A blog from my late father about the banks

The opening today is brought to you by my late father. You see he was a plastering sub-contractor who was a mild man but could be brought to ire by the subject of how he had been treated by the banks. He used to regale me with stories about how to keep the relationships going he would be forced to take loans he didn’t really want in the good times and then would find they would not only refuse loans in the bad but ask for one’s already given back. He only survived the 1980-82 recession because of an overdraft for company cars he was able to use for other purposes which they tried but were unable to end. So my eyes lit up on reading this from the BBC.

Banks have been criticised by firms and MPs for insisting on personal guarantees to issue government-backed emergency loans to business owners.

The requirement loads most of the risk that the loan goes bad on the business owner, rather than the banks.

It means that the banks can go after the personal property of the owner of a firm if their business goes under and they cannot afford to pay off the debt.

Whilst borrowers should have responsibility for the loans these particular ones are backed by the government.

According to UK Finance, formerly the British Bankers Association, the scheme should offer loans of up to £5m, where the government promises to cover 80% of losses if the money is not repaid. But, it notes: “Lenders may require security for the facility.”

In recent times there has been a requirement for banks to “Know Your Customer” or KYC for short. If they have done so then they would be able to sift something of the wheat from the chaff so to speak and would know which businesses are likely to continue and sadly which are not. With 80% of losses indemnified by the taxpayer they should be able to lend quickly, cheaply and with little or no security.

For those saying they need to be secure, well yes but in other areas they seem to fall over their own feet.

ABN AMRO Bank N.V. said Thursday that it will incur a significant “incidental” loss on one of its U.S. clients amid the new coronavirus scenario.

The bank said it is booking a $250 million pretax loss, which would translate into a net loss of around $200 million.

Well we now know why ABN Amro is leaving the gold business although we do not know how much of this was in the gold market. Oh and the excuse is a bit weak for a clearer of positions.

ABN AMRO blamed the loss on “unprecedented volumes and volatility in the financial markets following the outbreak of the novel coronavirus.”

Returning to the issue of lending of to smaller businesses here were the words of Mark Carney back as recently as the 11th of this month when he was still Bank of England Governor.

I’ll just reiterate that, by providing much more flexibility, an ability to-, the banking system has been put in
a position today where they could make loans to the hardest hit businesses, in fact the entire corporate
sector, not just the hardest hit businesses and Small and Medium Sized enterprises, thirteen times of
what they lent last year in good times.

That boasting was repeated by the present Governor Andrew Bailey. Indeed he went further on the subject of small business lending.

there’s a very clear message to the banks-, and, by the way, which I think has been reflected in things that a number of the banks have already said.

Apparently not clear enough. But there was more as back then he was still head of the FCA.

One of the FCA’s core principles for business is treating customers fairly. The system is now, as we’ve said many times this morning, in a much more resilient state. We expect them to treat customers fairly. That’s what must happen. They know that. They’re in a position to do it. There should be no excuses now, and both we, the Bank of England, and the FCA, will be watching this very
carefully.

Well I have consistently warned you about the use of the word “resilient”. What it seems to mean in practice is that they need forever more subsidies and help.

On top of that, we’re giving them four-year certainty on a considerable amount of funding at the cost of
bank rate. On top of that, they have liquidity buffers themselves, but, also, liquidity from the Bank of
England. So, they are in that position to support the economy. ( Governor Carney )

Since then they can fund even more cheaply as the Bank Rate is now 0.1%.

Meanwhile I have been contacted by Digibits an excavator company via social media.

Funding For Lending Scheme was crazy. We looked at this to finance a new CNC machine tool in 2013. There were all sorts of complicated (and illogical) strings attached and, at the end of the day, the APR was punitive.

I asked what rate the APR was ( for those unaware it is the annual interest-rate)?

can’t find record of that, but it was 6% flat in Oct 2013. Plus you had to ‘guarantee’ job creation – a typical top-down metric that makes no sense in SME world. IIRC 20% grant contribution per job up to maximum of £15k – but if this didn’t work out you’d risk paying that back.

As you can see that was very different to the treatment of the banks and the company was worried about the Red Tape.

The grant element (which theoretically softened the blow of the high rate) was geared toward creating jobs, but that is a very difficult agreement (with teeth) to hold over the head of an SME and that contribution could have been clawed back.

Quantitative Easing

There is a lot going on here so let me start with the tactical issues. Firstly the Bank of England has cut back on its daily QE buying from the £10.2 billion peak seen on both Friday and Monday. It is now doing three maturity tranches ( short-dated, mediums and longs) in a day and each are for £1 billion.

Yet some still want more as I see Faisal Islam of the BBC reporting.

Ex top Treasury official @rjdhughes

floated idea in this v interesting report of central bank – (ie Bank of England) temporarily funding Government by buying bonds directly, using massive increase in Government overdraft at BoE – “ways & means account”

Some of you may fear the worst from the use of “top” and all of you should fear the word “temporarily” as it means any time from now to infinity these days.

This could be justified on separate grounds of market functioning/ liquidity of key markets, in this case, for gilts/ Government bonds. There have been signs of a lack of demand at recent auctions…

Faisal seems unaware that the lack of demand is caused by the very thing his top official is calling for which is central bank buying! Even worse he seems to be using the Japanese model where the bond market has been freezing up for some time.

“more formal monetary support of the fiscal response will be required..prudent course of action is yield curve control, where Bank can create fiscal space for Chancellor although if tested this regime may mutate into monetary financing”

Those who have followed my updates on the Bank of Japan will be aware of this.

Comment

Hopefully my late father is no longer spinning quite so fast in his Memorial Vault ( these things have grand names).  That is assuming ashes can spin! We seem to be taking a familiar path where out of touch central bankers claim to be boosting business but we find that the cheap liquidity is indeed poured into the banks. But it seems to get lost as the promises of more business lending now morph into us seeing more and cheaper mortgage lending later. That boosts the banks and house prices in what so far has appeared to be a never ending cycle. Meanwhile the Funding for Lending Scheme started in the summer of 2012 so I think we should have seen the boost to lending to smaller businesses by now don’t you?

Meanwhile I see everywhere that not only is QE looking permanent my theme of “To Infinity! And Beyond” has been very prescient. No doubt we get more stories of “Top Men” ( or women) recommending ever more. Indeed it is not clear to me that a record in HM Treasury and the position below qualifies.

he joined the International Monetary Fund in 2008 where he headed the Fiscal Affairs Department’s Public Finance Division and worked on fiscal reform in a range of crisis-hit advanced, emerging, and developing countries.

 

 

The Chinese way of economic stimulus has started already in 2020

Firstly welcome to the new year and for some the new decade ( as you could argue it starts in 2021). The break has in some ways felt long and in other ways short but we have begun a new year with something familiar. After the 733 interest-rate cuts of the credit crunch era the People’s Bank of China ( PBOC ) has started 2020 with this.

In order to support the development of the real economy and reduce the actual cost of social financing, the People’s Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points on January 6, 2020 (excluding finance companies, financial leasing companies, and auto finance companies).

This is a different type of monetary easing as it operates on the quantity of money ( broad money) rather than the price or interest-rate of it. By increasing the supply ( with lower reserves banks can lend more) there may be cheaper loans but that is implicit rather than explicit. As to the size of the impact Reuters has crunched the numbers.

China’s central bank said on Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy.

Care is needed here as we see some copy and pasting of the official release. This is because that is the maximum not the definite impact and also because the timing is uncertain. No doubt some lending will happen now but we do not know when the Chinese banks will use up the full amount. That is one of the reason’s we in the West stopped using this as a policy option ( the UK switched in the 1970s) as it is unreliable in its timing or more specifically more unreliable than interest-rate changes, or so we thought.

Speaking of timing there is of course this.

Freeing up more liquidity now would also reduce the risks of a credit crunch ahead of the long Lunar New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to strains on China’s financial system.

The PBOC said it expects total liquidity in the banking system to remain stable ahead of the Lunar New Year. ( Reuters).

Although for context this is the latest in what has become a long-running campaign.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.

You could argue the number of RRR cuts argues against its usefulness as a policy but these days interest-rate changes have faced the same issue.

The translation of the official view is below.

The People’s Bank of China will continue to implement a prudent monetary policy, remain flexible and appropriate, not flood flooding, take into account internal and external balance, maintain reasonable and adequate liquidity, and increase the scale of currency credit and social financing in line with economic development and stimulate the vitality of market players. High-quality development and supply-side structural reforms create a suitable monetary and financial environment.

I would draw your attention to “flood flooding” but let’s face it that makes a similar amount of sense to what other central banks say and write!

I note that it is supposed to help smaller companies but central banks have plugged that line for some time now. The Bank of Japan gave it a go and in my country the Bank of England introduced the Funding for Lending Scheme to increase bank lending to smaller and medium-sized businesses in 2012. The reality was that mortgage lending and consumer credit picked up instead.

Of the latest funds released, small and medium banks would receive roughly 120 billion yuan, the central bank said, stressing that it should be used to fund small, local businesses.

The banks

Having said that this was different to policy in the West there is something which is awfully familiar.

The PBOC said lower reserve requirements will reduce banks’ annual funding costs by 15 billion yuan, which could reduce pressure on their profit margins from recent interest rate reforms. Last week, it said existing floating-rate loans will be switched to the new benchmark rate starting from Jan. 1 as part of a broader effort to lower financing costs. ( Reuters ).

I guess central banks are Simon and Garfunkel fans.

And I’m one step ahead of the shoe shine
Two steps away from the county line
Just trying to keep my customers satisfied,
Satisfied.

The Chinese Economy

There is something of an economic conundrum though if we note the latest economic news.

BEIJING, Dec. 31 (Xinhua) — The purchasing managers’ index (PMI) for China’s manufacturing sector stood at 50.2 in December, unchanged from November, the National Bureau of Statistics (NBS) said Tuesday.

A reading above 50 indicates expansion, while a reading below reflects contraction.

This marks the second straight month of expansion, partly buoyed by booming supply and demand as well as increasing export orders, said NBS senior statistician Zhao Qinghe.

“booming supply and demand”. Really? Well there is growth but hardly a boom/

On a month-on-month basis, the sub-index for production gained 0.6 points to 53.2 in December,

Even it is not backed up by demand.

while that for new orders fell slightly to 51.2, still in the expansion zone.

The wider economy is recorded as doing relatively well.

Tuesday’s data also showed China’s composite PMI slid slightly to 53.4, but was 0.3 points higher than this year’s average, indicating steady expansion in the production of China’s companies.

Stock Market

According to Yuan Talks it as ever liked the idea although it is only one day.

#Shanghai Composite index extends gains to 1.5% to approach 3100 mark. #Shenzhen Component Index and #Chinext index are surging near 2%.

Still President Trump would be a fan.

Yuan or Renminbi

Here we see that we have been on a bit of a road to nowhere over the past year. After weakening in late summer towards 7.2 versus the US Dollar the Yuan at 6.96 is up 1.2% on a year ago. So there have been a lot of column inches on the subject but in fact very little of them have been sustained.

Comment

It would appear that the PBOC does not have much faith in the reports of a pick up in the Chinese economy as it has already stepped up its easing programme. There are other issues in play such as the trade war and these next two so let us start with US Dollar demand.

China’s big bang opening of its $45 trillion financial industry begins in earnest next year — a step-by-step affair that’s unfolding just as economic strains threaten the promised windfall luring in global firms.

Starting with its insurance and futures markets, the Communist Party ruled nation will enact the most sweeping changes in decades to allow the likes of Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. to expand their footprint in China and compete for a slice of its growing wealth. ( Insurancejournal.com )

Will it need a dollar,dollar? We will have to see. Also this issue continues to build.

WARSAW (Reuters) – Bird flu has been detected in turkeys in eastern Poland, authorities said on Wednesday, and local media reported that the outbreak could require up to 40,000 birds to be slaughtered.

China has a big issue with this sort of thing and like in banking and economics the real danger was always possible contagion. So far it has had limited effect on UK pork prices for example as the annual rate of inflation is 0.7% but it is I think a case of watch this space.

Meanwhile according to Yuan Talks the credit may not flow everywhere.

Regulators in the city of Beijing warned financial institutions about risks in the lending to property developers with “extremely high leverage”, indicating the authority is not relaxing financing rules for the cash-starved sector as many anticipated.

Looking at it in terms of money supply growth an annual rate of 8.2% for broad money ( M2) may seem fast in the west but it has not changed much recently in spite of the easing and is slow for China.

 

 

The European Investment Bank and the UK’s missing £7.6 billion

The European Investment Bank is a major part of the European Union’s and also the Euro area’s infrastructure. Yet so many have not heard of it which I plan to begin to correct today. But there are also big issues and a possible expensive error on the way as the UK’s relationship with it gets set to change assuming that the UK does carry out some form of Brexit. As we stand the UK is one of the four largest shareholders ( along with France,Germany and Italy) with a shareholding of 16.1% or 39.2 billions Euros according to the EIB.

What is the EIB?

The first impression is that it is very large as we look at the scale of its operations.

Since its establishment in 1958 the EU bank has invested over a trillion euros.

Even in these inflated times that is quite a lot and it is expanding fast.

Lending: From ECU 10bn in 1988, our annual lending neared EUR 45bn in the mid-2000s before jumping to EUR 79bn in 2009 as a temporary response to the crisis. It was EUR 55.63bn in 2018.

In terms of its own operations it has been a win for Luxembourg. Quite a win really when you note its very small shareholding in the venture.

Our HQ: Founded in Brussels in 1958 as the Treaty of Rome comes into force, we moved to Luxembourg in 1968. We relocated to our current site in 1980 with a major new building extension completed in 2008.

As to its lending this is described here.

We support projects that make a significant contribution to sustainable growth and employment in Europe and beyond. Our activities focus on four priority areas:

 

Innovation and skills are key ingredients for ensuring sustainable growth and creating high-value jobs.

 

Small and medium-sized enterprises (SMEs) are important drivers of growth, innovation and employment in Europe…..Supporting access to finance for SMEs and mid-caps is a top priority for the EIB Group.

 

Infrastructure is an essential pillar that interconnects internal markets and economies.

 

As the EU bank, we have made climate action one of our top priorities and today we are the largest multilateral provider of climate finance worldwide.

We commit to climate change adaptation and mitigationmore than 25% of our total financing.

One way of looking at the EIB is that it’s role involves some regional policy which is of course an apposite issue both across the region and within the Euro area. Although it comes with buzzwords and phrases like “smart,sustainable and inclusive growth” which mean what exactly?

As the EU bank, promoting economic and social cohesion is one of the principles that guide us throughout our activities. Our investments support the delivery of the Europe 2020 strategy for smart, sustainable and inclusive growth.

Also it operates a financial version of foreign policy.

Outside the EU, the EIB’s activities reflect EU external policy. The EIB is active mainly in the pre-accession countries and eastern and southern neighbours.
The EIB also operates in African, Caribbean and Pacific countries, Asia and Latin America, financing local private sector development, social and economic infrastructure and climate action projects.

Where does the money come from?

You may have spotted that the capital quoted is less than the lending with a ratio of one to a bit over four.

Building on its financial merits, the EIB is able to borrow at attractive rates, and the benefits of EIB’s borrowing conditions are passed on to project promoters.

It also specialises in what it calls green finance.

The Bank plays a leading role in the Green Bond market. The EIB issued the world’s first Green Bond in 2007, called Climate Awareness Bonds (CABs). Since then, the Bank has expanded CAB issuance across a number of currencies, providing benchmark size transactions in the core currencies EUR, USD and GBP.

It borrows very cheaply as last week it issue a three-year US Dollar bond at only 0.114% over what the US Treasury can borrow at. In January it borrowed for ten-years in Euros at a mere 0.742%. So we see that especially in these times of ultra-low interest-rates and bond yields the EIB is a vehicle that can provide lending for a very low annual cost. In that sense it has been quite a triumph as I do not believe it is picked up on national balance sheets and when I checked with the UK Office for National Statistics only realised numbers are picked up which matters as pretty much all of it is notional.

The UK and the EIB

The House of Lords reported on its role in the UK at the end of January.

The European Investment Bank (EIB) has been active in the UK since 1973,during which time it has lent more than €118 billion to key infrastructure projects…… In 2015 alone, the EIB provided £5.6 billion for 40 different projects, amounting to approximately one-third of total investment in UK infrastructure.

This provokes an immediate thought about another bank namely the Bank of England. The Funding for Lending Scheme which began in the summer of 2012 was supposed to push small and medium-sized business lending higher but did not, That looks even more of a failure as we note that until recently the EIB has been expanding its support of lending.

Next although the House of Lords do not put it this way we have a clear driver of the fall in business investment in the UK which was picked up in last week’s economic growth (GDP) data.

This is all the more worrying given the 87 percent fall in EIB funding since 2016 and the fact that new UK projects will no longer have access to the EIB after 29 March 2019, until and unless a future relationship is agreed.

So I can only support this conclusion 100%.

It is therefore seriously concerning that, with Brexit and the associated loss of access to EIB financing a matter of
weeks away, the Government has said nothing publicly about its ambitions for a future relationship with the EIB.

With the problems in the UK infrastructure arena with the failure of Carillion and the more recent problems at Interserve already providing flashing warning lights this echoes too.

Losing access to the EIB will have negative consequences for the financing of UK infrastructure. Not only does the EIB offer cheaper and longer-term loans than commercial lenders, but the quality of its independent expertise and due
diligence also provides projects with a stamp of approval that crowds in additional private investment.

Comment

There is a lot to consider here as we mull what is an organisation with many successes but also issues as we note it has come under more political control. For example the way it has a role in the financial version of foreign policy and being used as a type of Euro area fiscal policy under the ( Jean-Claude) Juncker Plan. Those are political rather than financial choices.

Next comes the issue of how the UK might Brexit from this and looking at the House of Lords report it is quite a scandal.

Under the Withdrawal Agreement, the UK will, over a period of 12 years, receive the €3.5 billion of capital it has paid in to the EIB. However, the UK will not receive any share of the profits that the EIB has accumulated, nor any
interest or dividends. Given that this could amount to €7.6 billion, almost 20 percent of the UK’s obligations under the £35–39 billion financial settlement, we regret that the Government has failed to provide an adequate explanation of the position taken in the negotiations.

Whoever is responsible for this on the UK side should be named and shamed.

Weekly Podcast

 

 

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?

 

Whatever happened to the economic recovery promised for Greece?

It was only yesterday that I was discussing the failure of one part of the establishment which is the central banking system. In the UK this has been represented by the Bank of England “pumping up” Buy To Let mortgage lending and then claiming it will be in future the agent to deal with it ignoring the fact it created the problem. Later in the day Janet Yellen of the US Federal Reserve gave us at least the third version of Forward Guidance in 2016 alone. Yet the country which has been most let down by the various establishment’s has been Greece. Not only has its own political establishment failed it but the European Commission, the European Central Bank and the International Monetary Fund have done so too.

In particular we need to remind ourselves of this from back in the late spring of 2010 when what was even then the second bailout begun and people like Christine Lagarde starting boasting about “shock and awe”. It was supposed to led to this.

Real GDP growth is expected to contract sharply in 2010–2011, and recover thereafter with unemployment peaking at nearly 15 percent of GDP by 2012.

There was supposed to be economic growth starting in 2012 and then running at around 2.1% for two years and then pick-up to 2.7% in 2015..

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

Even companies like Enron have struggled to produce a document that turned out to be so false and such a misrepresentation of what was about to take place. This was then followed 2 or 3 years later by promises of what became called ” Grecovery” whereas even now we see a reality described below.

GDP for 2015 in volume terms, amounted to 185.1 billion € compared with 185.5 billion € for 2014 (0.2% reduction).

If we look into the detail a fall of 13.1% in investment was hardly optimistic for the future and if we consider that the whole process was to improve debt affordability then this example of genuine deflation showed yet another sign of failure.

GDP (market prices) for 2015 amounted to 176.0 billion € compared with 177.6 billion € for 2014 (0.9% reduction).

This is deflation because a price fall has added to the fall in output whereas the debt burden is in nominal terms and has got more expensive. So whilst Greece gets plenty of help in paying the interest the capital burden is in fact increasing on this measure.

Of course the establishments also engaged in a lot of scaremongering about what would happen if Greece had defaulted and devalued. By now if we look at the example of places like Iceland it would be doing much better.

Greek loans and bank deposits fall again

This is what particularly troubles me right now. Last year there were substantial falls in deposits at Greek banks as the fears that there would be “haircuts” of the form applied to some in Cyprus spread. Accordingly bank deposits fled the Greek banking system to avoid this. The problem is that you might have expected some to return as the situation calmed down, well take a look at this.

This shows us the scale of the monetary destruction wreaked by the original crisis then the self-inflicted problems of last year but also that not only has the money not returned it is drifting away.

Back on the 4th of December 2015 I discussed the impact of this on the Greek banking sector and its ability to support lending in the economy so let us take a look. From the Bank of Greece.

In February 2016, the annual growth rate of total credit extended to the domestic private sector stood at -2.3% from -2.1% in the previous month. The monthly net flow of total credit to the domestic private sector was negative at €295 million, compared with a negative net flow of €504 million in the previous month.

The very weak investment numbers for 2015 made me look at bank lending to industry and there is no recovery to be found here.

In particular, the annual growth rate of credit to non-financial corporations remained at -1.6%, unchanged from the previous month, and the monthly net flow of credit to non-financial corporations was negative at €49 million, against a negative net flow of €14 million in the previous month……..In February 2016, the monthly net flow of credit to sole proprietors and unincorporated partnerships was negative at €20 million, compared with a negative net flow of €12 million in the previous month,

The Greek banks

Here has been a tale of woe where there have been three major recapitalisations and the bottom line or cause of this is shown below by Macropolis.

The picture is different, though, if we look at the non-performing exposure (NPE), where the stock reached 115.8 billion euros and the relevant ratio and coverage both stood at 50 percent. Eurobank has the lowest NPE ratio (43.8 percent). Alpha (51.3 percent) and Piraeus (50.7 percent) are at the high-end.

That is not a long way short of the total amount of private-sector deposits is it? In other words we have a credit crunch on a quite extraordinary scale which the ECB is still supporting. The size of the ELA (Emergency Liquidity Assistance) programme is still 71.3 billion Euros which poses two issues. The first is that it is still there and the second is the cost of it as Greek banks have to pay an interest cost some 1.5% higher than normal rate for ECB borrowing.

What is the economic outlook?

For the Euro area overall the outlook is for economic growth but not much of it as the European Commission has reported today.

In March, the Economic Sentiment Indicator (ESI) registered the third consecutive drop in both the euro area (by 0.9 points to 103.0) and the EU (by 0.7 points to 104.6).

This means that the export outlook for Greece is only mildly favourable and so it is likely to have to generate economic growth domestically. The latest figures for industry are not optimistic.

The Turnover Index in Industry (both domestic and non-domestic market) in January 2016 compared with January 2015 recorded a decline of 13.3%.

If we look to the underlying index we see that it was at 65.5 in January where 2010 the bailout year was 100. Whilst the major driver of the recent fall was mining and quarrying it was also true that manufacturing turnover fell by 13.1%. Prices are falling fast but not by that much.

Also the specific surveys for Greece were patchy too with consumer sentiment falling to -71.9 from -66.8 whilst economic sentiment rose from 89 to 90.1

If we move to the Markit business surveys or PMIs then we await a new number at the turn of the month but the number at the beginning of March showed at 48.4 that there was certainly no growth and perhaps a contraction.

Greece will also be grimly noting the recent rising trend of the Euro which has seen it pass 1.13 versus the US Dollar today.

Comment

It is hard to find the right words to describe the scale of the economic destruction that has been seen in Greece. Perhaps the unemployment numbers are the most eloquent.

The unemployment rate was 24.4% compared with 24.0% in the previous quarter, and 26.1% in the corresponding quarter of 2014….As regards the unemployment rate for different age groups, the highest unemployment rate is recorded among young people in the age group of 15-24 years (49.0%). For young females the unemployment rate is 54.3%

So as a young woman you face an unemployment rate of 54.3%? That must be so demoralising. There is also the migrant crisis which is affecting Greece along the lines of the Shakespearian dictum that sorrows come in battalions rather than single spies. It may well boost GDP  a little but also imposes costs. Yet at best the country seems to be facing what is an L shaped recovery which is simply extraordinary considering the size of the decline. I would make those in charge attempt to explain that again and again.

Let me finish with some good news albeit of a Magpie type style from Bloomberg.

When it comes to luring foreign visitors to sun, sea and a bit of history, Greece might be about to gain from Turkey’s losses.

The Greek Tourism Confederation expects the number of visitors to rise to a record 25 million this year and bring 800 million euros ($897 million) of extra income,