A bond issue does little for the problem of plunging investment in Greece

Today brings a development which will no doubt be trumpeted across the media and it is explained by this from Reuters yesterday,

Greece will return to bond markets with a five-year issue “in the near future, subject to market conditions”, authorities said on Monday.

The sovereign has mandated BofA Merrill Lynch, Goldman Sachs International Bank, HSBC, J.P. Morgan, Morgan Stanley and SG CIB as joint lead managers for the transaction, according to a regulatory filing to the stock exchange.

The near future is today as we mull that in spite of its role in the Greek economic crisis Goldman Sachs is like the Barnacles in the writings of Charles Dickens as it is always on the scene where money is involved. As to why this is happening the Wall Street Journal explains.

Greece‘s borrowing costs have dropped to a four-month low, and Athens plans to raise up to $3.4 billion in a bond sale.

Although it is not turning out to be quite as cheap as the 3.5% hoped for.

Greece Opens Books For New 5 Year Bond, Initial Guidance For Yield 3.75-3.875% – RTRS Source ( @LiveSquawk)

Why are investors buying this?

The obvious objection is the default history of Greece but in these times of ultra low yields ~3.8% is not be sniffed at. This is added to by the Euro area slow down which could provoke more ECB QE and whilst Greece does not currently qualify it might as time passes. In the mean time you collect 3.8% per annum.

Why is Greece offering it?

This is much more awkward for the politicians and media who trumpet the deal because it is a bad deal in terms of financing for Greece. It has been able to borrow off the European Stability Mechanism at not much more than 1% yield for some time now. Actually its website suggests it has been even cheaper than that.

0.9992% Average interest rate charged by ESM on loans (Q1 2018)

Past borrowing was more expensive so the overall ESM average is according to it 1.62%. So Greece is paying a bit more than 2% on the average cost of borrowing from the ESM which is hardly a triumph. Even worse the money will have to be borrowed again in five years time whereas the average ESM maturity is 32 years ( and may yet be an example of To Infinity! And Beyond!).

So there is some grandstanding about this but the real reason is escaping from what used to be called the Troika and is now called the Institutions. The fact the name had to be changed is revealing in itself and I can understand why Greece would want to step away from that episode.
As we move on let me remind you that Greece has borrowed some 203.8 billion Euros from the ESM and its predecessor the EFSF.

The economy

We can see why the Greek government wants to establish its ability to issue debt and stay out of the grasp of the institutions as we note this from Kathimerini.

Greek Prime Minister Alexis Tsipras announced an 11 percent increase in the minimum wage during a cabinet meeting on Monday, the first such wage hike in the country in almost a decade.

Actually the sums are small.

The hike will raise the minimum wage from 586 to 650 euros and is expected to affect 600,000 employees. He also said the government will scrap the so-called subminimum wage of 518 euros paid to young employees.

There are two catches here I think. Firstly in some ways Greece is competing with the Balkan nations which have much lower average wages than we are used to. Also this reverses the so-called internal competitiveness model.

The standard mimimum monthly wage was slashed by 22 percent to 586 euros in 2012, when Greece was struggling to emerge from a recession.

A deeper cut was imposed on workers below 25 years, as part of measures prescribed by international lenders to make the labour market more flexible and the economy more competitive.

Productivity

Here we find something really rather awkward which in some ways justifies the description of economics as the dismal science. Let me start with a welcome development which is the one below.

The seasonally adjusted unemployment rate in October 2018 was 18.6% compared to 21.0% in October 2017 and 18.6% in September 2018 ( Greece Statistics Office)

But the improving labour market has not been matched by developments elsewhere as highlighted by this.

we documented that employment had started to lead output growth in the early days of the SYRIZA government. Since such a policy is unsustainable, we have to include in any consistent outlook that this process reverses and output starts leading employment again – hence restoring positive productivity growth. ( Kathimerini)

That led me to look at his numbers and productivity growth plunged to nearly -5% in 2015 and was still at an annual rate of -3% in early 2016. Whilst he says we “have to include” an improvement the reality is that it has not happened yet as this year has seen two better quarters and one weaker one. We have seen employment indicators be the first sign of a turn in an economy before but they normally take a year or so to be followed by the output indicator not three years plus. This reminds us that Greek economic growth is nothing to write home about.

The available seasonally adjusted data
indicate that in the 3rd quarter of 2018 the Gross Domestic
Product (GDP) in volume terms increased by 1.0% in comparison with the 2nd quarter of 2018, while
in comparison with the 3rd quarter of 2017, it increased by 2.2%.

If it could keep up a quarterly rate of 1% that would be something but the annual rate is in the circumstances disappointing. After all the decline was from a quarterly GDP of 62 billion Euros at the peak in 2009 whereas it is now 51.5 billion. So the depression has been followed by only a weak recovery.

More debt

I looked at the woes of the Greek banks yesterday but in terms of the nation here is the Governor of the central bank from a speech last week pointing to yet another cost on the way to repairing their balance sheets

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).

Comment

Whilst I welcome the fact that Greece has finally seen some economic growth the problem now is the outlook. The general Euro area background is not good and Greece has been helped by strong export growth currently running at 7.6%. There have to be questions about this heading forwards then there is the simply woeful investment record as shown by the latest national accounts.

Gross fixed capital formation (GFCF) decreased by 23.2% in comparison with the 3rd quarter of 2017.

The scale of the issue was explained by the Governor of the central bank in the speech I referred to earlier.

However, in order to increase the capital stock and thus the potential output of the Greek economy, positive net capital investment is indispensable. For this to happen, private investment must grow by about 50% within the next few years. In other words, the Greek economy needs an investment shock, with a focus on the most productive and extrovert business investment, to avoid output hysteresis and foster a rebalancing of the growth model in favour of tradeable goods and services.

Yet as we stand with the banks still handicapped how can that happen? Also if we return to the productivity discussion at best it will have one hand tied behind its back by as the lack of investment leads to an ageing capital stock. So whilst the annual rate of economic growth may pick up at the end of 2018 as last year quarterly growth was only 0.2% I am worried about the prospects for 2019.

It should not be this way and those who created this deserve more than a few sleepless nights in my opinion.

The ESM is being made ready to lead the next set of Euro area bailouts

Yesterday saw something of a change in the way that the Euro area would deal with a future crisis. A special purpose vehicle or SPV that was created in response to the post credit crunch crisis is expanding its role. This is the ESM or European Stability Mechanism which was the second effort in this area as the initial effort called the European Financial Stability Fund or EFSF turned out to be anything but that. However that was then and this is now at let me explain the driving force behind all of this which the EFSF highlighted in a press release on the 9th of this month.

The European Financial Stability Facility (EFSF) raised €4 billion today in a new 5-year benchmark bond, completing the EFSF’s funding needs for 2018………..The spread of the 0.20% bond, maturing on 17 January 2024, was fixed at mid swaps minus 13 basis points, for a reoffer yield of 0.258%. The order book was in excess of €5.3 billion.

As you can see it can borrow on extraordinarily cheap terms as it borrows at 0.26% for five years. Back in the day there were questions as to what interest-rate these collective Euro area institutions would be able to borrow at? We now know that they have been able to borrow if not at Germany;s rate ( it was around -0.15% on that day) at what we might consider to be a Germanic rate. Or as Middle of the Road put it.

Chirpy chirpy cheep cheep chirp

In a way it is extraordinary but amidst the turmoil these two vehicles which whilst they still have differences are treated by markets pretty much as they are one have been able to do this. From the 2017 annual report.

The ESM has a strong financial capacity. The EFSF
and the ESM together have disbursed €273 billion in
loans since inception. The ESM has an unused lending
capacity of €380 billion, after taking into account
the maximum possible disbursements to Greece.

As you can see there is still plenty of ammunition in the locker and once the Euro area switched course from punishing nations ( too late for Greece) it allowed it to trumpet things like the one below.

As a result of ESM and EFSF lending terms, our five beneficiary countries saved a total of €16.6 billion in debt service payments in 2017, compared to the assumed market cost of funding. Greece alone saved €12 billion last year, the equivalent of 6.7% of the country’s GDP.

Yet it is in fact a geared SPV which is another of its attractions until of course the day that really matters.

to ensure the preservation of the paid-in capital of €80.4 billion.1 This money was paid in by the 19 euro area countries, and is by far the largest paid-in capital of any IFI.

Okay so what changes are planned?

This was explained on Friday in Les Echos by ESM Chair Klaus Regling.

The ESM will play a more important role in financial crisis management together with the European Commission. At the beginning of the crisis, there was the troika consisting of the Commission, the ECB and the IMF. With the third programme for Greece in 2015, the ESM was added and it became a quartet. In the future, in principle, a tandem composed of the Commission and the ESM will deal with assistance programmes for countries in financial difficulty. The IMF and the ECB will play a less important role than 8 years ago.

The IMF move seems sensible on two counts. Firstly it should never have got itself involved in the Euro area in the first place as it has a balance of payments surplus. Secondly and this is of course interrelated to the first point the Euro area cannot always rely on it having a French managing director. The ECB may be more subtle as we mull whether its (large) balance sheet will be deployed in other roles? As an aside it is hardly a sign of success if you have to keep changing the names.

The banks

As we know “the precious” must always be protected in case anyone tries to throw it into Mount Doom. There are obvious issues in Greece to be dealt with.

Both Piraeus Bank and the National Bank of Greece dropped to all time record lows today. ( h/t @nikoschrysoloras )

Actually Piraeus Bank has dropped another 5% today so he could rinse and repeat his message. It seems that the triumphant last bailout is going the way of the previous triumphant bailout. Also there is my old employer Deutsche Bank which has got near to breaking the 8 Euro barrier today which will help to bring the Germans on board. Adding to the fear about its derivatives book is the allegation that some US $150 billion of the Danske money laundering scandal went through the books of  DB’s US subsidiary. Sometimes this sort of thing gets really mind-boggling as we observe the period when Danske had a bigger market capitalisation than DB partly driven by money laundering that was facilitated by DB. Do I have that right?

Anyway in the future Klaus Regling may well be stepping in. From his interview with Les Echos.

In June, we agreed that the ESM will provide the backstop. Its volume will be the same as the volume of the Single Resolution Fund. This is being built up with bank contributions and it will reach 1% of bank deposits at the end of 2023, in other words €55 to 60 billion. The decision to use this security net in case the resolution fund is insufficient has to be taken very quickly, even if the parliaments of some countries need to be consulted.

They seem to be hurrying along for some reason…..

 This will be in 2024 at the latest and it could be earlier.

Exactly how can the troubled banking sector which in relative terms is not far off as weak as it was when the credit crunch hit pay for all of this?

Italy

Regular readers will be aware that due to their astonishing track record we take careful note of official denials. Well on the 6th of October the ESM wrote to the Editor of Frankfurter Allgemeine Zeitung.

The claim that the ESM is guaranteeing Italy’s state debt is wrong. Italy has never lost access to international financial markets. Therefore, Italy has never had a rescue programme with the ESM or its temporary predecessor institution, the EFSF. For the same reason, the ESM has neither guaranteed Italy’s state debt nor has it granted Italy any emergency loans.

Of course not as Italy would have to do as it is told first and presently there is little or no sign of that. But one day…

Comment

There is a fair bit to consider here and the likely new role of the ESM is at the top. It is convenient for politicians to pass their responsibilities to technocrats as the latter can take the bad news from a country bailout. However whilst it will need to be approved by the 19 Euro area parliaments these things have a powerful tendency to turn out different to the description on the tin. Just look at the Greek bailout for example.

Whereas the banking moves seem more sotto voce in this but as we seem to be in the middle of if not a crisis a phase where we have seen bank share prices tumble we need to be on alert. It is not just the Euro area girding its loins as for example it was only a few short months ago we were noting plans for more capital for the Bank of England. It is quite an indictment of the bank bailout culture that all these years later we seem to be as David Bowie so aptly put it.

Where’s your shame
You’ve left us up to our necks in it
Time may change me
But you can’t trace time

What has happened to the Greek banks?

This week the Greek banking sector has returned to the newswires. You might think that after the storm and all the bailouts it might now be if not plain sailing at least calmer waters for it. Here is ForeignPolicy.com essentially singing along to “Happy days are here again”

The Greek banking sector has totally transformed as a result of the financial crisis. Legislation, restructuring and recapitalization have led to a sector that is now internationally recognized for its high capitalization levels and for substantial improvements in stability, governance and transparency. As Professor Nikolaos Karamouzis, Chairman of EFG Eurobank and Chairman of the Hellenic Bank Association, states, “we have been through four stress tests – no other system has been stressed as much.”

However even a view drizzled in honey could not avoid this issue.

“The question of non-performing loans in the Greek banking system is a crucial one”.
Panagiotis Roumeliotis, Chairman, Attica Bank…….About €30-35 billion is tied up in the large NPLs of some 100 companies, who are on the books of all the systemic banks.

The problem with taking sponsored content is that it steps into a universe far.far.away.

In a first for the country, Attica Bank recently securitized €1.3 billion of its bad loans. A move that could be copied by others and which its Chairman, Panagiotis Roumeliotis, says will make it “one of the healthiest banks in Greece.” Initiatives like this mean that the country’s targets for reducing NPLs are being met or exceeded.

Also I note a couple of numbers of which the first gives us perspective.

Another big challenge is recovery of deposits, which flew out of the country until restrictions were put in place in 2015. Since then, €8.5 billion has been repatriated.

Whilst that sounds a lot, compared to the decline it is not especially when we consider the time that had passed as the data here takes us to February 2017. Next comes some number crunching which is very useful for someone like me who argued all along for Greece to take the default and devalue route. Which just as a reminder was criticised by those in the establishment and their media supporters are likely to create a severe economic depression which their plan would avoid!

The 4 systemic banks have undergone 4 stress tests and 3 rounds of recapitalization since 2010, for close to €65 billion.

With all that money it is a good job they are so strong. Hold that thought please as we move to a universe beyond, far,far away.

Unlike the subprime banking crisis of other countries, the crisis in Greece wasn’t due to any particular problem in the sector. Rather, it was a consequence of the Greek sovereign debt crisis that created contagion. Coming out of that crisis, though, the sector has been transformed.

Someone seems to have forgotten all those non performing loans already.

Bringing this up to date

If we step forwards in time to the end of August suddenly we were no longer singing along to Sugar by Maroon 5. From Kathimeriini.

Greek banks Alpha and Eurobank posted weak second-quarter results on Thursday, with Alpha swinging to a loss and Eurobank barely profitable as both focus on shrinking their bad debt load.

So not exactly surging ahead and whilst the amount of support from the European Central Bank has reduced considerably we were reminded yesterday that the problem created in 2015 has not yet gone away.

On 9 October 2018 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €5.0 billion, up to and including Wednesday, 7 November 2018, following a request by the Bank of Greece.

The reduction of €0.2 billion in the ceiling reflects an improvement of the liquidity situation of Greek banks, taking into account flows stemming from private sector deposits and from the banks’ access to wholesale financial markets.

So that is good in terms of the reduction but as I pointed out above bad in that some is still required. After all Greece has now left its formal bailout albeit that the institutions still keep a very close watch on it. But even more significant was the next bit.

The ongoing improvement of the liquidity situation of Greek banks reflects the improved condition of the Greek financial system. The recent stock market developments in respect of the banking sector are not related to the soundness of Greek banks and are due to purely exogenous factors, such as rises in interest rates internationally and in Greece’s neighbouring countries in particular.”

We have learnt in the credit crunch era that the blame foreigners weapon is only deployed when things are pretty bad and a diversion is needed. Rather oddly the Financial Times seemed to be giving this some support.

The turbulent conditions have hit European banks across the continent, as declines in the value of banks’ holdings of Italian debt eat away at their capital base in a dangerous spiral known as the ‘doom loop’.

That applies to Italian banks yes and to some extent to others but I rather suspect we would know if Greek banks had been punting Italian bonds on any scale. Yesterday Kathimerini put the  state of play like this.

Greek banking stocks have lost more than 40 percent so far this year, and the selling pressure grew in recent days.

All rather different to the honey coated Foreign Policy article is it not? Also in the rush to blame others some genuine concerns are in danger of being overlooked.

. I disagree with the statement below Greek banks used 23% of their “real” Tier 1 capital reserves to support the reduction of NPEs. DTCs as a % of total regulatory capital are now ~75%. Banks “burned” EUR 6.6bn of “real” CET 1 capital to reduce their NPE’s by EUR 16.8bn. ( @mnicoletos on Twitter )

As you can see the argument here is that the Greek banks are finding that dealing with sour loans is beginning to burn through their capital. Using the numbers above suggests that each 1 Euro reduction in bad debts is costing around 40 cents. We do not know that will be the exact rate going forwards but if we take it as a broad brush suddenly the “high capitalization levels” look anything but and no doubt there are fears that the capital raising begging bowl will be doing the rounds again.

Piraeus Bank

This had tried to steal something of a march on the others but this from Reuters last week says it all.

Piraeus Bank  said plans to issue debt to bolster its capital were on track on Wednesday as Greece’s largest lender by assets faced a near 30 percent share price fall.

Quite why anyone would buy one if its bonds escapes me but that was and may even still be the plan.

Piraeus Bank’s restructuring plan, which it has submitted to supervisors at the European Central Bank, involves the issuance of debt, likely to be a Tier-2 bond, among other measures.

But if you are willing to take the red pill from The Matrix then maybe you might be a believer of this.

analysts said the 29.3 percent fall in its shares to 1.16 euros by 1020 GMT was the result of negative investor sentiment affecting the whole banking sector,

Comment

There is a fair bit to consider here but let us do some number crunching. We can start with this from Kathimerini referring to yesterday’s report from Moody’s.

The ratings agency said asset quality remains the main challenge for local lenders, with assets at end-June adding up to 291 billion euros and NPEs at 89 billion euros.

So should the Non Performing Exposures eat up capital at the rate described above that would be another 35 billion Euros or so.  That of course is a very broad brush but one might reasonably think that troubles in that area might be much more of a cause of this than blaming Italy and Turkey.

The banks index has followed up its 24 percent slump in September with a fresh 15 percent decline in the first seven sessions in October, sending the capitalization of the four systemic banks below 5 billion euros between them, from 8.7 billion at the start of the year. ( Kathimerini )

So 69 billion Euros has been poured into them according to Foreign Policy and of course rising for them to be valued at less than 5 billion Euros? As to what they were worth well here you are.

 

Greece still faces a long hard road to end its economic depression

This morning has brought a development that many of you warned about in the comments section and it relates to Greece. So with a warning that I hope you have not just eaten let us begin.

You did it! Congratulations to Greece and its people on ending the programme of financial assistance. With huge efforts and European solidarity you seized the day. ( President Donald Tusk)

There was also this from the European Union Council.

“Greece has regained the control it fought for”, says Eurogroup President as today exits its financial assistance programme. 

There is an element of triumphalism here and that is what some of you warned about with the only caveat being that the first inkling of good news was supposed to be the cause whereas that is still in the mix. So there is an element of desperation about all of this. This is highlighted by the words of the largest creditor to Greece as the European Stability President Klaus Regling has said this and the emphasis is mine.

 We want Greece to be another success story, to be prosperous and a country trusted by investors. This can happen, provided Greece builds upon the progress achieved by continuing the reforms launched under the ESM programme.

What is the state of play?

It is important to remind ourselves as to what has happened in Greece because it is missing in the statements above and sadly the media seem to be mostly copying and pasting it. As you can imagine it made my blood boil as the business section of BBC Breakfast glibly assured us that a Grexit would have been a disaster. Meanwhile the reality is of an economy that has shrunk by around a quarter and an unemployment rate that even now is much more reminiscent of an economic disaster than a recovery.

 The seasonally adjusted unemployment rate in May 2018 was 19.5%…..

The youth (15-24)  unemployment rate is 39.7% which means that not only will many young Greeks had never had a job but they still face a future with little or no prospect of one. Yesterday the New York Times put a human face on this.

When Dimitris Zafiriou landed a coveted full-time job two months ago, the salary was only half what he earned before Greece’s debt crisis. Yet after years of struggling, it was a step up.

“Now, our family has zero money left over at the end of the month,” Mr. Zafiriou, 47, a specialist in metal building infrastructure, said with a grim laugh. “But zero is better than what we had before, when we couldn’t pay the bills at all.”

The consequence of grinding and persistent unemployment and real wage cuts for even the relatively fortunate has been this.

A wrenching downturn, combined with nearly a decade of sharp spending cuts and tax increases to repair the nation’s finances, has left over a third of the population of 10 million near poverty, according to the Organization for Economic Cooperation and Development.

Household incomes fell by over 30 percent, and more than a fifth of people are unable to pay basic expenses like rent, electricity and bank loans. A third of families have at least one unemployed member. And among those who do have a job, in-work poverty has climbed to one of the highest levels in Europe.

The concept of in work poverty is sadly not unique to Greece but some have been hit very hard.

Mrs. Pavlioti, a former supervisor at a Greek polling company, never dreamed she would need social assistance…….The longer she stays out of the formal job market, the harder it is to get back in. Recently she took a job as a babysitter with flexible hours, earning €450 a month — enough to pay the rent and bills, though not much else.

She provided quite a harsh critique of the triumphalism above.

“The end of the bailout makes no difference in our lives,” Mrs. Pavlioti said. “We are just surviving, not living.”

The end of the bailout

The ESM puts it like this.

Greece officially concludes its three-year ESM financial assistance programme today with a successful exit.

The word successful grates more than a little in the circumstances but it was possible that Greece could have been thrown out of the programme. It was never that likely along the lines of the aphorism that if you owe a bank one Euro it owns you but if you owe it a million you own it.

 As the ESM and EFSF are Greece’s largest creditors, holding 55% of total Greek government debt, our interests are aligned with those of Greece……..From 2010 to 2012, Greece received € 52.9 billion in bilateral loans under the so-called Greek Loan Facility from euro area Member States.

That is quite a lot of skin in the game to say the least. Because of that Greece is not as free as some might try to persuade you.

The ESM will continue to cooperate with the Greek authorities under the ESM’s Early Warning System, designed to ensure that beneficiary countries are able to repay the ESM as agreed. For that purpose, the ESM will receive regular reporting from Greece and will join the European Commission for its regular missions under the Enhanced Surveillance framework.

Back on February 12th I pointed out this.

 It is no coincidence that the “increased post-bailout monitoring” is expected to end in 2022, when the obligation for high primary surpluses of 3.5 percent of gross domestic product expires.

As you can see whilst the explicit bailout may be over the consequences of it remain and one of these is the continued “monitoring”. This is a confirmation of my point that whilst there has been crowing about the cheap cost of the loans in the end the size or capital burden of them will come into play.

Borrowing costs will rise

After an initial disastrous period when the objective was to punish Greece ( something from which Greece has yet to recover) the loans to Greece were made ever cheaper.

Thanks to the ESM’s and EFSF’s extremely advantageous loan conditions with long maturities and low-interest rates, Greece saves around €12 billion in debt servicing annually, 6.7% of GDP every year.  ( ESM)

So Greece is now turning down very cheap money as it borrows from the ESM at an average interest-rate of 1.62%. As I type this the ten-year yield for Greece is 4.34% which is not only much more it is a favourable comparison as the ESM has been lending very long-term to Greece. This was simultaneously good for Greece ( cheap borrowing) and for both ( otherwise everything looked completely unaffordable).

For now this may not be a big deal as with its fiscal surpluses Greece will not be in borrowing markets that much unless of course we see another economic downturn. There is a bond which matures on the 17th of April next year for example. Also the ECB did not help by ending its waiver for Greek government bonds which made it more expensive to use them as collateral with it and no doubt is a factor in the recent rise in Greek bond yields. Not a good portent for hopes of some QE purchases which of course are on the decline anyway.

Comment

The whole Greek saga was well encapsulated by Elton John back in the day.

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

The big picture is that it should not have been allowed into the Euro in 2001. The boom which followed led to vanity projects like the 2004 Olympics and then was shown up by the global financial crash from which Greece received a fatal blow in economic terms. The peak was a quarterly economic output of 63.6 billion Euros in the second quarter of 2007 (2010 prices) and a claimed economic growth rate of over 5% (numbers from back then remain under a cloud). As the economy shrank doubts emerged and the Euro area debt crisis began meaning that the “shock and awe” bailout so lauded by Christine Lagarde who back then was the French Finance Minister backfired spectacularly. The promised 2.1% annual growth rate of 2012 morphed into actual annual growth rates of between -4.1% and -8.7%. Combined with the initial interest-rates applied the game was up via compound interest in spite of the private sector initiative or default.

Any claim of recovery needs to have as context that the latest quarterly GDP figure was 47.4 billion Euros. This means that even the present 2.3% annual rate of economic growth will take years and years to get back to the starting point. One way of putting this is that the promised land of 2012 looks like it may have turned up in 2018. Also after an economic collapse like this economies usually bounce back strongly in what is called a V-shaped recovery. There has been none of this here. Usually we have establishments giving us projections of how much growth has been lost by projecting 2007 forwards but not here. The reforms that were promised have at best turned up piecemeal highlighted to some extent by the dreadful fires this summer and the fear that these are deliberately started each year.

Yet the people who have created a Great Depression with all its human cost still persist in rubbishing the alternative which as regular readers know I suggested which was to default and devalue. Or what used to be IMF policy before this phase where it is led by European politicians. A lower currency has consequences but it would have helped overall.

 

 

 

 

 

Is Greece growing more quickly than the UK?

Today we return to a long running and grim saga which is the story of Greece and its economic crisis. However Bloomberg has put a new spin on it as follows.

Greece is growing faster than Britain and is outperforming it in financial markets.

Okay so let us take a deeper look at what they are saying. Matthew Winkler who is the Editor-in-Chief Emeritus of Bloomberg News, whatever that means, goes on to tell us this.

In a role reversal not even the most prescient dared to anticipate, Greece is growing faster than the U.K. and outperforming it in financial markets. ……..Now that Europe is leading the developed world in growth, productivity and job creation after the euro gained 14.2 percent last year — the most among 16 major currencies and the strongest appreciation since 2003 — Greece is the biggest beneficiary and Britain is the new sick man of Europe.

This is really quite extraordinary stuff isn’t it? Let me just mark that the author seems to be looking entirely through the prism of financial markets and look at what else he has to say.

In the bond market, Greece is the king of total return (income plus appreciation), handing investors 60 percent since the Brexit vote. U.K. debt securities lost 3 percent, and similar bonds sold by euro-zone countries gained 7 percent during the same period, according to the Bloomberg Barclays indexes measured in dollars. Since March 1, 2012, when the crisis of confidence over Greece was at its peak and its debt was trading at 30 cents on the dollar, Greek bonds have returned 429 percent, dwarfing the 19 percent for euro bonds and 10 percent for the U.K., Bloomberg data show.

Also money is flowing into the Greek stock market.

ETF flows to Europe gained 15 percent and 13 percent to the U.K. during the same period. The Global X MSCI Greece ETF, the largest U.S.-based exchange-traded fund investing in Greek companies, is benefiting from a 35 percent increase in net inflows since the 2016 Brexit vote.

Finally we do actually get something based on the real economy.

The same analysts also forecast that Greece will overtake Britain in GDP growth. They expect Greece to see its GDP rise 2.15 percent this year and 2.2 percent in 2019 as the U.K. grows 1.4 percent and 1.5 percent.

Many of you will have spotted that the Greece is growing faster than the UK has suddenly morphed into people forecasting it will grow quicker than it! This poses a particular problem where Greece is concerned and can be illustrated by the year 2012. Back then we had been assured by the Troika that the Greek economy would grow by 2% on its way to an economic recovery and the UK was back then enmeshed in “triple-dip” fears. Actually there was no UK triple dip and the Greek economy shrank by around 7% on the year before.

GDP growth

According to the Greek statistics office these are the latest figures.

The available seasonally adjusted data
indicate that in the 3rd quarter of 2017 the Gross Domestic
Product (GDP) in volume terms increased by 0.3% in comparison with the 2nd quarter of 2017, while in comparison with the 3rd quarter of 2016, it increased by 1.3%.

Thus we see that if we move from forecasts and rhetoric to reality Greece has some economic growth which we should welcome but not only is that slower than the UK in context it is really poor if we look at its record. After the severe economic depression it has been through the economy should be rebounding rather than edging forwards. I have written many times that it should be seeing sharp “V Shaped” growth rather than this “L Shaped” effort.

If we look back the GDP at market prices peaked in Greece in 2008 at 231.9 billion Euros but in 2016 it was only 175.9 billion giving a decline of the order of 24% or 56 billion Euros. That is why it should be racing forwards now to recover at least part of the lost ground but sadly as I have predicted many times it is not. Even if the forecasts presented as a triumph above come true it will be a long long time before Greece gets back to 2008 levels. Whereas the UK economy is a bit under 11% larger and to be frank we think that has been rather a poor period.

Job creation

You may note that there was a shift to Europe leading the world on job creation as opposed to Greece so let us investigate the numbers.

The number of employed persons increased by 94,071 persons compared with November 2016 (a 2.6% rate of increase) and decreased by 9,659 persons compared with October 2017 (a 0.3% rate of decrease).

I am pleased to see that the trend is for higher employment albeit there has been a monthly dip. Actually if we look further the last 3 months have seen a fall so let us hope we are not seeing another false dawn. Further perspective is provided by these numbers.

The seasonally adjusted unemployment rate in November 2017 was 20.9% compared to the upward revised 23.3% in November 2016 and the upward revised 20.9% in October 2017. The number of employed in November 2017 amounted to 3,761,452 persons. The number of unemployed amounted to 995,899 while the number of inactive to 3,242,383.

The first issue is the level of unemployment which has improved but still has the power to shock due to its level. The largest shock comes from a youth unemployment rate of 43.7% which is better than it was but leaves us mulling a lost generation as some seem set to be out of work for years to come and maybe for good. Or perhaps as Richard Hell and the Voidoids put it.

I belong to the Blank Generation, and
I can take it or leave it each time.

Before I move on I would just like to mark the level of inactivity in Greece which flatters the numbers more than a little.

Bond Markets

Last week there was a fair bit of cheerleading for this. From the Financial Times.

Greece has wrapped up the sale of a seven-year bond after a 48-hour delay blamed on international market turbulence, raising €3bn at a yield of 3.5 per cent. The issue marked the first time since 2014 that the country has raised new money. A five-year bond issue last July raised €3bn, about half of which involved swapping existing debt for longer-dated paper.

The problem is in the interest-rate as Greece has got the opportunity to borrow at a much higher rate than it has been doing! Let me hand you over to the European Stability Mechanism or ESM.

The loans, at very low-interest rates with long maturities, are giving Greece fiscal breathing space to bring its public finances in order……..Moreover, the EFSF and ESM loans lead to substantially lower financing costs for the country. That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment.

As you can see the two narratives are contradictory as we note Greece is now choosing to issue more expensively at a considerably higher interest-rate or yield. This matters a lot due to its circumstances.

They point to the debt-to-GDP ratio, which stands at more than 180%.

Comment

I would be more than happy if the Greek economy was set to grow more quickly than the UK as frankly it not only needs to be growing much faster it should be doing so for the reason I explained earlier. As someone who has consistently made the case for it needing a default and devaluation I find it stunning that the Bloomberg article claims this is a success for Greece.

 the euro gained 14.2 percent last year — the most among 16 major currencies and the strongest appreciation since 2003

After all the set backs for Greece and its people what they do not need is a higher exchange rate. Finally the better prospects for the Euro area offer some hope of better days but they will be braked somewhat by the higher currency.

The confused narrative seems to also involve claiming that paying more on your debt is a good thing. Awkward in the circumstances to be making the case for sovereignty! But the real issue is to get out of this sort of situation which is sucking demand out of the economy. From Kathimerini.

 It is no coincidence that the “increased post-bailout monitoring” is expected to end in 2022, when the obligation for high primary surpluses of 3.5 percent of gross domestic product expires.

So in conclusion there is a lot to consider here as we wish Greece well for 2018. It badly needs a much better year but frankly also more considered and thoughtful analysis as those who have suffered through this deserve much better. The ordinary Greek was mostly unaware of what their establishment was doing as it fiddled the data and let the oligarchs slip slide away from paying their taxes.

 

What is austerity and how much of it have we seen?

The subject of austerity is something which has accompanied the lifespan of this blog so 7 years now. The cause of its rise to prominence was of course the onset of the credit crunch which led to higher fiscal deficits and then national debts via two routes. The first was the economic recession ( for example in the UK GDP fell by approximately 6% as an initial response) leading to a fall in tax revenue and a rise in social security payments. The next factor was the banking bailouts which added to national debts of which the extreme case was Ireland where the national debt to GDP ratio rose from as low as 24% in 2006 to 120% in 2012.  It was a rarely challenged feature of the time that the banks had to be bailed out as they were treated like “the precious” in the Lord of the Rings and there was no Frodo to throw them into the fires of Mount Doom.

It was considered that there had to be a change in economic policy in response to the weaker economic situation and higher public-sector deficits and debts. This was supported on the theoretical side by this summarised by the LSE.

The Reinhart-Rogoff research is best known for its result that, across a broad range of countries and historical periods, economic growth declines dramatically when a country’s level of public debt exceeds 90% of gross domestic product……… they report that average (i.e. the mean figure in formal statistical terms) annual GDP growth ranges between about 3% and 4% when the ratio of public debt to GDP is below 90%. But they claimed that average growth collapses to -0.1% when the ratio rises above a 90% threshold.

The work of Reinhart and Rogoff was later pulled apart due to mistakes in it but by then it was too late to initial policy. It was also apparently too late to reverse the perception amongst some that Kenneth Rogoff who these days spend much of his time trying to get cash money banned is a genius. That moniker seems to have arrived via telling the establishment what it wants to hear.

The current situation

The UK Shadow Chancellor John McDonnell wrote an op-ed in the Financial Times ahead of Wednesday’s UK Budget stating this.

The chancellor should use this moment to lift his sights, address the immediate crisis in Britain’s public services that his party created, and change course from the past seven disastrous years of austerity.

If we ignore the politics the issue of austerity is in the headlines again but what it is has changed over time. Before I move on it seems that both our Chancellor who seemed to think there were no unemployed at one point over the weekend and the Shadow Chancellor was seems to be unaware the UK economy has been growing for around 5 years seem equally out of touch.

Original Austerity

This involved cutting back government expenditure and raising taxation to reduce the fiscal deficits which has risen for the reasons explained earlier. Furthermore it was claimed that such policies would stop rises in the national debt and in some extreme examples reduce it. The extreme hardcore example of this was the Euro area austerity imposed on Greece as summarised in May 2010 by the IMF.

First, the government’s finances must be sustainable. That requires reducing the fiscal deficit and placing the debt-to-GDP ratio on a downward trajectory……With the budget deficit at 13.6 percent of GDP and public debt at 115 percent in 2009, adjustment is a matter of extreme urgency to avoid the debt spiraling further out of control.

A savage version of austerity was begun which frankly looked more like a punishment beating than an economic policy.

The authorities have already begun fiscal consolidation equivalent to 5 percent of GDP.

But the Managing Director of the IMF Dominique Strauss-Khan was apparently confident that austerity in this form would lead to economic growth.

we are confident that the economy will emerge more dynamic and robust from this crisis—and able to deliver the growth, jobs and prosperity that the country needs for the future.

Maybe one day it will but so far there has been very little recovery from the economic depression inflicted on Greece by the policy prescription. This has meant that the national debt to GDP ratio has risen to 175% in spite of the fact that there was the “PSI” partial default in 2012. It is hard to think of a clearer case of an economic policy disaster than this form of disaster as for example my suggestion that you needed  a currency devaluation to kick-start growth in such a situation was ignored.

A gentler variation

This came from the UK where the coalition government announced this in the summer of 2010.

a policy decision to reduce total spending by an additional £32 billion a year by 2014-15, including debt interest savings;

In addition there were tax rises of which the headline was the rise in the expenditure tax VAT from 17.5% to 20%. These were supposed to lead to this.

Public sector net borrowing falls from 11.0 per cent of GDP in 2009-10 to 1.1 per cent in 2015-16. Public sector net debt is forecast to rise to a peak of 70.3 per cent of GDP in 2013-14, before falling to 67.4 per cent in 2015-16.

As Fleetwood Mac would put it “Oh Well”. In fact the deficit was 3.8% of GDP in the year in question and the national debt continued to rise to 83.8% of GDP. So we have a mixed scorecard where the idea of a surplus was a mirage but the deficit did fall but not fast enough to prevent the national debt from rising. Much of the positive news though comes from the fact that the UK economy began a period of sustained economic growth in 2012.

Economic growth

We have already seen the impact of economic growth via having some (  UK) and seeing none and indeed continued contractions ( Greece). But the classic case of the impact of it on the public finances is Ireland where the national debt to GDP ratio os now reported as being 72.8%.

Sadly the Irish figures rely on you believing that nominal GDP rose by 68 billion Euros or 36.8% in 2015 which frankly brings the numbers into disrepute.

Comment

The textbook definitions of austerity used to involved bringing public sector deficits into surplus and cutting the national debt. These days this has been watered down and may for example involve reducing expenditure as a percentage of the economy which may mean it still grows as long as the economy grows faster! The FT defines it thus.

Austerity measures refer to official actions taken by the government, during a period of adverse economic conditions, to reduce its budget deficit using a combination of spending cuts or tax rises.

So are we always in “adverse economic conditions” in the UK now? After all we still have austerity after 5 years of official economic growth.

What we have discovered is that expenditure cuts are hard to achieve and in fact have often been transfers. For example benefits have been squeezed but the basic state pension has benefited from the triple lock. Also if last years shambles over National Insurance is any guide we are finding it increasingly hard to raise taxes. Not impossible as Stamp Duty receipts have surged for example but they may well be eroded on Wednesday.

Also something unexpected, indeed for governments “something wonderful” happened which was the general reduction in the cost of debt via lower bond yields. Some of that was a result of long-term planning as the rise of “independent” central banks allowed them to indulge in bond buying on an extraordinary scale and some as Prince would say is a Sign O’The Times. As we stand the new lower bond yield environment has shifted the goal posts to some extent in my opinion. The only issue is whether we will take advantage of it or blow it? Also if we had the bond yields we might have expected with the current situation would public finances have improved much?

Meanwhile let me wonder if a subsection of austerity was always a bad idea? This is from DW in August.

Germany’s federal budget  surplus hit a record 18.3 billion euros ($21.6 billion) for the first half of 2017.

With its role in the Euro area should a country with its trade surpluses be aiming at a fiscal surplus too or should it be more expansionary to help reduce both and thus help others?

 

 

Let us continue to remember what has been inflicted on Greece

Yesterday the Financial Times revealed the results of an intriguing poll in Greece,

More than half of all Greeks agreed it was a mistake to have joined the euro. Barely a third of Greeks thought the euro wasn’t a mistake. Even among those who wanted to remain in the euro area at the end of 2015, fewer than half would have chosen to join again if given the chance to go back in time and warn their fellow citizens.

That survey took place almost two years ago. Since then, Walter finds that support for the euro has dropped by 10 percentage points.

Frankly I find it a bit of a surprise that even more Greeks do not think that joining the Euro was a mistake! But in life we see so often that some support the status quo again and again almost regardless of what it is. After all so many in the media and in my profession have sung along to Blur about Euro area membership for Greece.

There’s no other way
There’s no other way
All that you can do is watch them play

Regular readers will be aware that I have been arguing there was and indeed is another way since 2011. One of the saddest parts of this sorry saga has been the way that those who have plunged Greece into a severe economic depression accused those suggesting alternatives of heading for economic catastrophe.

If we look at the current state of play we see this.

The available seasonally adjusted data indicate that in the 2nd quarter of 2017 the Gross Domestic Product (GDP) in volume terms increased by 0.5% in comparison with the 1 st quarter of 2017, while in comparison with the 2nd quarter of 2016, it increased by 0.8%.

So economic growth but not very much especially if we note that this is a good year for the Euro area in total. So far not much of that has fed through to Greece although any signs of growth are welcome. To put this in economic terms this is an L-shaped recovery as opposed to the V-shaped one in my scenario. The horizontal part of the L is the fact that growth after the drop has been weak. The vertical drop in the L is illustrated by the fact that twice during its crisis the Greek economy shrank at an annual rate of 10% leaving an economy which had quarterly GDP of 63 billion Euros as 2008 opened now has one of 46.4 billion Euros. By anyone’s standards that is quite an economic depression.

Some good news

Here I would like to switch to what used to be the objective of the International Monetary Fund or IMF which is trade. In essence it helped countries with trade deficits by suggesting programme’s involving reform, austerity and devaluation/depreciation. The French managing directors of the IMF were never going to be keen on devaluation for Greece for obvious reasons and as to reform well you hear Mario Draghi call for that at every single European Central Bank press conference which only left austerity.

This was a shame as you see there was quite a problem. From the Bank of Greece.

In 2010, the current account deficit fell by €1.8 billion or 6.9% in comparison with 2009 and came to €24.0 billion or 10.5% of GDP (2009: 11.0% of GDP).

Even the improvement back then was bad as it was caused by this.

Specifically, the import bill for goods excluding oil and ships fell by €3.9 billion or 12.6%,

The deficit improvement was caused by the economic collapse. Now let us take the TARDIS of Dr. Who and leap forwards in time to the present.

In the January-August 2017 period, the current account improved year-on-year, as the €211 million deficit turned into a €123 million surplus.

This was driven by a welcome rise in tourism to Greece.

In August 2017, the current account showed a surplus of €1.8 billion, up by €163 million year-on-year………The rise in the surplus of the services balance is due to an improvement mostly in the travel balance, since non-residents’ arrivals and the corresponding receipts increased by 14.3% and 16.4%, respectively.

The Bank of Greece is so pleased with the new state of play that it did some in-depth research to discover that it is essentially a European thing.

In January-August 2017, travel receipts increased by 9.1%, relative to the same period of 2016, to €10,524 million. This development is attributed to a 14.5% rise in receipts from within the EU28 to €7,117 million,

I am pleased to note that my country is doing its bit to help Greece which with the weaker Pound £ might not have been expected and that Germans seem both welcome and willing to go.

as did receipts from Germany, by 29.0% to €1,638 million. Receipts from the United Kingdom also increased, by 17.7% to €1,512 million.

So finally we have some better news but there are two catches sadly. The first is that it has taken so long and the second is that Greek should have a solid surplus in terms of scale after such a depression.

Money Money Money

A sign of what Taylor Swift would call “trouble,trouble,trouble” can be found in the monetary system. The media world may have moved onto pastures new but Greece is still suffering from the capital flight of 2015.

On 26 October 2017 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €28.6 billion, up to and including Wednesday, 8 November 2017, following a request by the Bank of Greece.

The amount of Emergency Liquidity Assistance is shrinking but it remains a presence indicating that the banking system still cannot stand on its own two feet. This means that the flow of credit is still not what it should be.

In September 2017, the annual growth rate of total credit extended to the economy stood at -1.5%, unchanged from the previous month and the monthly net flow was negative at €552 million, compared with a negative net flow of €241 million in the previous month.

Also in a country where the central bank has official interest-rates of 0% and -0.4% we see that banks remain afraid to spread the word to ordinary depositors.

The overall weighted average interest rate on all new deposits stood at 0.29%, unchanged from the previous month.

Also we learn that negative official interest-rates are not destructive to bank profits and how banks plan to recover profits in one go.

The spread* between loan and deposit rates stood at 4.26 percentage points from 4.28 points in the previous month.

Comment

There is a lot to consider here but we can see clearly that the “internal devaluation” economic model or if you prefer the suppression of real wages has been a disaster on an epic scale. Economic output collapsed as wages dropped and unemployment soared. Even now the unemployment rate is 21% and the youth unemployment is 42.8%, how many of the latter will never find employment? As for the outlook well in the positive situation that the Euro area sees overall this from Markit on Greek manufacturing prospects is a disappointment.

“The latest PMI data continue to paint a positive
picture of the Greek manufacturing sector, with the
headline PMI signalling an improvement in
business conditions for the fifth month in
succession……….There was, however, a notable slowdown in output growth, which poses a slight cause for concern
going forward.

A bit more than a slight concern I would say.

Meanwhile I note that the media emphasis has moved on as this from Bloomberg Gadfly indicates.

Greece is taking a step closer to get the respect it deserves from Europe.

It is how?

Yields on the country’s government bonds, which have already taken great strides lower this year, hit a new low last week on news the government is preparing a major debt swap.

I have no idea how the latter means the former but let us analyse the state of play. Lower bond yields for Greece are welcome but are currently irrelevant as it is essentially funded by the institutions and mostly by the European Stability Mechanism. There are in fact so few bonds to trade.

So Greece will have an opportunity to issue debt more expensively than it can fund itself via the ESM now? Why would it do that? We come back to the fact that it would get it out of the austerity programme! Not quite the Respect sung about by Aretha Franklin is it?