Monte Paschi symbolises the economy of Italy

There is a saying that history does not repeat but it does rhyme. Well it faces a challenge from the world’s oldest bank where we keep facing the same situation. You might think that after all the bailouts  Monte Paschi Di Siena is done, but as ever another twist arrives.

LONDON/MILAN (Reuters) – Italy is working on a plan to take on about 14 billion euros ($17 billion) of UniCredit’s impaired loans to make a takeover of state-owned Monte dei Paschi more attractive for the country’s second-biggest bank, sources told Reuters.

This is all rather familiar as we look back as there never seems to be quite enough money to cover the problems. Reuters summarises the most recent bailout before this one.

Rome spent 5.4 billion euros in 2017 to rescue the loss-making Tuscan bank, which now needs up to another 2.5 billion euros, giving fresh urgency to efforts to cut Italy’s 64% stake as agreed with European Union authorities.

After warning its capital reserves would breach minimum thresholds in the first quarter, MPS must tell the ECB by the end of January how it plans to address the shortfall.

For the Italian taxpayer there is an element of robbing Peter to pay Paul about all of this.

Bad loan manager AMCO, which is backed by Rome and run by former UniCredit executive Marina Natale, is looking to hoover up around 60% of UniCredit’s problem debts while also ridding Monte dei Paschi of some high-risk loans, two sources said on condition of anonymity.

The plan is part of measures being readied by the Treasury in order to press ahead with the sale of MPS, whose plight has come to symbolise Italy’s long-running banking crisis.

Yes we have another bank bad loan manager in Italy which to be fair is a booming business. Regular readers will recall Atlante I and II which were sometimes called Atlas and to be fair the image of trying to hold up the whole world must have been how they felt. Things there just went from bad to worse. Or rather from declared triumph to bad to worse. So the banking private sector effort turned into a state backed one.

AMCO, a state-backed bad loan manager, has gone from bit player to one of the leading forces in Italy’s 330 billion euro ($390 billion) bad debt market in the space of three years with over 33 billion euros in assets under management.

Swamped by bad debts from the last financial crisis, Italy in 2016 put the Treasury in control of AMCO, expanding its remit beyond managing the problem loans of failing Banco di Napoli for which it had been created two decades earlier.

This is not the last of the problems here as back on December 2nd we looked at this from parmapress24.

WHO CAN ASK FOR DAMAGES  – Apart from those who were constituted in the process (and who will not have to – for now – do anything), all those who are or have been holders of shares in Banca Monte Paschi di Siena can make a claim  between 2008 and 2015 and those shareholders who resold the bank’s securities in the period in question , accusing a significant loss of assets.

I have to confess the first thought that brings to mind was the claim by the previous Prime Minister Matteo Renzi that Monte Paschi was a “good investment”. Anyway there is another issue for the Italian taxpayer from this.

To address the costly legal risks stemming from MPS’s ill-fated acquisition of rival Banca Antonveneta in 2007, the Treasury is working with its advisers on three options.

These would entail either a “guarantee scheme” or alternatively some kind of “insurance contract” with cash as collateral, one of the sources said.

Another option is a subordinated loan whose principal could be wiped off under certain circumstances, the source added.

Interesting as “certain circumstances” have so far happened 100% of the time where Monte Paschi is concerned. Reuters pins down an amount.

Sources have said the foundation and MPS could consider a settlement that would see 3.8 billion euros in damage claims dropped in exchange for shares in the bank.

I have seen 10 billion Euros quoted before and again the track record is that the higher amounts come into play and sometimes they are not high enough.

This will also drove a Jose Mourinho sized bus through the European Union banking and competition rules. But it is the same EU via the European Central Bank which is pressing Italy to sort this out.

Along the way Unicredit will get quote a few billion Euros of sweeteners. Also as more banks are merged into it then it will become exactly the Too Big To Fail or TBTF institution we are supposed to be trying to avoid.

Italy’s Economy

We can look at this as a case of this was then and that is now. The then was Italy’s statistical office on the 22nd of December.

In December 2020, the respondents became more optimistic again, so the consumer confidence bettered from 98.4 to 102.4……..As for the business confidence climate, compared to the previous month, the index (IESI, Istat Economic Sentiment Indicator) showed a new significantly improvement, rising from 83.3 to 87.7.

Whereas yesterday’s Markit PMI business survey told a very different story.

The Composite Output Index* posted 43.0 in December to
signal a third successive contraction in Italian private sector output. The index figure was little-changed from November’s 42.7 and signalled another marked decline overall, which was again driven by the services sector.
A further reduction in new orders at Italian companies
was also recorded in December. The rate of decline eased
noticeably on the month, but was still sharp.

There was a minor rally in construction reported this morning but frankly a reading of 50.5 means treading water.

As you can see below the further slow down is also affecting the labour market.

Amid ongoing weakness in demand, firms made further
cuts to their staffing levels during December, extending the
current sequence of falling employment to ten months. That
said, the rate of job shedding eased since November and was modest.


As Elton John would say this is a sad.sad situation ( the economy) and it’s getting more and more absurd ( the banks). If we start with the former then the official Italian forecast for the Euro area is below.

GDP in the euro area is expected to fall again in Q4 by -2.7% with a decline by -7.3% in 2020 compared to the previous year. Given the assumptions mentioned above, GDP should recover by +0.7% in Q1 and +3.0% in Q2.

As events have moved on we now face another contraction in Q1 as we see something I have consistently warned about. When forecasters do not know they automatically predict growth/ Sadly in line with our “Girlfriend in a coma” theme Italy looks set to under perform.

Switching to the banks they do not even get any particular asset based relief from house prices.

According to preliminary estimates, in the third quarter of 2020, the HPI (see Italian IPAB) decreased by 2.5% compared with the previous quarter and increased by 1.0% compared with the same quarter of the previous year (it was +3.3% in the second quarter)………The decrease on quarterly basis of HPI was only due to the prices of existing dwellings (-3.2%), while prices for new dwellings increased (+1.1%).

In many ways this is admirable as younger Italians do not face the house price surges seen elsewhere as prices are below those of a decade ago with an index now of 105.6 as opposed to the 118.1 of 2010. Although they would need a job.

From the point of view of the ECB though this is a complete disaster as we have official interest-rates at -0.5% and -1% for the banks as well as a QE driven five-tear yield of -0.1%. But house prices do not respond.






Christine Lagarde has left another economic disaster behind her in Argentina

One of the rules of modern life is that the higher up the chain you are or as Yes Prime Minster put it “the greasy pole” the less responsible you are for anything. A clear example of that is currently Christine Lagarde who is on here way to becoming the next President of the European Central Bank and found her competence being praised to the heavens in some quarters. Yet the largest ever IMF programme she left behind continues to fold like a deckchair. From the Argentina central bank or BCRA this morning via Google Translate.

Measures to protect exchange-rate stability and the saver

There are two immediate perspectives. The first is that we need to translate the announcement which suggests as a minimum a modicum of embarrassment. Next when central banks tell you that you are being protected it is time to think of the strap line of the film The Fly.

Be Afraid, Be Very Afraid

Let us look at the detail.

The measure establishes that exporters of goods and services must liquidate their foreign exchange earnings in the local market……Resident legal entities may purchase foreign currency without restrictions for the importation or payment of debts upon expiration, but they will need compliance from the Central Bank of the Argentine Republic to purchase foreign exchange for the formation of external assets, for the precancelation of debts, to turn abroad profits and dividends and make transfers abroad.

So some restrictions on businesses and here are the ones on the public.

Humans will not have any limitations to buy up to USD 10,000 per month and will need authorization to buy amounts greater than that amount. Transactions that exceed USD 1,000 must be made with a debit to an account in pesos, since they cannot be carried out in cash. Nor will it be allowed to transfer funds from accounts abroad of more than USD 10,000 per person per month. Except between accounts of the same owner: in this case there will be no limitations.

If you are not Argentinian then the noose is a fair bit tighter.

Non-resident human and legal persons may purchase up to USD 1,000 per month and may not transfer funds from dollar accounts abroad.

What about the debt?

We need a bit of reprogramming here after all it has been party-time for bondholders in most of the world. However as Reuters points out not in Argentina.

Standard & Poors announced on Thursday that it was slashing Argentina’s long-term credit rating another three notches into the deepest area of junk debt, saying the government’s plan to “unilaterally” extend maturities had triggered a brief default. The ratings agency said it would consider Argentina’s long-term foreign and local currency issue ratings as CCC- “vulnerable to nonpayment” – starting on Friday following the government’s Wednesday announcement that it wants to “re-profile” some $100 billion in debt.

That’s more than a bit awkward for those who bought the 100 year bond which was issued in 2017. It was also rather difficult for the IMF which seems to have found itself in quicksand.

By the time Treasury Minister Hernan Lacunza said on Wednesday that the government wanted to extend maturities of short-term debt, and would negotiate new time periods for loans to be paid back to the International Monetary Fund, a debt revamp was already widely expected.

We will have to see how the century ( now 98 year ) bond does but after being issued at 85 it traded at 38 last week. In a sign of the times even the benchmark bond which in theory pays back 100 in 2028 did this.

The January 2028 benchmark briefly dropped under 40 cents for the first time ever before edging up to trade at 40.3.

For perspective Austria also issued a century bond at a similar time and traded at 202 last week.

The Peso

Back on August 12th I pointed out that it took 48.5 Pesos to buy a single US Dollar ahead of the official opening. Things went from bad to worse after the official opening with the currency falling into the mid-50s in a volatile market. On Friday it closed at 59.5 and that was after this.

The central bank has burnt through nearly $1 billion in reserves since Wednesday in an effort to prop up the peso. But the intervention did not have the desired impact and risk spreads blew out to levels not seen since 2005, while the local peso currency extended its year-to-date swoon to 36%. ( Reuters ).

If we stay with the issue of reserves I note that the BCRA itself tells us that as of last Wednesday it had US $57 billion left as opposed to this from my post on August 12th.

But staying with the central bank maybe it will be needing the US $66.4 billion of foreign exchange reserves.

I was right and the nuance here is shown by how little of the reserves were actually deployable in a crisis. We know 14% were used and at most 20% have now been used yet policy has been forced to change. That is a common theme of a foreign exchange crisis you only end up being able to use if I an generous half of your reserves before either you press the panic button or someone does it for you.


Here we see another departure from the world-wide trend as rather than falls we are seeing some eye-watering levels. Back on August 12th I noted an interest-rate of 63.71% whereas now it is 83.26%. This provides another perspective on the currency fall because you get quite decent return for these times if you can merely stay in the Peso for a week or two.

As for the domestic economy such an interest-rate must be doing a lot of damage because of the length of time this has lasted for as well as the number now.


As recently as June 7th last year the IMF announced this.

The Argentine authorities and IMF staff have reached an agreement on a 36-month Stand-By Arrangement (SBA) amounting to US$50 billion (equivalent to about SDR 35.379 billion or about 1,110 percent of Argentina’s quota in the IMF).

The amount has been raised since presumably because of the rate of access of funds. If you look at the IMF website it has already loaned just short of 33 billion SDRs. Meanwhile here is some gallows humour from back then.

The authorities have indicated that they intend to draw on the first tranche of the arrangement but subsequently treat the loan as precautionary.

As Christine Lagarde was cheerleading for this she did get one thing right.

I congratulate the Argentine authorities on reaching this agreement

They kept themselves in power with the help of IMF funds. That has not gone so well for the Argentine people not the shareholders of the IMF. There are similarities here with the debacle in Greece where of course Christine Lagarde was heavily involved in the “shock and awe” bailout that contributed to an economic depression. For example as 2018 opened the IMF forecast 2.5% economic growth for it and 2.8% this year as opposed to the reality of the numbers for the first quarter being 5.8% lower than a year before.

Yet as recently as April she was telling us this.

When the IMF completed its third review of Argentina’s economy in early April, managing director Christine Lagarde boasted that the government policies linked to the country’s record $56bn bailout from the fund were “bearing fruit”.

It is not an entirely isolated event as we look at other IMF programmes.

Pakistan Rupee -4.83% seems IMF’s (Lagarde’s) lesser-known second success story. Eurozone you are next up ( @Sunchartist )

But the official view has been given by Justin Trudeau of Canada who has described Christine Lagarde as a “great global leader.”


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.


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 ).

The Investing Channel



It is all about the banks yet again

If there is a prime feature of the credit crunch in the financial world it is the woes and travails of the banks. That is quite an anti-achievement when you consider that if you count from the first signs of trouble at the mortgage book of Bear Stearns we are now in out second decade of this period having lost one already. Before we come to today’s main course delightfully prepared first by chefs in Italy and then finished off in Brussels I have a starter for you from the UK.

The Co-op Bank

Back on the 13th of February I gave my views on this institution being put up for sale.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis……..Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

Since then we have had regular reports in places like the Financial Times that a deal was just around the corner whereas I feared it might end up in the hands of the Bank of England. This morning has come news that the ill-fated sale plans have been abandoned and replaced by a doubling-down by the existing investors. From Sky News.

The beleaguered Co-operative Bank is closing in on a £700m rescue deal with US hedge funds amid ongoing talks about the separation of the vast pension scheme it shares with the Co-op Group.

Much of the issue revolves around funding the pension scheme and if I was worker at the Co-op I would be watching that like a hawk. Also the name may need some review as the shareholding of the Co-operative group falls below 5%.

We have also seen in the UK how a bailed out bank boosts the economy in return for taxpayers largesse. From Reuters.

British lender Royal Bank of Scotland (RBS.L) is planning to cut 443 jobs dealing with business loans and many of them will move to India, the bank said

The Veneto Banks

As we move from our starter to the main course we find ourselves facing a menu which has taken nearly a decade to be drawn up. The Italian response to the banking crisis was to adopt the ostrich position and ignore it for as long as possible. Indeed for a while the Italian establishment boasted that only 0.2% of GDP ( Gross Domestic Product) had been spent on bank bailouts compared to much higher numbers elsewhere. Such Schadenfreude came back to haunt them driven by one main factor which was the rise and rise of non-performing loans in the Italian banking sector which ended up with more zombies than you might expect to see in a Hammer House of Horror production. Even worse this was a drag on the already anaemic Italian rate of economic growth meaning that its economy is now pretty much the same size as when it joined the Euro.

There has been a long program of disinformation on this subject and I am sure that regular readers will recall the claims that Monte Paschi was a good investment made by then Prime Minister Matteo Renzi. There have also been the regular statements by Finance Minister Padoan along the lines of this from Politico EU in January.

Italian Finance Minister Pier Carlo Padoan has defended the way his country dealt with its banking crisis, saying the government had “only spent €3 billion” on bailouts, in an interview with Die Welt published today.

If we are being ultra polite that was especially “odd” as Monte Paschi was in state hands but of course over this weekend came more woe for Padoan. From the European Commission.

On 24 June 2017, Italy notified to the Commission its plans to grant State aid to wind-down BPVI and Veneto Banca. The measures will enable the sale of parts of the two banks’ activities to Intesa, including the transfer of employees. Italy selected Intesa Sanpaolo (Intesa) as the buyer in an open, fair and transparent sales procedure:

I will come to the issue of Intesa in a moment but let us first look at the cost to Italy from this.

In particular, the Italian State will grant the following measures:

  • Cash injections of about €4.785 billion; and
  • State guarantees of a maximum of about €12 billion, notably on Intesa’s financing of the liquidation mass. The State guarantees would be called upon notably, if the liquidation mass is insufficient to pay back Intesa for its financing of the liquidation mass.

This has opened up a rather large can of worms and as Bloomberg points out we can start with this.

Rome will effectively by-pass the EU’s “single resolution board” which is supposed to handle bank failures in an orderly way and the “Banking Recovery and Resolution Directive,” which should act as the euro zone’s single rulebook.

Why? Well as we have looked at before there was the misselling of bonds to retail investors.

The government could have taken a less expensive route, involving the “bail in” of senior bondholders. It chose not to: Many of these instruments are in the hands of retail investors, who bought them without being fully aware of the risks involved. The government wants to avoid a political backlash and the risk of contagion spreading across the system.

Privatisation of profits and socialisation of losses yet again. Also only on the June 8th we were told this.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks

Good job they said no as they would have been over 3 billion short! Oh and Padoan described the problems as “exaggerated” whereas if we return to reality this was always the real problem.

A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.


This seems to have got something of a free lunch here provided courtesy of the Italian taxpayer. From Reuters.

The government will pay 5.2 billion euros ($5.82 billion) to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of the banks.

So it can clear up the mess? Er not quite.

will leave the lenders’ good assets in the hands of Intesa,

So it is being paid to take the good bits. Heads it wins if things turns out okay and tails the Italian taxpayer loses if they do not as it will use the guarantees. Also as you can see it seems to have thought of everything.

You think Santander made a killing with Pop until you realise will even make the state pay for the redundancy package of V&V staff ( @jeuasommenulle )

It may even be able to gain from some Deferred Tax Assets but chasing down that thread is only in very technical Italian.


There is much to consider here so let me open with the two main issues. The European Banking Union has just been torpedoed by the Italian financial navy. The promised bail in has become a bailout. Next comes the issue of how much all the dilatory dithering has cost the Italian taxpayer? As in the end the cost is way above the sums that Financial Minister Padoan was calling “exaggerated”. I note that BBC Breakfast called the cost 5 billion Euros this morning ignoring the 12 billion Euros of guarantees which no doubt Italy in a by now familiar attempted swerve will try to keep it out of the national debt numbers. Although to be fair Eurostat has mostly shot down such efforts.

Over the next few days we will no doubt be assailed with promises that the money will come back. For some it already has. From the FT.

Intesa Sanpaolo, the country’s strongest lender that will take over the failed banks’ good assets, was the second biggest riser on the eurozone-wide Stoxx 600 index. Shares in the bank were up 3.6 per cent at publication time, to €2.71.






The Greek crisis continues on its road to nowhere

Yesterday on my way to looking at the UK Public Finances I pointed out that Greece had a national debt to GDP ratio of 179% at the end of 2016. This came with some cheerleading from the Institutions ( they used to be called the Troika until the name became so damaged) and some of the media about a budget primary surplus of 4.2% of GDP although if we put debt costs back in the surplus shrinks to 0.7%. You may recall that the PSI or Private-Sector Involvement of 2012 was supposed to bring the debt position under control but the ongoing economic depression blew that out of the water as the economy tanked and debt rose.

A consequence of this situation is that as we head to the heights of summer Greece will need yet more funding as it has debt repayments to make. Actually repayments is too strong a word as the debt will in fact be rolled from one Euro area institution to another. Bloomberg updates us on the issue.

The heavily indebted Mediterranean nation needs the next installment of about 7 billion euros ($7.6 billion) to repay lenders in a few months

It always turns out like this as this is a road we have been down more than once.

The IMF says two conditions must be met before it co-finances the country’s ongoing third bailout. First, Athens must agree to a set of credible reforms, particularly of its pension and tax systems. Second, the IMF insists that the euro area ease Greece’s debt burden.

This is all so familiar as we are always told there has been great success on reform yet somehow more is always needed! Also the debt burden needs easing yet again.

Debt relief

The problem here comes from the number below.

The latest figures show Greece’s debt stands at 179 percent of its gross domestic product, or about 315 billion euros….. Currently the country owes about 216 billion euros to the European Stability Mechanism, the euro-area bailout fund (and its predecessor), as well as to other euro-area countries.

At the beginning of the saga Greece faced high interest costs as the theme was as US Treasury Secretary Timmy Geithner pointed out was one of punishment. This only made things worse as the economy shrunk further so the PSI was enacted. The flaw was that the ever-growing amount of debt held by the Euro area and IMF was excluded from any write-down as we muse the first rule of ECB club which is that it must always be repaid. As this ballooned an alternative more implicit rather than explicit debt relief programme was put in place . From the ESM ( European Stability Mechanism).

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. Greece will not have to start repaying its loans to the ESM before 2034, for instance.

It calculates the savings for Greece as follows.

Thanks to the debt relief measures approved by the Eurogroup, the Greek government saved an equivalent of 49% of its 2013 GDP. This includes savings of 34% of GDP thanks to eased conditions on EFSF loans to Greece.

You may note that Greece is always “saving” money and yet the debt burden gets worse. A clue to that is the section on economic progress which trumpets the current account, fiscal deficit and something which apparently the IMF needs to be told.

Greece has made major progress in carrying out structural reforms – it is the best performing economy in terms of implementing OECD recommendations on structural reforms.

Somehow it misses out what now must be called the Great Economic Depression which has ravaged the Greek economy. Also is this one of the reforms?

The government is preparing to honor a pledge to offer permanent status to civil servants in key posts of the public sector, Kathimerini understands, with legislation boosting their rights expected to head to Parliament soon.


Also a board member showed the confusion with this sentence in a speech on the 6th of March.

As the Eurogroup chairman Jeroen Dijsselbloem said, there is no immediate liquidity squeeze over the next months, but that does not mean that Greece does not need money.


The medicine

In spite of where we stand this remains the same as the FT points out.

Greece agreed this month to adopt measures that would improve its primary budget surplus – before paying debt servicing costs – by 2 per cent of gross domestic product.

It is a bit like the old-fashioned treatment of bleeding the patient where it was reported a success but sadly the patient died isn’t it? As usual the rhetoric is being revved up and last night Prime Minister Tsipras was doing exactly that although I note he has passed the responsibility for the changes to the next government.

The measures would be divided roughly equally between cuts in pensions due to be made in 2019 followed by a sharp reduction of the income tax threshold in 2020. But they could be implemented earlier if the budget surplus target veers off-track.

What is the economic outlook for Greece?

The background is favourable as the overall picture for the Euro area is good. However the business surveys do not seem to have picked this up. From the Markit PMI.

At 46.7 in March, down from 47.7 in February, the latest figure signalled a seventh successive deterioration in Greek manufacturing sector conditions. The rate of decline accelerated from the previous month, and was marked overall. Underlying the latest contraction was a sharp fall in new order intakes

There is a clear difference here with the official data which tells us this for January and February combined.

3.7% (rise) in the Manufacturing Production Index.

The official view is pretty much what it has been for the last five years.

Looking forward, the Bank of Greece expects GDP to grow by around 2.5% in 2017, although a downward revision of the December 2016 forecasts is likely due to the negative carry-over effect of the sharp decline in output in Q4 2016 (attributed mainly to the decline in gross fixed capital formation and government consumption). Downside risks to the economic outlook exist related to delays in the conclusion of the second review of the Programme, the impact of increased taxation on economic activity and reform implementation.

The situation regarding bank deposits in Greece is complex because the definition has changed however I note that the ECB gave Greece an extra 400 million Euros of Emergency Liquidity Assistance last month. So the money which left in 2015 has remained abroad. The latest bank lending survey of the Bank of Greece tells us this.

The demand for total loans remained also unchanged during the first quarter of 2017


This saga has been an economics version of Waiting for Godot. The price of Godot never arriving has been this.

The seasonally adjusted unemployment rate in January 2017 was 23.5% compared to 24.3% in January 2016 and the upward revised 23.5% in December 2016…….

Yes it has fallen a bit but if we compare to the pre credit crunch low of 7.9% you get an idea of the scale of the issue. Also this now defines long-term unemployment especially for the young ( 15-24 ) where nearly half ( 48%) are unemployed.

As the band strikes up a familiar tune and we see claims of reform and progress I think this from Elvis is appropriate for Greece.

We’re caught in a trap
I can’t walk out
Because I love you too much baby

Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

We can’t go on together
With suspicious minds
And we can’t build our dreams
On suspicious minds



What is happening to the banking sector of Italy?

2016 has seen an outbreak of bad news for equities combined with falls in commodity and oil prices with yesterday seeing quite wild swings in both. However tucked away behind the noise generated has been a development which I have mentioned on here for several years and it concerns the Italian banking system. Just over four years ago when I was writing for Mindful Money I discussed the problems of Unicredit which was suffering back then as a result of its holdings in Italian government bonds and as a result of its lending in foreign currencies ( Euros and Swiss Francs) to mortgage and business borrowers in Eastern Europe. I summarised the latter as shown below.

And also that lending in foreign currencies to individuals and businesses in other nations, particularly in Hungary, was going wrong. I highlighted the way that the Hungarian Forint had hit a new low against the Euro and that in spite of moves by the Swiss National Bank it was heading lower against the Swiss Franc too. This means that those who borrowed in Swiss Francs and Euros but repay in Hungarian Forints have a problem which means that the lender also has a problem.

The Hungarian government has made changes in the meantime to address this issue but mostly the burden was switched to the banks in the intervening four years. However the exchange-rate issue did not go away as back then 321 Hungarian Forints bought one Euro and 314 do today so only a minor change. Those who had foreign currency mortgages in Hungary must have hoped for more from the QE and hence currency depreciation plans of European Central Bank President Mario Draghi, oh and mark that name as it will be reappearing.

There was a general issue with Italian banks and foreign currency mortgages in Eastern Europe which caused both losses and problems for the borrowers and the banks. For those who hoped that bankers might have learnt well there was a sit-in yesterday at a bank in Moscow on this very subject! That will not have been helped by a further 3% decline in the Ruble overnight.

There have also been issues created by the economic problems of Italy which has been in it sown lost decade pretty much since it joined the Euro. The October 2014 banking stress tests showed problems at 9 Italian banks which according to the Bank of Italy told us this.

The results confirm the overall resilience of the Italian banking system

Oh okay but we saw some other familiar names in the detail.

Taking account of these measures the potential shortfalls are reduced from €3.3 billion to €2.9 billion  and concern two banks: Banca Carige and Banca Monte dei Paschi di Siena, which have been under scrutiny by the Bank of Italy for some time.

The name of Banca Monte dei Paschi di Siena is believed to be the world’s oldest bank and has figured a lot in the credit crunch era which if you follow the official view must be a continual and repeating surprise.

Reports that Monte Paschi is fine have invariably been followed by a requirement for yet more capital. Back in January 2013 the Governor of the Bank of Italy assured viewers on CNBC that there was “no question that the bank is stable”

We now arrive at a situation where there is increasing concern over the level of non-performing loans at Italian banks with Bloomberg calculating that 5 of them have an NPL to total loan book ratio of over 20%. This leads people to wonder how many of these are permanent. Oh and top of the list at 32.8% is our old friend Monte Paschi!

What about the new Euro area banking rules?

These are in effect bail-in rules and have been summarised by the Financial Times thus.

Crucially, those rules became tougher on January 1 when new legislation kicked in requiring 8 per cent of a bank’s liabilities to be wiped out before public money can be used.

Back on the 21st of December I discussed how Portugal made a dash ahead of these changes leading to punishment for bondholders at Novo Banco which was supposed to be a good bank! Well Italy made a not dissimilar dash which is odd when officially there was no problem isn’t it? From Reuters.

Italy saved Banca Marche, Banca Etruria, CariChieti and CariFe at the end of November, drawing 3.6 billion euros from a crisis fund financed by the country’s healthy lenders.

This posed its own questions but also had a knock-on effect as in the “dash for yield” in which we live advisers had persuaded retail investors to buy these bonds. No doubt the original plan was that it would hit only the institutional ones and to some extent be masked. Instead the backlash goes on.

Mario Draghi to the rescue

The President of the ECB pops up quite a few times in the Italian banking saga. We can start with his “everything it takes (to save the Euro)” speech in the summer of 2012 which has led on a road which includes 60 billion Euros a month of QE and interest-rates of -0.3%. This has already indirectly helped the Italian banking sector via the way that there have been considerable capital gains on their holdings of Italian government bonds. Will Mario be tempted today to further extend the QE criteria such that the ECB will shift problem assets off the backs of the banks and onto the Italian and Euro area taxpayers? The 146 billion Euro purchases of covered or mortgage bonds must have been a help to Italian banks although they are spread over the Euro banking system.

If we look further back in time we see that the law covering Italian financial markets is often called the Draghi Law and we note that around the turn of the century he was Director General of the Italian Treasury. Then he went to Goldman Sachs which was busy designing derivatives for Italy and Monte Paschi as well as Greece before returning to head the Bank of Italy. So if there is a crime his fingerprints are all over it.

Share prices

So far we have seen many share prices fall but there is plenty of food for thought in this below from Macrocredit.

MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn

A very new style of stability! It fell some 22% yesterday but it has rallied today such that it is now only down 48% so far this year. If we look wider we see that there is speculation of a bailout with the Italian Prime Minister on the wires saying the share price is “incredible”. The Financial Times puts the state of play thus.

One senior Italian official familiar with the negotiations told the FT that a deal on the so-called “bad bank” plan, which involves guaranteeing hundreds of billions of euros of bad loans weighing down banks’ balance sheets, must be concluded in the coming days or weeks otherwise the whole initiative will collapse.


The situation over the past few years has been littered with official denials about the problems that the banking sector of Italy faces, and we know what that means. Such things come to the forefront at times like this especially as we note rumours of deposit withdrawals. Will Mario Draghi try a technical change to ECB rules later today to help or will the Italian government finally formalise its plans for a bad bank? Either way the bullish case is for a socialisation of bad private-sector assets which should worry both Italian and Euro area taxpayers.

As things develop I would like to remind you of my thirteen point plan which covers banking bailouts and how they develop.

1. The Board issues a statement accusing bloggers of spreading both irresponsible and factually incorrect rumours as the bank is sound and has no need of new capital.

2. The Bank issues a statement of confidence in its management.

3. The Bank tries to raise more private capital in spite of it having no need for it.

4. If this does not work the relevant government(s) express(es) complete confidence in the bank and tell us that it has a sound management structure and business model. Indeed the bank had only recently been giving the government advice as to how to run the public-sector more efficiently.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

9. Debt costs of the relevant sovereign nation or nations rise.

10. Consequently that nation finds that its credit rating is downgraded.

11. It is announced that due to difficult financial times public spending needs to be trimmed and taxes such as Value Added Tax need to be raised. It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforseen difficulties”.





How many more banking collapses will we see in Portugal?

This weekend has seen yet another bank bailout in Portugal and consequent costs for the Portuguese taxpayer. This of course follows on from the collapse of Banco Espirito Santo back in August 2014 and begs yet another question about the recovery in Portugal’s economic situation. It is particularly unfortunate that it involves a bank that was supposed to have been rescued by the state back in 2013.Those who followed the story of Banco Espirito Santo will remember a tale which itself involved plenty of slip sliding away as well as misrepresentations and likely corruption. It also reminds me that last week when I was analysing the ongoing problems of UK banks that sadly there are countries where the situation is even worse. So let us take a look.

The 2013 bailout

Let us jump into the TARDIS of Dr.Who and go back to the 31st of January 2013.

The European Commission has temporarily approved, under EU state aid rules, a recapitalisation totalling €1.1 billion granted by Portugal to Banco Internacional do Funchal S.A. (Banif) for reasons of financial stability.

Oh no “temporarily” ! There was a clear warning signal although not quite as clear a warning as “on track”.. Back then there was a sign that there has been serious trouble here.

In view of the significant aid the bank received with regard to its size (approximately 10% of risk weighted assets) and of the seriousness of its problems, this plan needs to provide for a material overhaul of the bank’s business model…

Portugal was supposed to have it all sorted by the end of March but as we now know the new business model has not turned out to be any more successful than the old one. for those wondering about Banif here is some more detail.

Banif is currently the eighth-largest commercial bank in Portugal when measured by book asset value, with a large regional presence in the Azores and Madeira. It is listed on the Lisbon Stock Exchange. At the end of 2011, it held total assets amounting to €15.8 billion.

This reminds me of my point last week about banks which is that whilst new and usually higher capital requirements are welcome in a real crisis they are invariably not enough and we see here that a bailout of 7% of risk assets was required.

Bringing matters up to date

On the 15th of this month the Bank of Portugal announced that it was looking more deeply into matters. In other words Banif was one of the “still substantial challenges and risks,” it has mentioned in its Financial Stability Report. There were Northern Rock style queues around branches after one TV network suggested that deposits were at risk. The head of the bank issued a comforting communique according to The Portugal News.

The CEO of Banif, Jorge Tomé, also looked to allay growing fears this week, when he said that the bank had “comfortable liquidity” and guaranteed that “the depositors and tax payers could rest easy”.

I guess you are already fearing for what happened next as the only thing worse than an official denial would have been a claim that things were on track. Let us move forwards to this morning’s statement from the European Commission.

The Portuguese authorities notified to the Commission plans to grant €2.255 billion in aid measures to support the sale of Banif’s assets and liabilities to the purchaser, as well as aid amounting to €422 million contained in the asset transfer to the asset management vehicle. An additional buffer in the form of a state guarantee is also approved to cater for potential recent changes of values in the part bought by Banco Santander Totta, bringing the total potential aid measures up to €3 billion.

There are various references to this being in addition to the original 1.1 billion Euro “rescue” of 2013 as we see something beginning to resemble a bottomless pit. The “serenity and tranquility” referred to only a week ago by the bank’s head seems about as realistic as Portugal’s taxpayers being able to “rest easy”!

If we look at this in numerical terms we see that the total rescue cost is well over 3 billion Euros and could head towards 4.1 billion Euros. Okay to rescue what?

In the 3rd quarter of 2015, Banif’s consolidated balance sheet amounted to €11.9 billion.

That is an extraordinary percentage on what must have been some dreadful lending back in the day. Also according to Reuters the deposit base is only this.

The small Madeira-based bank has a market capitalization of 91 million euros ($98 million) and had deposits of 6 billion euros at the end of September.

Everything about the bank is small except the bailout. It was heading towards a one for one backing of the deposits.

There was a small repayment today as Santander paid 150 million Euros for the good part of the bank. But against that the Portuguese state has had to put up some 1.77 billion Euros and the Bank of Portugal’s Resolution Fund has put up 489 million Euros. In theory the Resolution Fund is provided by bank levies but Eurostat usually does not see it like that and adds it to the Portuguese national debt.

A catch with this style of Resolution Fund can be seen as an even weaker Portuguese banking sector finds itself being called to pay up again and again and of course weakens further.

What about Novo Banco?

Those who recall the collapse of Banco Espirito Santo may recall the confident proclamations about the Novo Banco which emerged. However the sale planned for September this year was cancelled. Then November produced some news which after all the bailouts was really rather stunning.

Novo Banco successfully completes the ECB Banking Supervision stress test in the baseline scenario. A shortfall of EUR 1,398 million was identified in the adverse stress test scenario, which is in line with expectations.

So successful it had a shortfall in the adverse scenario. Let us just stop and remind ourselves that this is supposed to be the “good bank” part as in clean. Anyway the whole thing was so “successfully” completed that last week it submitted plans to raise at least another 1.4 billion Euros of extra capital.

You might think therefore that last week was a bad time for a judge to do this. From The Portugal News.

The Portuguese judge, Carlos Alexandre has repealed the house arrest measure he had handed down to the former CEO of Banco Espírito Santo (BES), Ricardo Salgado,


We see that seven years into the credit crunch and five years after the Euro area crisis began that problems with the Portuguese banking system continue to emerge. The problem with a strategy that involves kicking the banking can into the future is that it requires it to be better like a clear blue sky whereas in fact there are still plenty of economic clouds to be seen. One clear one has been the way that the Portuguese national debt rose to 130% of its GDP at the end of 2014. Or to put it another way the numbers quoted today can be looked at in the context of a national debt of around 228 billion Euros.This is not an issue in terms of funding it as the ECB QE purchases are keeping those costs remarkably low although of course we are seeing a problem shifted from one balance sheet to another in a familiar trend. The problem is how will Portugal get into a situation where it is under some sort of control?

There is economic growth to be found (year on year 1.4%) in what has been the best phase for Portugal for many years as a low oil price and ECB monetary easing combine. But unless it speeds up Portugal will remain troubled and at risk especially as there seems to be a regular blow-up in the banking sector. If we go back in time there must have been some extraordinarily incompetent lending must there not? It is hard also not to think of the report from Unmask The Corrupt discussed in The Portugal News.

Portuguese bank Banco Espírito Santo and the daughter of the Angolan president Isabel dos Santos, are among the 15 “most symbolic cases of grand corruption” in the world that Transparency International put to a vote on Wednesday.

Oh and the timing of the move on Banif was to avoid the bail-in rules which come into play next year.

Oh, what a tangled web we weave

When first we practise to deceive!

( Walter Scott)







With the Greek banks recapitalising again, who will lend to consumers and businesses?

Earlier this year there was a subject which occupied the headlines beyond the financial section and it was the Greek banking crisis. We had deposit flight and we also had an interesting redefinition of money as we saw both white goods and cars become ersatz substitutes for it in a rush to find perceived safe assets. Whilst the situation is now much calmer the main Greek banks (Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank) were damaged by this and the European Central Bank (ECB) reported on Saturday as to how much it feels will be needed to undertake repairs.

This assessment comprised an asset quality review (AQR) and a forward-looking stress test, including a baseline and an adverse scenario,

Okay so how much?

Overall, the stress test identified a capital shortfall across the four participating banks of €4.4 billion under the baseline scenario and €14.4 billion under the adverse scenario,

I have to confess that my immediate thought was that as it is hard to think of anywhere where things have been more adverse than Greece in recent times that it had to be the latter which was applicable.

How will the Greek banks respond?

Bloomberg has the details.

The ECB expects the banks to raise at least 4.4 billion euros from shareholders and bondholders…..The state-owned Hellenic Financial Stability Fund is ready to inject the 10 billion euros identified in the ECB’s adverse scenario, offering 25 percent through common shares with full voting rights in the lenders, and the rest via contingent convertible securities,

If we look at the proposed shareholder contribution there is the issue that they put in around 8 billion Euros of new capital last year. This is what they were told then.

The sales represent “a vote of confidence for the Greek banking system,” Maria Kanellopoulou, a financial analyst at Euroxx Securities SA, said in an interview. “Major progress has been achieved, especially for those two banks.”

The only major progress seen in 2015 has been in reverse gear for the Greek banks. Will investors be singing along to The Average White Band?

Let’s Go Round Again

Behind that is the Hellenic Financial Stability Fund or HFSF which according to its accounts published in March was in a marked to market position of having lost some 30 billion Euros of equity. Since then Greek banking shares have fallen heavily so I suppose you could see its involvement as a type of doubling down although I note that some of its new investment will be via what are called Co-Cos or contingent convertible securities. If you are a Greek taxpayer you would prefer to be investing again at a lower price but of course that dilutes existing investors. Awkward.

Also the HFSF is Greek government-owned but of course the funding comes from the Euro area.

How are the banks doing?

If we return to the issue of domestic deposits then they are 122 billion Euros are a long way short of the 160 billion with which 2015 began. A little money has dribbled back in but as you can see the vast majority has not.

As to performance well those who invested in 2014 will not be doing a jig and I will illustrate with Saturday’s numbers from Alpha Bank.

Alpha, about 66 percent owned by the country’s bank rescue fund HFSF, posted a net loss of 838.4 million euros ($922.7 million) in the Jan.-to-Sept. period versus a profit of 129.3 million euros in the same period last year. (Kathimerini).

Not auspicious for a bank which needs another 2.7 billion Euros of capital under the adverse scenario.

What about the Greek economy?

We have an obvious issue here as we consider how likely it is that the Greek banks will be able to supply credit to Greek businesses and consumers.? The answer is no at the moment and the outlook looks rather like the current London fog. Once this is over some 65 billion Euros will have been poured into the Greek banks to provide growth in only one area which is non-performing loans.

If we look at the ECB’s own view then the baseline or optimistic view is for a contraction of 2.3% in the Greek economy this year followed by a further 1.3% in 2016. The adverse view is that -3.3% this year will be followed by -3.9% in 2016. That makes me wonder exactly how 2016 could be worse than 2015 considering the shambles that 2015 has been? Has the ECB lost its faith?

Let us just remind ourselves that under the original IMF/ECB plan Greece would now be into its fourth year of economic expansion with around 3% per annum of growth between now and the end of time.

Latest Data

if we look at the consumer sector it is hard to believe that the numbers could still be falling but last week we discovered that they were.

The volume of retail trade (i.e. turnover in retail trade at constant prices) in August 2015, recorded a decrease of 2.2% compared with the corresponding index of August 2014,

The heaviest falling category was in food,beverages and tobacco (-5.1%) so let’s hope that the Greeks are smoking less. However the theme of economic depression is reinforced by an underlying index which was set at 100 in 2010 being at 76. The economic disaster which was July saw it at 68.3. If we recall the “Grecovery” theme which was being pressed by some well so far in 2015 5 months are worse than 2013 and 3 are better.

if we put it another way we can look at tax revenue which in the second quarter of 2012 was 20.2 billion Euros compared to 21.6 billion in 2012. If we factor in the many tax increases since then we can consider the Laffer curve via Alice In Wonderland.

“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”.

Business Surveys

The summary is sadly depressing.

Coming off the back of the worst average quarter for the PMI since the survey’s inception, the downturn at manufacturing companies in Greece eased in October.

In the circumstances of 2015 then a reading of 47.3 may be not so bad but of course we are in yet another depressionary environment and it is still getting worse.We also get a confirmation that the woes of the banking sector have crippled it in terms of aiding the economy.

Overall, the lack of capital circulating through the economy continued to take its toll on operating conditions at Greek manufacturers.


This is a sad sorry tale which has an apparently unending ability to get worse. Not the sort of perpetual motion that we hope for. The banks are about to undergo their third capital raising in the Euro area bailout period and the IMF is again reminding everyone that the overall situation is unsustainable. From Bloomberg.

Pledges to review Greece’s debt servicing won’t be enough unless they’re accompanied by specific terms for paring back the borrowing burden, David Lipton, the IMF’s first deputy managing director, said in an interview in Washington.

As to the ECB Mario Draghi dropped even heavier hints of a further interest-rate cut in the Italian press on Saturday but a cut to -0.3% or -0.4% would do what exactly for Greece?

Unless there are further wrong turns you would think that 2016 has to be a better year but we know that 2015 which should have been a good year due to the lower oil price has been wasted. As Elton John pointed out.

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

Speaking about absurdity

Here is a link to lunch with the FT with Sepp Blatter

Also if we continue with the sporting theme but not the absurd bit congratulations to the All Blacks who were worthy winners of the Rugby World Cup.

Greece GDP growth in 2015 so far beats that of Germany!

Sadly the summer weather has departed southern England for now but it does not mean that we have to stop a wry smile at some summer fun. What do I mean? Well take a look at the official reports we have been provided with in the past 24 hours.

First we received this from the Greek statistics office.

Available seasonally adjusted data# indicate that in the 2nd quarter of 2015 the Gross Domestic Product (GDP) in volume terms# increased by 0.8% in comparison with the 1st quarter of 2015,

Then early this morning the Germans replied.

The German economy continues to grow. In the second quarter of 2015, the gross domestic product (GDP) rose 0.4% on the first quarter of the year after adjustment for price, seasonal and calendar variations.

So in quarter on quarter terms Greece grew at twice the rate of Germany! How is the German reform program going? More seriously it does in a way reinforce my subject of yesterday because Germany has grown at 0.3% and now 0.4% in 2015 so far which when you consider the favourable background of lower oil prices and expansionary monetary policy is hardly racing away. Thus we mull one more time what it would be doing if it had its own (much stronger) currency?

As we look deeper we see that it is likely that Greece has outgrown Germany in 2015 so far as it revised its first quarter from -0.2% to 0%. So we are down t the decimal points and let us hope it was not a draw. English football fans know that draws with Germany lead to a loss on penalties.

What happened in Greece?

I explained the position on the World Business Report on the BBC World Service yesterday evening.

As there is no break down of the data I gave some thoughts on what has been taking place. In essence white goods and cars were purchased as the banking crisis began to fire up and that looks to have provided a boost to consumption. Also there may have been a trade effect if the finance issue led to a drop in imports which would boost the recorded trade balance and hence GDP. We do know that imports dropped by 12% in June compared to a year before.

There was a reinforcement of one of these ideas earlier this week.

The Hellenic Statistical Authority announces that in July 2015, 8.181 road motor cars (both new and used from abroad) were put into circulation for the first time, recording a 23,9% decrease compared with the corresponding month of 2014.

This contrasted substantially with the pattern for the year so far shown below.

During the period January – July 2015, 74.603 road motor cars (both new and used from abroad) were put into circulation for the first time, representing a 18,4% increase compared to the corresponding period of 2014

So we see that there was a surge of car buying in the first half of 2015 which fits the theory that relatively well-off Greek were shifting from bank deposits to real goods and of course in this instance goods which are mobile by definition! A type of store of value when there were genuine fears about what might happen to bank deposits.

Why then and not in July? It may not have been possible in July as the bank shut downs and restrictions started on June 28th and also we are likely to be seeing people in a position to act ahead of events. You may note that the July numbers raise real fears about what is happening in this quarter in Greece. Back on the 3rd of this month I pointed out that Greek manufacturing had been hit hard.

The headline seasonally adjusted Markit Greece Manufacturing Purchasing Managers’ Index® (PMI® ) – a single-figure measure of overall business conditions – registered 30.2, well below the neutral 50.0 mark and its lowest ever reading.

What about debt sustainability?

This relates to an issue I raised at the end of the radio interview linked to above. Whilst a rise in GDP seems welcome compared to the Greek national debt burden this fades as we see how it has taken place. This is because the rise in output is being driven by a fall in prices. This is very welcome in terms of buying goods and services as you can buy more for the same outlay. However against a fixed debt burden we see that Greece has a nominal or if you like Euros in your pocket GDP which fell by 0.7%. If we compare to a year ago nominal GDP in Greece is virtually unchanged (0.1% up) whereas we know the debt burden continues to mount and gets ever more unaffordable.

Putting it another way this is why central banks like inflation! It boosts nominal GDP and helps with debt burdens most of which are not linked to inflation. This is an underlying reason why the ECB is undertaking QE on a large-scale now.

What about the new deal?

Slowly such thoughts (the debt is unaffordable) are ricocheting around the institutions (ex-Troika). The European Commission has linked online to an IMF statement which contains this.

once the steps on the authorities’ program and debt relief have been taken,

According to Bloomberg their minds have been focused by this.

Greece’s obligations will peak at 201 percent of gross domestic product next year,

Of course they may yet make a dogs dinner of all of this.

Today’s bailout vote

The Syriza government has managed to get the bailout bill through the Greek Parliament albeit at the price of the fact that by shedding members it no longer has a majority government. However we move ever nearer to the next deadline which is the repayment of a 3.2 billion Euro bond owned by the ECB which Greece does not have the funds to repay. So as Muse put it we are in familiar territory.

once the steps on the authorities’ program and debt relief have been taken,

What about the implications for Greece?

I have been very critical about these and they provide a counterpoint to the latest glimmer of sun through the clouds provided by the GDP data for 2015 so far. In essence it all boils down to this. From the European Commission.

the authorities will accordingly pursue a new fiscal path premised on a primary surplus balance targets of -¼, 0.5, 1¾, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018 and beyond,

The “and beyond” rather echoes the famous phrase of Buzz Lightyear. The fundamental issue here is that we know what imposing such austerity does to Greece as each time it has been applied it has extended its economic depression and we can paly another section of that Muse song.

I think I’m drowning
I want to break the spell
That you’ve created


Briefly Greece finds itself along with Spain and probably Ireland in the van of the Euro area growth pack. However if we allow for the expansionary monetary policy and the fall in the oil price the Euro area disappointed in the last quarter.

Seasonally adjusted GDP rose by 0.3% in the euro area (EA19) during the second quarter of 2015……Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.2% in the euro area

As we look forwards for Greece we see that there are disappointments ahead as we fear what the economic growth figures for this quarter will bring. Also the European Commission debt forecasts rely on economic growth returning otherwise the 201% as a national debt to GDP ratio will be far from a peak. Remember when they told us it was on its way or “on track” to 120%?

If the Euro did not exist what would the economies of Greece and Germany be doing right now?

How long before Greece can rely on some more help from the ECB ?

Today has already seen a flurry of news from Greece and  in addition to the re-opening of the banks there has been quite a bit of borrowing and repayment activity. It would appear that the Greek government was either under instruction to settle its debts promptly or decided to do so of its own accord. Thus some 6.8 billion Euros of debt has been repaid according to Bloomberg. If we look at the list we see what might be called a likely crew. The main payment was just over 4 billion Euros to the European Central Bank (ECB) followed by the settling of 2 billion Euros to the International Monetary Fund (IMF) and the rest to the Bank of Greece.

The reasons for this were that as part of its Securities Markets Programme the ECB had been buying Greek debt to support the price and reduce the yield. Some of that can was kicked forwards to today as the bond has matured and the capital needed to be repaid as well a coupon or interest payment. This will be a reasonably frequent event as the ECB initially chose to buy short-dated bonds because the “shock and awe” bailout operations were predicted to work quickly. It is hard to know whether to laugh or cry at that. Also various IMF repayments which have been missed have been settled as well as the account at the Bank of Greece which was raided to make an IMF repayment.

Bridge Finance

The obvious problem with the paragraphs above is that Greece lacked the money to make such payments as in the case of the IMF it would have already done so. Step forwards the EFSM or European Financial Stability Mechanism! It has loaned some 7 billion Euros to Greece and of that there is now only a relative pittance left.

You may wonder why the grandly named European Stability Mechanism was not used for this purpose? After all it is the “the permanent crisis resolution mechanism for the countries of the euro area.” However as you can see from the quote below it has what is financial terms might be compared to the turning-circle of a super-tanker.

The institutions will start negotiating the Memorandum of Understanding (MoU) with the Greek authorities.

Once done it can lend but not before which as I have pointed out before is a clear flaw for an organisation to provide stability. Thus the nine nations of the European Union (including the UK) found themselves providing bridge financing to a Euro area problem. Still at least the EFSM has a quality song written by Paul Simon.

When times get rough
And friends just can’t be found,
Like a bridge over troubled water
I will lay me down.
Like a bridge over troubled water
I will lay me down.

What about QE for Greece?

We open with one rule of ECB club, which is that the ECB must always be repaid in full and on time! That has been fulfilled this morning although quite how it can walk away with a profit from this is beyond me in terms of moral behaviour. Because of the distressed state of the Greek bond market back then it would have paid much less than 100. Also Euro area taxpayers and for a time European Union taxpayers are financing its profits in an example of round-tripping.

However if we go back to last Thursday ECB President Mario Draghi dropped various hints that Greece may not be the one Euro area country where his Quantitative Easing bond buying programme is not taking place for too long.

So there is an issue of going back to a rating which would make Greek bonds, eligible for monetary policy.

Constâncio: Or there should be a waiver.

So Vice President Constancio’s slumber was disturbed to remind us that the claim that the ECB is a “rules-based organisation” is one only for when it feels like that.. It can ignore them if it likes. This then went on.

Second point is the limit on how much of each country’s bonds can be bought by the ECB. As some SMP holdings will be repaid on 20 July and afterwards Greece would comply with this limit and there would be some room for doing QE.

You can see that some 3.5 billion Euros of this was cleared only this morning and there is more to come on August 20th when another bond owned by the ECB (3.2 billion Euros) reaches its maturity date.

Indeed Vitor Constancio went further and the emphasis is mine.

So the Governing Council will have to assess, after there is a programme, at a certain moment, that there is a credible compliance with the programme. That may come at the end of the first review, because that would be clear. The Governing Council could nevertheless decide even before that if there was credible implementation. So it’s at the discretion of the Governing Council either to wait for the review or to do it slightly before, if indeed, there is good implementation of the programme.

As the institutions who used to be called the troika before that name became poisonous have if you will excuse me a track record of telling us that Greece is “on track” what do you think is likely to happen next?

If Greece plays ball and the ESM gets on with its review and program then not only will its funding become available but Greece will then probably see itself in the ECB QE programme. Just to give an idea of scale this would have meant that some 1.36 billion Euros worth of Greek government bonds would have been bought in June alone.

What about Greece?

In a financing sense this is a story of two halves. In a capital sense the issue will build as Greece will have to keep borrowing more. Today is a small example of this as interest payments are capitalised and rolled on. However there will be gains in terms of interest to be paid as for example the maturing bond will be financed at a much lower interest-rate should the ESM finally get around to completing its review.

Of course this is yet another version of can-kicking.

What about the Greek banks?

They are open today unlike the Athens stock exchange which remains closed. There has been a slight relaxation of the deposit withdrawal controls as now 420 Euros can be withdrawn a week as opposed to having to make 7 daily withdrawals of 60 Euros. If we do the maths we see that the extra ECB ELA financing of 900 million Euros will finance some 2,142,857 such withdrawals this week.

If we look beneath this though the banking system in terms of lending to businesses must be in a dreadful state. What price credit finance? Or is there any credit finance at all?

The VAT rise

This is another kick in the teeth for businesses. The fall in the value of the Euro was something which hopefully would give a boost to the Greek tourism business. However as we arrive at peak season prices have been pushed higher via the VAT (sales tax) increases. The rate for restaurants and taxis has risen sharply from 13% to 23%.

If we move to the domestic market there are a range of increases including a similar jump as stated above on some foods. This has been estimated by Macropolis as having an average effect of some 650 Euros per household. As net household income is of the order of 13,800 Euros (OECD 2014) we see that this will take quite a bite out of it.

Frankly this seems set to prove that the Laffer Curve can apply to indirect as well as direct taxes.

Today’s data

This rather speaks for itself as an indicator of what has been happening in the Greek economy.

The Turnover Index in Industry (both domestic and non-domestic market) in May 2015 compared with May 2014 recorded a decline of 4.2%……Manufacturing turnover decreased by 4.2%.

Not what you want when you have a large debt burden.


We are back to a story of two halves here and it is a regular theme of the gap between the financial and real economy. There is a nuance however as this time it is a central bank rather than a private-sector one disappearing over the horizon with a swag bag of cash. There is a dizzying round-tripping of funds but the debt is being shifted onto Euro area taxpayers and for a hopefully brief period European Union ones as well as the Greeks themselves.

As the debt burden rises the average cost per unit will fall. This will help the Greek government finances at the margin but by the time we reach the Greek economy we see two major forces in the opposite direction. The first is the ongoing credit crunch where there is no finance available. The second is the latest round of austerity and in particular the VAT rises which will crunch the economy one more time. Does anybody believe that QE will be a cure for this?