be paid for that and whether it would help much? Regular readers will recall that we were told it was a triumph when some of the NPLs of the Italian banks were sold. Would you want them now? I rather suspect the problem has been kicked like a can elsewhere. I note the Bank of Italy reporting this in its latest Economic Bulletin.

approving a debt moratorium on outstanding bank loans, and increasing public guarantees on new loans to firms.

The latest Financial Stability Report was somewhat upbeat on the subject.

At the end of June, the stock of NPLs net of
provisions fell to €84 billion (€177 billion gross
of provisions), 7 per cent less than at the end
of 2018.

Although even by then ( November) the Bank of Italy was troubled by the slow down in the Italian economy and of course now we know that essentially 2019 saw no economic growth at all.

In the fourth quarter of 2019 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.3 per cent over the previous quarter and increased by 0.1 per cent in comparison with the fourth quarter of 2018. ( Istat)

So we can see why Italy would be keen especially as we note this development.

In June, Italian banks’ exposure to emerging economies was €165 billion (about 5 per cent of assets),
6.4 per cent higher than at the end of 2018.

They got into trouble with this last time around.

Returning to the FT there is also a mention of a couple of places which the official and FT lines had been ones of recovery.

Total NPLs in the biggest 121 eurozone banks almost halved in four years to €506bn, or 3.2 per cent of their loan books, by the end of last year. But Greek, Cypriot, Portuguese and Italian banks still have NPL ratios above 6 per cent.

Portugal had been in a better economic run but those who followed the debacle at Novo Banco will be aware of the banking system problems.

Comment

There are quite a few issues for us to pick our way through. For example with the expansion of its role is the ECB already a bad bank itself? Let me hand you over the the present ECB President Christine Lagarde.

Second, we are buying public and private sector bonds in large volume to ensure that all sectors of the economy can benefit from easy financing conditions…….We have also extended our asset purchases to commercial paper, which is an important source of liquidity for firms.

It is also lending but with wider ( aka weaker) collateral requirements. I raise this issue because back at the height of the credit crunch issue the Bank of England ended one of its schemes early because of “Phantom Securities”. I am sure you get the drift.

A reply to the FT from Italicus raises another issue.

So the idea is to remove NPL from the balance sheets of banks so that they can keep on lending to people and businesses who can keep on not repaying their debts?

As Pink Floyd so aptly put it.

Tired of lying in the sunshine staying home to watch the rain.
You are young and life is long and there is time to kill today.
And then one day you find ten years have got behind you.
No one told you when to run, you missed the starting gun.

Next comes the issue that rules for banks are only applied when the seas are calm which is the reverse of what should happen.

The European Central Bank (ECB) today announced a temporary reduction in capital requirements for market risk, by allowing banks to adjust the supervisory component of these requirements.

Next comes the issue of what are Special Purpose Vehicles. The Italian versions for bad loans called variously Atlas and Atlante have rather faded from view. Not before some rather spectacular write downs though which weakened the banking sector they were supposed to support.

Also there is Deutsche Bank with its share price of 5.88 Euros.

Podcast

 

The ECB now considers fiscal policy via QE to be its most effective economic weapon

Yesterday saw ECB President Christine Lagarde give a speech to the European Parliament and it was in some ways quite an extraordinary affair. Let me highlight with her opening salvo on the Euro area economy.

Euro area growth momentum has been slowing down since the start of 2018, largely on account of global uncertainties and weaker international trade. Moderating growth has also weakened pressure on prices, and inflation remains some distance below our medium-term aim.

In the circumstances that is quite an admittal of failure. After all the ECB has deployed negative interest-rates with the Deposit Rate most recently reduced to -0.5% and large quantities of QE bond buying. No amount of blaming Johnny Foreigner as Christine tries to do can cover up the fact that the switch to a more aggressive monetary policy stance around 2015 created what now seems a brief “Euro boom” but now back to slow and perhaps no growth.

But according to Christine the ECB has played a stormer.

 The ECB’s monetary policy since 2014 relies on four elements: a negative policy rate, asset purchases, forward guidance, and targeted lending operations. These measures have helped to preserve favourable lending conditions, support the resilience of the domestic economy and – most importantly in the recent period – shield the euro area economy from global headwinds.

It is hard not to laugh at the inclusion of forward guidance as a factor as let’s face it most will be unaware of it. Indeed some of those who do follow it ( mainstream economists) started last year suggesting there would be interest-rate increases in the Euro area before diving below the parapet. There seems to be something about them and the New Year because we saw optimistic forecasts this year too which have already crumbled in the face of an inconvenient reality. Moving on you may note the language of of “support” and “helped” has taken a bit of a step backwards.

Also as Christine has guided us to 2018 we get a slightly different message now to what her predecessor told us as this example from the June press conference highlights.

This moderation reflects a pull-back from the very high levels of growth in 2017, compounded by an increase in uncertainty and some temporary and supply-side factors at both the domestic and the global level, as well as weaker impetus from external trade.

As you can see he was worried about the domestic economy too and mentioned it first before global and trade influences. This distinction matters because as we will come too Christine is suggesting that monetary policy is not far off “maxxed out” as Mark Carney once put it.

For balance whilst there is some cherry picking going on below I welcome the improved labour market situation.

Our policy stimulus has supported economic growth, resulting in more jobs and higher wages for euro area citizens. Euro area unemployment, at 7.4%, is at its lowest level since May 2008. Wages increased at an average rate of 2.5% in the first three quarters of 2019, significantly above their long-term average.

Although it is hard not to note that the level of wages growth is worse than in the US and UK for example and the unemployment rate is much worse. You may note that the rate of wages growth being above average means it is for best that the ECB is not hitting its inflation target. Also we get “supported economic growth” rather than any numbers, can you guess why?

Debt Monetisation

You may recall that one of the original QE fears was that central banks would monetise government debt with the text book example being it buying government bonds when they were/are issued. This expands the money supply ( cash is paid for the bonds) leading to inflation and perhaps hyper-inflation and a lower exchange-rate.

What we have seen has turned out to be rather different as for example QE has led to much more asset price inflation ( bond, equity and house prices) than consumer price inflation. But a sentence in the Christine Lagarde speech hints at a powerful influence from what we have seen.

 Indeed, when interest rates are low, fiscal policy can be highly effective:

Actually she means bond yields and there are various examples of which in the circumstances this is pretty extraordinary.

Another record for Greece: 10 yr government bonds fall below 1% for the first time in history (from almost 4% a year ago)  ( @gusbaratta )

This is in response to this quoted by Amna last week.

 “If the situation continues to improve and based on the criteria we implement for all these purchases, I am relatively convinced that Greek bonds will be eligible as well.” Greek bonds are currently not eligible for purchase by the ECB since they are not yet rated as investment grade, one of the basic criteria of the ECB.

Can anybody think why Greek bonds are not investment grade? There is another contradiction here if we return to yesterday’s speech.

Other policy areas – notably fiscal and structural polices – also have to play their part. These policies can boost productivity growth and lift growth potential, thereby underpinning the effectiveness of our measures.

Because poor old Greece is supposed to be running a fiscal surplus due to its debt burden, so how can it take advantage of this? A similar if milder problem is faced by Italy which you may recall was told last year it could not indulge in fiscal policy.

The main target in President Lagarde’s sights is of course Germany. It has plenty of scope to expand fiscal policy as it has a surplus. It would in fact in many instances actually be paid to do so as it has a ten-year yield of -0.37% as I type this meaning real or inflation adjusted yields are heavily negative. In terms of economics 101 it should be rushing to take advantage of this except we see another example of economic incentives not achieving much at all as Germany seems mostly oblivious to this. There is an undercut as the German economy needs a boost right now. Although there is another issue as it got a lower exchange rate and lower interest-rates via Euro membership now if it uses fiscal policy and that struggles too, what’s left?

Mission Creep

If things are not going well then you need a distraction, preferably a grand one

We also have to gear up on climate change – and not only because we care as citizens of this world. Like digitalisation, climate change affects the context in which central banks operate. So we increasingly need to take these effects into account in central banks’ policies and operations.

Readers will disagree about climate change but one thing everyone should be able to agree on is that central bankers are completely ill equipped to deal with the issue.

Comment

This morning’s release from Eurostat was simultaneously eloquent and disappointing.

In December 2019 compared with November 2019, seasonally adjusted industrial production fell by 2.1% in the
euro area (EA19)……In December 2019 compared with December 2018, industrial production decreased by 4.1% in the euro area……The average industrial production for the year 2019, compared with 2018, fell by 1.7% in the euro area

The index is at 100.6 so we are nearly back to 2015 levels as it was set at 100 and we have the impact of the Corona Virus yet to come. Actually we can go further back is this is where we were in 2011. Another context is that the Euro area GDP growth reading of 0.1% will be put under pressure by this.

In a nutshell this is why the ECB President wants to discuss things other than monetary policy as even central bankers are being forced to discuss this.

 We are fully aware that the low interest rate environment has a bearing on savings income, asset valuation, risk-taking and house prices. And we are closely monitoring possible negative side effects to ensure they do not outweigh the positive impact of our measures on credit conditions, job creation and wage income.

But central bankers are creatures of habit so soon some will be calling for yet another interest-rate cut.

Let me finish with some humour.

Governors had to stop trashing policy decisions once taken and keep internal disputes out of the media, presenting a common external front, 11 sources — both critics and supporters of the ECB’s last, controversial stimulus package — told Reuters.

Yep, the ECB has leaked that there are no leaks….

 

 

 

Greece GDP growth is a tactical success but a strategic disaster

Yesterday the Eurogroup made a statement lauding the economic progress made by Greece.

We welcome the confirmation by the institutions that Greece is projected to comfortably meet the primary surplus target of 3,5% of GDP for 2019. We also welcome the adoption of a budget for 2020, which is projected to ensure the achievement of the primary surplus target and which includes a package of growth-friendly measures aimed at reducing the tax burden on capital and labour. Greece has also made significant progress with broader structural reforms, notably in the area of the labour market, digital governance, investment licensing and the business environment.

Actually of course this is another form of punishment beating as we note that the depression ravaged Greek economy will find 3.5% of GDP subtracted from it each year. It is hard not to then laugh at the mention of “growth-friendly” measures. Moving to reform well this all started in the spring of 2010 so why is reform still needed? Indeed the next bit seems to suggest not much has been done at all.

 It will be crucial for Greece to maintain, and where necessary accelerate, reform momentum going forward, including through determined implementation of reforms on all levels. Against this background, we welcome that the Greek authorities reiterated their general commitment to continue the implementation of all key reforms adopted under the ESM programme, especially as regards the reduction of arrears to zero, recruitments in the public sector and privatisations.

Anyway they are going to give Greece some of the interest and profits they have taken off it back.

Subject to the completion of national procedures, the EWG and the EFSF Board of Directors are expected to approve the transfer of SMP-ANFA income equivalent amounts and the reduction to zero of the step-up interest margin on certain EFSF loans worth EUR 767 million in total.

What about the economy?

We have reached the stage I have long feared where any improvement is presented as a triumph. This ignores two things which is how bad matters got and how long it has taken to get here. Or to put it another way Christine Lagarde was right to describe it as “shock and awe” when she was French finance minister but in the opposite way to what she intended.

Manufacturing

This week’s PMI survey from Markit was quite upbeat.

November PMI® survey data signalled a quicker improvement in operating conditions across the Greek manufacturing sector. Overall growth was supported by sharper expansions in output and new orders. Stronger domestic and foreign client demand led to a faster rise in workforce numbers and a greater degree of business confidence.

The reading of 54.1 is really rather good at a time when many other countries are reporting declines although of course the bit below compares to a simply dreadful period.

The rate of overall growth was solid and among the sharpest seen over the last decade.

However there was some good news in a welcome area too.

In response to greater new order volumes, Greek
manufacturers expanded their workforce numbers at a steep pace that was the quickest for seven months.

Also there was some optimism for next year.

Our current forecasts point towards a faster expansion in industrial production in 2020, with the rate of growth expected to pick-up to 1.1% year-on-year.

Sadly though if we look at the previous declines even at such a rate before Maxine Nightingale would be happy.

We gotta get right back to where we started from

Retail Trade

If we switch to the official data we see that the recent news looks good.

The Overall Volume Index in retail trade (i.e. turnover in retail trade at constant prices) in September 2019, increased by 5.1%, compared with the corresponding index of September 2018, while, compared with the corresponding index of August 2019, decreased by 3.9%

So in annual terms strong growth which should be welcomed. But having followed the situation in Greece for some time I know that the retail sector collapsed in the crisis. So we need to look back and if we stay with September we see that the index ( 2015=100) was 144.5 in 2009 and 129.3 in 2010 whereas this year it was 107.3. In fact looking back the peak in September was in 2006 at 167.1 so as you can see here is an extraordinary depression which brings the recent growth into perspective.

Indeed the retail sector was one of the worst affected areas.

Trade

This is one way of measuring the competitiveness of an economy and of course is the area the International Monetary Fund used to prioritise before various French leaders thought they knew better. After such a long depression you might think the situation would be fixed but no.

The deficit of the Trade Balance, for the 9-month period from January to September 2019 amounted to 16,500.5 million euros (18,313.6 million dollars) in comparison with 15,390.6 million euros (18,139.7 million dollars) for the corresponding period of the year 2018, recording an increase, in euros, of 7.2%.

However there is a bright spot which we find by switching to the Bank of Greece.

A rise in the surplus of the services balance is due to an improvement primarily in the travel balance and secondarily in the transport and other services balance. Travel receipts and non-residents’ arrivals increased by 14% and 3.8% year-on-year respectively. In addition, transport (mainly sea transport) receipts rose by 5.5%.

Shipping and tourism are traditional Greek businesses and the impact of the services sector improves the situation quite a bit.

In the January-September 2019 period, the current account was almost balanced, while a €1.4 billion deficit was recorded in the same period of 2018. This development reflects mainly a rise in the services surplus and also an improvement in the primary and the secondary income accounts, which more than offset an increase in the deficit of the balance of goods.

In fact tourism has played an absolute blinder for both the trade position and the economy.

In January-September 2019, the balance of travel services showed a surplus of €14,032 million, up from a surplus of €12,507 million in the same period of 2018. This development is attributed to an increase, by 14.0% or €1,976 million, in travel receipts, which were only partly offset by travel payments, up by 28.0% or €450 million.

GDP

Today has brought the latest GDP data from Greek statistics.

The available seasonally adjusted data indicate that in the 3rd quarter of 2019 the Gross Domestic
Product (GDP) in volume terms increased by 0.6% in comparison with the 2nd quarter of 2019, while
in comparison with the 3rd quarter of 2018, it increased by 2.3%.

The story here is of export driven growth which provides some hope. The domestic economy shrank with consumption 0.4% lower and investment 5% lower on a quarterly basis whereas there was this on the external side.

Exports of goods and services increased by 4.5% in comparison with the 2nd quarter of 2019……….Imports of goods and services increased by 0.6% in comparison with the 2nd quarter of 2019.

Comment

At first it looks extraordinary that the Greek domestic economy could shrink on a quarterly basis but then of course we need to remind ourselves that the fiscal policy described at the beginning of this article is extraordinarily contractionary. So in essence the recovery seems to be depending rather a lot on the tourism industry. I also note that if we look at the Euro area data there is an unwelcome mention in the employment section.

The largest decreases were observed in Lithuania (-1.2%), Romania (-1.1%), Finland (-0.5%) and Greece (-0.3%).

Not what you would hope for in a recovery period.

Switching to an idea of the scale of the depression we see that in the latest quarter GDP was 49 billion Euros, compared to the previous peak in the spring of 2007 of 63.3 billion Euros ( 2010 prices). So more than 12 years later still nearly 23% lower. That is what you call a great depression and at the current rate of growth it will be quite some time before we get right back where Greece started from.

 

Where next for the Euro, the ECB and the Euro area economy?

In our new financial world where pretty much everything depends on the whims and moods of central bankers one of the main leaders is the ECB or European Central Bank. Yesterday we got one version of its future from the Governor of the Bank of Finland Ollie Rehn. So let me hand you over to his interview with the Wall Street Journal.

“It’s important that we come up with a significant and impactful policy package in September,” said Mr. Rehn, who sits on the ECB’s rate-setting committee as governor of Finland’s central bank.

“When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker,” Mr. Rehn said.

That is pretty cleat although there is are two self-fulfilling problems in trying to overshoot financial markets. The first is that you are devolving monetary policy to financial markets. The second is that markets will now adjust ( they did so yesterday as I will discuss later) so do you overshoot that as well?

According to the WSJ these are the expectations Ollie was trying to overshoot.

Analysts expect the ECB will announce next month a 0.1 percentage-point cut to its key interest rate, currently set at minus 0.4%, as well as around €50 billion ($56 billion) a month of fresh bond purchases under its quantitative easing program. The program had previously been phased out at the end of last year.

There is already an example of the “slip-sliding away” as Paul Simon would put it that I mentioned earlier as the monthly bond purchases were expected to be 30 billion Euros a month. So which one would Ollie be overshooting?

Even worse for hapless Ollie others seem to have a different set of expectations.

Investors currently expect the ECB to cut its key interest rate to minus 0.7% and to hold rates below their current level through 2024, according to futures markets. Mr. Rehn said those market expectations showed that investors had understood the ECB’s guidance.

So will he now be overshooting -0.5% or -0.7%? Actually it gets better as -0.6% is in there now as well.

The comments suggest the ECB might cut interest rates by more than expected in September, perhaps by 0.2 percentage points, and could start to purchase new types of assets, Mr. Ducrozet said.

So roll up! Roll up! Place your bets on what Ollie will be trying to overshoot. Also as no doubt you have spotted whilst he may be in Finland he wants to start turning Japanese.

Mr. Rehn said he didn’t rule out a move to purchase equities under the QE program, but that would depend on the assessment of ECB staff.

That is a pretty shocking as the ECB staff assessment will be exactly what the Governing Council wants in the manner explained by The Jam.

You want more money – of course, I don’t mind
To buy nuclear textbooks for atomic crimes
And the public gets what the public wants

As I have acquired quite a few extra followers in the last week or two let me explain the Japan reference which is that the Bank of Japan has for a while now been purchasing Japanese equities. According to its latest accounts it now holds 26.6 trillion Yen of them.

The Problem

It is highlighted by this.

To provide space for fresh bond purchases, the ECB could adjust the rules of its bond-buying program, which currently prohibit the bank from buying more than 33% of the debt of any individual eurozone government, he added.

This is an example of what ECB President Mario Draghi calls it being a “rules-based organisation”. It is until they are inconvenient and then it changes them! One of the ways it got support for the previous QE programme was the limit above bit now it will be redacted from history. How high can it go? Well one example is from my own country the UK where the Bank of England does not have country limits ( for obvious reasons) but it does have a limit of 70% for each individual Gilt-Edged bond.

The Euro

Part of the plan behind Ollie’s interview was to talk down the Euro. After all the new “currency war” style consensus is to try a grab a comparative advantage in a zero-sum game. In a small way he succeeded as the Euro fell against most currencies. But there is a catch as highlighted by this release from Eurostat today.

As a result, the euro area recorded a €20.6 bn surplus in trade in goods with the rest of the world in June 2019…….In January to June 2019, euro area exports of goods to the rest of the world rose to €1 163.3 bn (an increase of
3.2% compared with January-June 2018), and imports rose to €1 061.2 bn (an increase of 3.7% compared with
January-June 2018). As a result the euro area recorded a surplus of €102.2 bn, compared with +€103.6 bn in
January-June 2018.

As you can see in the first half of the year trade created a demand for the Euro of around 102 billion Euros which is a barrier against any sustained fall. Actually this is a German thing because if you look at the national breakdown it accounts for 112 billion of this. Other nations such as the Netherlands run large surpluses assuming we look away from the “Rotterdam Effect” but as a collective in a broad sweep they contribute very little. So we get something very awkward which is that the main exchange rate fall came when Germany switched the Dm to the Euro. Since then there has been a lot of hot air on the subject but in terms of the effective exchange rate the Euro is at 98.3 or a mere 1.7% from where it started.

In a purist form I should look at the full current account but hopefully you have the idea from the trade figures. Partly I am doing that because I have very little faith in the other numbers.

Even more awkward for the ECB would be a situation where President Trump actually goes forward with his plan to buy Greenland. He would pay Denmark in its Kroner but as it is pegged to the Euro this would raise the Euro versus the US Dollar which is presumably part of the plan.

Comment

There is a lot to consider here but let me open with looking at the real economy. It is struggling with some but not much growth. So far in 2019 economic growth has gone 0.4% and then 0.2% on a quarterly basis. The fear is that it will slow further based on what was a strength above ( Germany’s trade surplus) which right now looks a weakness or as Frances Coppola out it.

Thread. Germany has been importing demand from China for a long time.

I am not saying it is the only perspective but it is one. On this road we have found little economic growth because even if we take the view of Mario Draghi this created a mere 1.5% of extra GDP growth. On the other side of the ledger is the destruction wreaked on all long-term contracts such as pensions and bond markets by the world of negative interest-rates. Oh and the fact if it had worked we would not be here.

As to the real economy well if we return to Ollie we see that in fact his main concern is “The Precious! The Precious!”

To offset the impact on eurozone banks of a longer period of negative interest rates, the ECB could introduce a tiered-deposit system, under which only a portion of bank deposits might be subject to negative rates, Mr. Rehn said.

The ECB could also alleviate the stress on banks by sweetening the terms of new long-term loans, known as targeted longer-term refinancing operations, he said.

If the real economy merits a mention I will let you know….

As a final point this version of economic management combining “open mouth operations” with reading a Bloomberg or Reuters screen to see where markets are often involves what have become called “sauces” saying something different, so be on your guard.

Meanwhile liuk on twitter has a suggestion which we can file under QE for millennials.

#ECB STAFF WILL INCLUDE AVOCADO FOR NEW ASSET BUYING PROGRAM

It would be a bit dangerous putting them in the Helicopter Money drop though…..

 

What economic situation faces the new Greek government?

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.

Trade Problems

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.

Looking Ahead

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.

Bond Market

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.

  1. 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.
  2. Pretty much any yield is being bought these days!
  3. 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.

Comment

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%

and

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

 

 

What does a Greek bond yield below 3% tell us?

Sometimes it is good to look at things from another direction so let me start by looking at the current situation through the prism of financial markets rather than the real economy. From @tracyalloway.

Greek government bond yields below 3%

I will return to the why and therefore of this in a moment but let me first move onto the stock market. Here is an article from Forbes from Saturday.

Greece’s stock market rose sharply this week, following a big defeat of the ruling leftist coalition in Regional and Euroelections last Sunday.

The Global Shares X FTSE shares (GREK) have gained 9.10%, as most financial markets around the world lost ground. Banks were particularly strong, leading the rally.

As you can see that was different to many other equity markets and continues stronger performance this year. If we move to the ASE General Index it at 828 is just under its high for the year and is up nearly 9% this year and around 35% on a year ago.

Some Perspective

If we return to the bond market then there are two clear perspectives. The first is that we have yet another day of singing along with the Black-Eyed Peas.

Boom boom boom
That boom boom boom
That boom boom boom
Boom boom boom

We have seen yet another all-time high for the benchmark German bond or bund as the ten-year yield has fallen to -0.21%. That has something of an ominous portent for the world economy if traders are correct. As we note that this time around Greece has joined the party there are nuances.

EFSF financial assistance, part of the second programme, ran from March 2012 through June 2015. In this programme, the EFSF disbursed a total of €141.8 billion, of which €130.9 is outstanding………….Together, the EFSF and ESM disbursed €204 billion to Greece, and now hold more than half of its public debt. ( European Stability Mechanism)

So as you can see there are a lot fewer Greek bonds in circulation than there were, as they have been subsumed into EFSF/ESM system. This has had a consequence for volumes in the market as @Birdyworld points out.

When people are talking about Greek government bond yields it’s worth remembering that it’s basically not a market any more. The average month from 2001-2010 saw 42bn euros in secondary market transactions. The ENTIRE transaction volume 2011-2019 is 29bn euros.

This is a point I remember making back in the early days of the crisis when the ECB was buying Greek bonds to support the market that volumes went off the edge of a cliff. So the bond market does not tell us what it used to.

Also the stock market has improved but when we note it was previously above 5000 we can see that some context is required there too.

Manufacturing

We can continue with something of a positive gloss as we note this from earlier this morning.

The Greek manufacturing sector strengthened further in
May. Production and new order growth remained sharp,
with employment continuing to rise. Domestic and foreign
demand were still resilient as new export orders rose strongly………… Currently, IHS Markit forecasts a 3%
increase in industrial production in 2019, with the rate of
unemployment set to fall to 18.3% by the end of the year.

That was from the Manufacturing PMI release which contrary what you might think was in fact lower at 54.2 as opposed to the previous 56.6. But according to this measure there has been a sustained improvement.

The latest headline PMI figure extended the current sequence of expansion to two years.

However some care is needed because if we look at the official data the numbers have improved so far in 2019 but if we look back the two years to March 2017 we see that output is in fact a little lower than the 104.92 of back then. The current reading of 104.03 is also a fair bit lower than the around 110 of last July.

Trade Problems

This is a crucial area because this was the modus operandi of the IMF (International Monetary Fund). The problem is highlighted by these figures from the Bank of Greece.

In March 2019, the current account deficit came to €1.5 billion, up by €352 million year-on-year, as a result of an increase in the deficit of the balance of goods, and notwithstanding the improved services balance. Additionally, the primary and secondary income accounts deteriorated………..In the first quarter of 2019, the current account deficit came to €3.7 billion, up by €420 million year-on-year, as the improved services balance and primary income account only partly offset a deterioration of the balance of goods and the secondary income account.

When we consider the extent of the economic depression that Greece has been through this is a pretty shocking result. All that pain to still be in deficit. Even worse any sort of stabilisation and maybe improvement seems to come with more imports of goods.

 Imports of goods grew by 6.0% at current prices and 4.1% at constant prices. ( first quarter 2019).

The Greek shipping industry seems to be booming against the world trend but was unable to offset the higher imports.

Sea transport receipts rose by 18.9%.

Money Supply

The good news is that narrow money growth or M1 has been picking up in 2019. However at 6.3% in April it remains below that of the wider Euro area so that is not entirely heartening. The numbers were especially weak around the turn of the year so we cross our fingers for tomorrow’s economic growth release for the first quarter.

Also we need to be cautious as Greece does not have its own money supply so these are numbers which make more assumptions than usual. Central bankers will find something to cheer in this however.

According to data collected from credit institutions,(1) nominal apartment prices are estimated to have increased on average by 2.5% year-on-year in the fourth quarter of 2018, whilst in 2018 the average annual increase in apartment prices was 1.5%, compared with an average decrease of 1.0% in 2017.

If you want to see a bear market though this has provided it with the overall index being at 60.5 at the end of 2018 where 2007 =100.

Comment

There have been some changes in the Greek situation but some things look awfully familiar. From Kathimerini.

There will be no service on the Athens metro and tram from 9 p.m. on Monday as workers walk off the job to protest understaffing, cutbacks and the privatization of public transport.

Also considering its share price you might think Deutsche Bank would have better things to do than troll Greece.

Greece should not sacrifice the credibility and discipline it has earned with such sacrifice in the past few years to short-term measures, warns Ashok Aram, Deutsche Bank’s regional CEO for Europe.

The Greek economy was sacrificed on the altar of turning the public finances into a sustained surplus. It is hard to believe that it was supposed to return Greece to economic growth ( 2.1% was forecast for 2012) whereas the contraction approached 10% at times. Sometimes I have to pinch myself when I see the media proclaiming the views of those responsible for this as being of any use, but that is the world we live in. But the reality is that after a depression which contracted the economy by around a quarter we still have to look hard for clear signs of a recovery or if you prefer the shape of it is an L rather than a V.

The world can be so upside down at times that we cannot rule out we might see a Greek bond with a negative yield.

Weekly Podcast

I look at why bond yields have dropped so sharply in the past few weeks.

 

The economic depression in Greece looks set to continue

A feature of the economic crisis that enfolded in Greece was the fantasy that economic growth would quickly recover. It seems hard to believe now that anyone could have expected the economy to grow at 2% ot so per annum from 2012 onwards but the fans of what Christine Lagarde amongst others called “shock and awe” did. I was reminded of that when I read this from the International Monetary Fund on Tuesday.

Greece has now entered a period of economic growth that puts it among the top performers in the eurozone.

That is to say the least somewhat economical with the truth as this from the Greek statistics office highlights.

The available seasonally adjusted data
indicate that in the 4th quarter of 2018 the Gross Domestic
Product (GDP) in volume terms decreased by 0.1% in comparison with the 3rd quarter of 2018.

So actually it may well have left rather than entered a period of economic growth which is rather different. Over the past year it has done this.

in comparison with the 4th quarter of 2017, it increased by 1.6%.

What this showed was another signal of a slowing economy as 2018 overall was stronger.

GDP for 2018 in volume terms amounted to 190.8 billion euro compared with 187.2 billion euro for 2017 recording an increase of 1.9%.

There is a particular disappointment here as the Greek economy had expanded by 1% in the autumn of last year leading to hopes that it might be about the regain at least some of the ground lost in its depression. Now we find an annual rate of growth that is below the one that was supposed to start an up,up and away recovery in 2012. Nonetheless the IMF is playing what for it is the same old song.

We expect growth to accelerate to nearly 2½ percent this year from around 2 percent in 2018. This puts Greece in the upper tier of the eurozone growth table.

Money Supply

This has proved to be a good guide of economic trends in the Euro area so let us switch to the Bank of Greece data set so we can apply it to Greece alone. The recent peak for the narrow money measure M1 was an annual rate of growth of 7.3% in December 2017 and then mostly grew between 5% and 6% last year. But then the rate of growth slowed to 3.8% last December and further to 2.7% in January.

I am sorry to say that a measure which has worked well is now predicting an economic slow down in Greece and perhaps more contractions in the first half of this year. Looking further ahead broad money growth has slowed from above 6% in general in 2018 to 4.2% in December and 3.3% in January. This gives us a hint towards what economic growth and inflation will be in a couple of years time and the only good thing currently I can say is that Greece tends to have low inflation.

The numbers have been distorted to some extent by the developments mentioned by the IMF below but they are much smaller influences now.

 For example, customers are now free to move their cash to any bank in Greece, and the banks themselves have almost fully repaid emergency liquidity assistance provided by the European Central Bank.

The Greek banks

Even in the ouzo hazed world of the IMF these remain quite a problem.

Third, we are urging the government to do more to fix banks, which remain crippled by past-due loans. This will help households and businesses to once again be able to borrow at reasonable interest rates.

They have another go later.

Directors encouraged the authorities to take a more comprehensive, well-coordinated approach to strengthening bank balance sheets and reviving growth-enhancing lending.

There are two issues with this and let me start with how many times can the Greek banks be saved? Money has been poured again and again into what increasingly looks like a bottomless pit. Also considering they think bank lending is weak – hardly a surprise in the circumstances – on what grounds do they forecast a pick-up in economic growth?

Back on the 29th of January I pointed out that the Bank of Greece was already on the case.

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).

So the banks remain heavily impaired in spite of all the bailouts and are no doubt a major factor in this.

vulnerabilities remain significant and downside risks are rising……………. If selected fiscal risks materialize, the sovereign’s repayment capacity could become challenged over the medium term.

That would complete the cycle of disasters as about the only bit of good news for the Institutions in the Greek bailout saga is this.

The government exceeded its 2018 primary fiscal balance target of 3.5 percent of GDP,

Moving out of the specific area of public finances we see that money is being sucked out of the economy to achieve this which acts as a drag on economic growth.

The Eurogroup

It does not seem quite so sure that things are going well as it refrains for putting its money behind it at least for now. From Monday.

The finance ministers of the 19-member Eurozone have decided to postpone disbursing 1 billion euros ($1.12 billion) to Greece.

The reason for postponing the payment is that Greece has not yet changed the provisions of a law protecting debtors’ main housing property from creditors to the EU’s satisfaction. ( Kathimerini).

Euro area

The problem with saying you are doing better than the general Euro area is twofold. If we start with the specific then it was not true in the last quarter of last year and if we move to the general Greece should be doing far, far better as it rebounds from the deep recession/depression it has been in. That is not happening.

Also beating the Euro area average is not what it was as this from earlier highlights. From Howard Archer.

Muted news on as German Economy Ministry says economy likely grew moderately in Q1 & warns on industrial sector. Meanwhile, institute cuts 2019 growth forecast sharply to 0.6% from 1.1%, citing weaker foreign demand for industrial goods.

Some have been pointing out that this matches Italy although that does require you to believe that Italy will grow by 0.6% this year.

Comment

Let me shift tack and now look at this from the point of view of how the IMF used to operate. This was when it dealt with trade issues and problems rather than finding French managing directors shifting its focus to Euro area fiscal problems. If you do that you find that the current account did improve in the period 2011-13 substantially but never even got back to balance and then did this.

The current account (CA) deficit was wider than anticipated, reaching 3.4 percent of GDP (though in part due to methodological revisions). Higher export prices and strong external demand were more than offset
by rising imports due to the private consumption recovery, energy price hikes, and the large import share in exports and investment. The primary income deficit widened due to higher payments on foreign investments.

That is quite a failure for the internal competitiveness model ( lower real wages) especially as we noted on January 29th that times were changing there. So the old measure looks grim in fact so grim that I shall cross my fingers and hope for more of this.

The tourism and travel sector in Greece grew 6.9 percent last year, a rate that was three-and-a-half times higher than the growth rate of the entire Greek economy, a survey by the World Travel and Tourism Council (WTTC) has noted.

The survey illustrated that tourism accounted for 20.6 percent of the country’s gross domestic product, against a global rate of just 10.4 percent.

This means that one in every five euros spent in Greece last year came from the tourism and travel sector, whose turnover amounted to 37.5 billion euros. ( Kathimerini ).

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