The economic problems of Greece are multiplying

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

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

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

Also Governor Stournaras told us this.

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

So let us take a look.

Balance of Payments

This morning’s release tells us this.

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

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

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

Let us get straight to the tourism numbers.

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

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

Switching to the half-year we see this.

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

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

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

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

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

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

Government Deficit

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

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

Unsurprisingly revenues are down and expenditure up.

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

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

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

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

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

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

What is he smoking?


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

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

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

Greece was also grateful for the lower borrowing costs.

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

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

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

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


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


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

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

I’m spinning around
Move outta my way

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


Do not forget Greece is still in an economic depression

Today I intend to look at something which I and I know from your replies many of you have long feared. This is that the merest flicker of better news from Greece will be used as a way of obscuring the fact that it is still in an economic crisis. At least I think that is what we should be calling an economic depression. So let me take you straight to the Financial Times.

Today, on the face of things, the emergency is over and the outlook is bright. The authorities have lifted capital controls, imposed four years ago. Greece’s 10-year bond yield touched an all-time low in July. Consumer confidence is at its highest level since 2000. Elections in July produced a comfortable parliamentary majority for New Democracy, a conservative party committed under prime minister Kyriakos Mitsotakis to a well-designed programme of economic reform, fiscal responsibility and administrative modernisation.

Firstly let me give the FT some credit for lowering its paywall for a bit. However the latter sentence is playing politics which is an area they have got into trouble with this year on the subject of Greece but I will leave that there as I keep out of politics.

As to the economics you may note that the first 2 points cover financial markets rather than the real economy and even the first point is a sentiment measure rather than a real development. If we work our way through them it is of course welcome that capital controls have now ended although it is also true that it is troubling that they lasted for more than four years.

Switching to Greek bonds we see that they did indeed join the worldwide bond party. I am not quite sure though about the all-time July low as you see it is 1.31% as I type this compared to being around 1% higher than that in July! Perhaps he has not checked since it dipped below 2% at the end of July which is hardly reassuring. As to why this has happened other than the worldwide trend there are 2 other factors. Firstly there is the way that the European Stability Mechanism has changed the debt envelope as the quote from Karl Regling below shows.

 In total, Greece received almost €290 billion in financial support, of which €205 billion came from the EFSF and the ESM.

So the Greek bond yield is approaching what the ESM charges. Another factor is they way that it has confirmed my “To Infinity! And Beyond!” theme as the average maturity was kicked like a can to 42.5 years. Next is a factor that I looked at on the 9th of July and Klaus also notes.

The general government primary balance in programme terms last year registered a surplus of 4.3% of GDP, strongly over-performing the fiscal target of 3.5% of GDP.

This is awkward for the political theme of the article as it was achieved by the previous government. Also let me be clear that whilst this is good for bond markets there is a big issue for the actual economy as 4.3% of demand was sucked out of it which is a lot is any circumstance but more so when you are still in an economic depression.

So it is a complex issue which to my mind has seen Greek bond yields move towards what the ESM is charging which is ~1%. Maybe the ECB will add it to its QE programme as well as whilst it does not qualify in terms of investment rating it could offer a waiver.

Greek Consumer Confidence

I have to confess referring to a confidence signal does set off a warning klaxon. But let us add in this from the Greek statistics office.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in June 2019, increased by
2.3%, compared with the corresponding index of June 2018……..The seasonally adjusted overall volume index in June 2019, compared with the corresponding index of May 2019, increased by 2.5%.

So there has been some growth. However there is a but and it is a BUT. You might like to sit down before you read the next bit. The volume index in June was 103.5 which compares to 177.7 in March 2008 and yes you did read that right. I regularly point out that monthly retail sales numbers are erratic so let me also point out that late 2007 and early 2008 had a sequence of numbers in the 170s. Even worse this century started with a reading of 115.4 in January 2000.

So we have seen a little growth but not much since the index was set at 100 in 2015 and you can either have a depression lasting this century or quite a severe depression since 2008 take your pick. Against that some optimism now is welcome but does not really cut it in my opinion.

Economic growth

There is a reference to it.

Even before these clouds appeared on the horizon, however, Greece was not rebounding from the debt crisis with the vigour of other stricken eurozone economies such as Ireland, Portugal and Spain.

That is one way of putting a level of GDP that has fallen 18% this decade. In 2010 prices it opened this decade with a quarterly performance of just over 59 billion Euros whereas in the second quarter of this year it was 48.3 billion. I am nit sure that “clouds on the horizon” really cover an annual growth rate struggling to each 2% after such a drop. Greece should be rebounding but of course as I have already pointed out the dent means that 4.3% of economic activity was sucked out of it last year. So no wonder it is an L-shaped and not a V-shaped recovery. At the current pace Greece may not get back to its previous peak in the next decade either.


There are some references to ongoing problems in Greece as for example the banks.

A second factor is the fragility of Greece’s banks. By the middle of this year, they were burdened with about €85bn in non-performing loans. To some extent, however, liquidity conditions are now improving.

Not mentioned is the fact that according to the Bank of Greece more than another 40 billion Euros needs writing off. From January 19th.

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).

That brings us to another problem which is that the debt was supposed to fall from 2012 onwards whereas even now there are plans for it to grow. So whilst the annual cost has been cut to low levels the burden just gets larger.

Also there has been a heavy human cost in terms of suicides, hospitals not being able to afford drugs and the like. It has been a grim run to say the least. The ordinary Greek did not deserve anything like that as they were guilty of very little. The Greek political class and banks were by contrast guilty of rather a lot. The cost is an ongoing depression which looks like it will continue for quite some time yet. After all I welcome the lower unemployment rate of 17% but also recall that such a rate was considered quite a disaster on the way up.

Is this the real life? Is this just fantasy?
Caught in a landslide, no escape from reality
Open your eyes, look up to the skies and see ( Queen)


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

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

Greek government bond yields below 3%

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

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

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

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

Some Perspective

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

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

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

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

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

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

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

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


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

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

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

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

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

Trade Problems

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

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

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

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

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

Sea transport receipts rose by 18.9%.

Money Supply

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

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

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

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


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

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

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

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

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

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

Weekly Podcast

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


Greece GDP growth is accompanied by weakening trade and falling investment

Let us take the opportunity to be able to look at some better news from Greece which came from its statistics office yesterday.

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

So Greece has achieved the economic growth level promised for 2012 in the original “shock and awe” plan of the spring of 2010. Or to be more specific regained it as the 1.3% growth of the second quarter of 2017 saw the annual growth rate rise to 2.5% at the opening of this year before falling to 1.7%. So far in 2018 Greece has bucked the Euro trend but in a good way as quarterly economic growth has gone 0.5%,0.4% and now 1%.

If we continue with the upbeat view there was this on Monday from the Markit PMI business survey of the manufacturing sector.

Greek manufacturing firms signalled renewed growth
momentum in November, with the PMI rising to a six month high. The solid overall improvement in operating
conditions was driven by stronger expansions in output and
new orders. That said, foreign demand was not as robust,
with new export order growth easing to a 14-month low.
Manufacturers increased their staffing numbers further
in November, buoyed by stronger production growth and
domestic client demand.

So starting from a basic level there is growth and it is better than the average for the Euro area with a reading of 54 compared to 51.8. Also there is hopeful news for an especially troubled area.

In line with stronger client demand, manufacturing firms
expanded their workforce numbers at the fastest pace for
three months. Moreover, the rate of job creation was one of
the quickest since data collection began in 1999


If we move to the detail of the national accounts we see that even this level of growth comes with concerns.

Exports of goods and services increased by 2.8% in comparison with the 2nd quarter of 2018. Exports of goods increased by 1.0% while exports of services increased by 3.8%.

This looks good at this point for what was called the “internal devaluation” method where the Greek economy would become more price competitive via lower real wages. But it got swamped by this.

Imports of goods and services increased by 7.5% in comparison with the 2nd quarter of 2018. Imports of goods increased by 8.3% while imports of services increased by 2.2%.

If we look deeper we see that the picture over the past year is the same. We start with a story of increasing export growth looking good but it then gets swamped by import growth.

Exports of goods and services increased by 7.6% in comparison with the 3rd quarter of 2017. Exports of goods increased by 7.9%, and exports of services increased by 8.0%…… Imports of goods and services increased by 15.0% in comparison with the 3 rd quarter of 2017. Imports of goods increased by 15.0%, and imports of services increased by 16.0%.

This is problematic on two counts and the first one is the simple fact that a fair bit of the Greek problem was a trade issue and now I fear that for all the rhetoric the same problem is back. Perhaps that is why we are hearing calls for reform again. Are those the same reforms we have been told have been happening. Also I note a lot of places saying Greek economic growth has been driven by exports which is misleading. This is because it is the trade figures which go in and they are a drag on GDP due to higher import growth. We can say that Greece has been both a good Euro area and world member as trade growth has been strong over the past year but it has weakened itself in so doing.


An economy that is turning around and striding forwards should have investment growth yet we see this.

Gross fixed capital formation (GFCF) decreased by 14.5% in comparison with the 2nd quarter of 2018.

Ouch! Time for the annual comparison.

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

Whilst those numbers are recessionary as a stand-alone they would be signals of a potential depression but for the fact Greece is still stuck in the middle of the current one. For comparison Bank of England Governor Mark Carney asserted that UK investment is 16% lower than it would have otherwise have been after the EU Leave vote so Greece is much worse than even that.

There are issues here around the level of public investment and the squeeze applied to it to hit the fiscal surplus targets. If this from National Bank of Greece in September is to turn out to be correct then it had better get a move on.

A back-loading of the public investment programme, along with positive confidence effects, should provide an additional boost to GDP growth in the H2:2018,

What did grow then?

Rather oddly the other sectoral breakdown we are provided with shows another fall.

Total final consumption expenditure decreased by 0.2% in comparison with the 2nd quarter of 2018.

But the gang banger in all of this is the inventories category which grew by 1321 million Euros or if you prefer accounts for 2.4% quarterly GDP growth on its own. This is not exactly auspicious looking forwards as you can imagine unless there is about to be a surge in demand. The only caveat is that we do not get a chain-linked seasonally adjusted number.


As you can see there is plenty of food for thought in the latest GDP numbers for Greece.On the surface they look good but the detail is weaker and in some cases looks simply dreadful. That is before we get to the impact of the wider Euro area slow down. The problem with all of this is that of we look back rather than the 2.1% economic growth promised for 2012 Greece saw economic growth plunge into minus territory peaking twice at an annual rate of 10.2%. Or the previous GDP peak of 60.4 billlion Euros of the spring of 2009 has been replaced by 48 billion in the autumn of 2018.

Meanwhile after the claimed triumphs and reform and of course extra cash the banks look woeful. So of course out comes the magic wand. From the Bank of Greece.

The proposed scheme envisages the transfer
of a significant part of non-performing exposures
(NPEs) along with part of the deferred
tax credits (DTCs), which are booked on bank
balance sheets, to a Special Purpose Vehicle
(SPV). value (net of loan loss provisions). The
amount of the deferred tax asset to be transferred
will match additional loss, so that the
valuations of these loans will approach market
prices. Subsequently, legislation will be
introduced enabling to transform the transferred
deferred tax credit into an irrevocable
claim of the SPV on the Greek State with a
predetermined repayment schedule (according
to the maturity of the transaction).

More socialisation of losses?


What does the 10 year yield of Greece tell us?

Today’s headline or title introduces a subject which I find both frustrating and annoying.This is not only because it regularly misunderstood but also because it represents something of a financialisation of the human experience. What I mean by that is that some have used it as a way of suggesting an improvement in Greek economic performance that does not exist. Personally I sometimes wonder if it is used because it is the one signal that does show a clear improving trend. Let me illustrate with this from the LSE European Politics blog this morning.

A fall like that looks good on the face of it. Few point out the irony which is that falls in bond yields like that used to mean that a country was heading into at best a recession and probably a depression. Actually a drop from around 10% to around 4% indicates that something may be wrong so let us investigate.

The Greek bond market

A troubling sign arrives when we look for the benchmark 10 year bond of Greece and see that the benchmark page at the Hellenic Republic debt agency or PDMA is “under construction”. If we look at the data at the end of 2017 we see that of total debt of 328.7 billion the total of bonds is around 50.4 billion and if we add in treasury bills and the like we get to 65.4 billion.

By comparison the European Stability Mechanism or ESM tells us this.

The loan packages from the ESM and EFSF are by far the largest the world has ever seen. The two institutions own half of Greece’s debt.

Actually the support for Greece totals some 233 billion Euros which means we need to add the IMF and the original Greece “rescue” package to the numbers above.

Oh and as to the bond total well there is still the SMP which sounds like something used in the Matrix series of films but is in fact the Securities Markets Program which has mostly been forgotten but still amounts to 85 billion Euros. These days that is I guess a balancing item in the ECB accounts but it does appear here and there.

The ECB’s interest income from its SMP holdings of Greek government bonds amounted to €154 million (2016: €185 million).

There was a time that the SMP was a big deal and regular readers will recall so was its “sterilisation” but the ECB got bored with that in 2014 and gave up. Oh well!

But if we move on we see that there are relatively few Greek bonds around and of those that do exist the ECB holds a fair bit.

Why has the bond yield fallen then?

You could argue that the bond yield should have fallen before. A possible reason for it not doing so is that it is now too small a market for big hedge funds to bother with, especially if we note that a busy month now for the market (December) had a volume of 120 million Euros. But if we look from now there have been changes in the bond metrics. For example the average maturity of Greek bonds has risen mostly by the fact that ESM loans have an average maturity of 32 years. Also bond investors may have noticed a certain “To Infinity! And Beyond” willingness from the ESM and added that to the overall bond maturity of 18.32 years.

Fiscal Matters

The LSE blog summarises matters like this.

Greece has outperformed Programme budget targets . According to the Hellenic Fiscal Council, Greece may have reached a 3.5% primary surplus in 2017 already, versus a target of 1.75%. There are reasons to be optimistic about Greece meeting the fiscal targets in 2018 as well. Maintaining a 3.5% primary surplus also in the years to come appears feasible. On balance, the overall improvement of the fiscal situation is impressive.

From a bond investor’s point of view this if combined with the extended average maturity looks more than impressive as it means on their metrics the thorny issue of repayment has been kicked into the future. They will also like this statement from the ESM on the 27th of March.

 Today the Board of Directors of the European Stability Mechanism (ESM) approved the fourth tranche of €6.7 billion of ESM financial assistance for Greece. …….The tranche will be used for debt service, domestic arrears clearance and for establishing a cash buffer.

Problems in the real economy

There is a very descriptive chart in the LSE blog.

This shows us that the initial credit crunch impact on Greece was what we might call Euro area standard. But those of a nervous disposition might want to take the advice of BBC children’s programming from back in the day and look away now from the real crisis. Here we saw “shock and awe” but not of the form promised by Christine Lagarde which back then was France’s Finance Minister. An attempt to achieve the fiscal probity so approved of by bond markets saw the economy plunge into quite a recession and made an already bad situation worse. But the rub is that the recovery such as it is was not the “V-shaped” bounce back you might expect but rather this.

However, not only is there no indication of any catching up following the crisis, but also the pace of growth remains below the Eurozone’s.

So whilst we now have some growth there has been no relative recovery and in fact on that metric things have got worse. This comes in spite of the “Grecovery” theme of around 2013 which was an example of what we now call Fake News and of course was loved by the Euro area establishment. The reality is not only did thy make the recession worse they seem to have managed to prevent a bounce back as well. We can bring this up to date with the latest business survey for Greek manufacturing.

At 55.0, the index reading signalled a
marked rate of growth, albeit one that was weaker
than the multi-year high seen in February (56.1).

I am pleased to see that but you see that is slightly worse than what the UK did in March. I will not tire you with the different themes and descriptions in the media but simply say I am sad for Greece and  its people and use the famous words of Muhammad Ali.

Is that all you’ve got George?


If we step back we can see the impact of what is called “internal competitiveness” or if you prefer squeezing real wages. Let us look at that a different way as the UK had some of this albeit not as much. But the measure here we gives us a scale of the disaster is unemployment which has got better in Greece but comparing an unemployment rate of 20.8% with one of 4.3% is eloquent enough I think.

It also gives us an easy cause of this issue raised by the LSE.

Direct tax revenues are not performing very well. The high rate of social contributions has probably increased the area of tax evasion.

Also I am reminded that the IMF has failed in an area it mostly used to be successful in.

The external position has improved sharply, although more because of weakness in domestic demand than strength in export activity. Export performance remains underwhelming.

You see on that performance any improvement will simply put Greece back into balance of payments problems which is sort of where we came in. Also there is this from the Bank of Greece.

On 8 March 2018 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €16.6 billion, up to and including Wednesday, 11 April 2018, following a request by the Bank of Greece.

The reduction of €3.2 billion in the ceiling reflects an improvement of the liquidity situation of Greek banks, taking into account flows stemming from private sector deposits and from the banks’ access to wholesale financial markets. 

So it has got better but it has yet to go away.

Thus in summary we see that we have seen something of a divorce between the Greek financial and real economies. Prospects for the bond market look good but the real economy has not done much more than stop falling with a lot of ground still to be reclaimed. Those who look at credit conditions will not be reassured by this from the LSE blog.

 According to the Bank of Greece, the annual growth rate of credit to the private sector stood at -1.0% in February, and that of credit to corporations at 0.2%.

There was a time when the supporters and acolytes of the Euro area “shock and awe” package accused me and others who were in the default and devaluation camp of being willing to collapse the economy so let me finish with some Michael Jackson.

Remember the time
Remember the time
Do you remember, girl
Remember the time



Greece sees its economic depression continue with ever more debt

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

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

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

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

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

What about debt relief?

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

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

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

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

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

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

The debt continues to pile up

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

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

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

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


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

2012  GDP 191.2 Billion Euros

2013 GDP 180.7 Billion Euros

2014 GDP 177.9 Billion Euros

2015 GDP 175.7 Billion Euros

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

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

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

The monetary position

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

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

House Prices

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

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

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

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


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

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


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

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

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

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

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

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

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

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

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

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



How and when can the Greek banks support a Grecovery?

Yesterday saw something of a misfire for the monetary policy Bazooka of Mario Draghi and the European Central Bank. It was also a misfire for the Financial Times which put out an incorrect announcement five minutes early which begs a question as you see the ECB has repeated the mistake on its website.

the deposit facility will remain unchanged…… -0.2%

It sort of symbolised the day and something must have been in the air as agency after agency made mistakes. I have not seen anything like it since the 1990s when one news agency declared a German interest rate rise as another declared a cut and bedlam ensued! Just for clarity the deposit rate was reduced to -0.3% from December 9th. In terms of consequences well the Euro shot higher to 1.09, Euro area bond markets plummeted just as Mario was giving himself the credit for them rising, and equity markets fell too for a financial market clean sweep.

However there was quite a bit of news relating to the relationship between the ECB and Greece that slipped to some extent under the radar. Indeed Deputy Governor Vitor Constancio was woken up to give us some of the news which is a sign of the times. I use the number of times his afternoon nap is disturbed at ECB press conferences as a signal of trouble. If there is credit to be taken and easy results Mario holds sway if not what is often a hospital pass is swept out.

The Greek banks

The ECB has been supplying an extraordinary level of support for the Greek banking industry most publicly shown by the amount of Emergency Liquidity Assistance or ELA. From the Bank of Greece.

On 3 December 2015 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €77.9 billion, up to and including Wednesday, 16 December 2015, following a request by the Bank of Greece.

The reduction of €7.8 billion in the ceiling reflects an improvement of the liquidity situation of Greek banks amid a reduction of uncertainty and the stabilization of private sector deposits flows, as well as the progress achieved in the recapitalisation process of Greek banks.

Quite a chunky reduction in something which the ECB had been reducing in thin slivers up to then. Also we have learnt to take care with gifts being given to Greeks so let us investigate further as after all “stabilization of private sector deposits flows” is not a great vote of confidence if you think about it.


This for the Greek banks has been rather like London buses. Do not worry if you miss one as another will be along in a minute. The latest one has been particularly problematic as after all there are only so many times you can tell people that a corner has been turned! Yesterday saw one in particular hit hard. From Kathimerini.

with National Bank (of Greece) suffering a widely anticipated 30 percent limit-down upon its return to the market with its new shares after its capital increase.

All the banks required further dilution of existing shareholders and as you can see Natioanl Bank of Greece shareholders were hit heavily again. Also Piraeus bank needed the help of the European Stability Mechanism.

Piraeus Bank requires additional state aid through the Hellenic Financial Stability Fund (HFSF), which is funded by the ESM. The first disbursement of €2.72 billion on 1 December 2015 covers such capital needs.

This consequence of this lead to this at the ECB press conference yesterday.

some politicians in Greece say that the shareholdings of the Greek State and the pension funds in Greek banks have become worthless because of the recapitalisation method imposed by the institutions. What is your view?

Ouch! Here is Vitor’s reply.

So there is in that respect not a problem of valuation of those public shares.

As Greek banking shares fell by another 10% yesterday shareholders will not think that! But apparently.

So the statement, that those public investments are worthless, is not correct.

Why is that Vitor?

(Because they) will benefit from any profits or dividends that the banks will get in the future.

These profits will have to be extraordinary at National Bank of Greece were shares have just been issued at more than a 90% discount and this of course comes on top of many other falls and discounts in the Greek crisis.

Greek banking liquidity

The mainstream media has moved on as this is no longer a matter for the headlines but towards the end of last month the numbers posed a question?From Reuters.

Business and household deposits dropped by 590 million euros or 0.5 percent month-on-month to 121.08 billion euros ($129.1 billion), to their lowest level since March 2003.

Thus the overall situation if we look at 2015 so far is this.

Greece saw a 42 billion euro deposit outflow from December to July.

What we learn is that the money went but so far at least has not come back which is probably why we are seeing a barrage of rhetoric from EU officials that “haircuts” are off the agenda now.

Official Interest-Rates and Reality

You might think that is there is anywhere that the new even more negative deposit interest-rate of the ECB will apply it is Greece. After all it has so much negative GDP,prices, and wages. Yet in an echo of one of the opening themes of this blog back in 2009 take a look at reality. From the Bank of Greece.

The overall weighted average interest rate on all new loans to households and corporations increased by 29 basis points from the previous month to 5.08%.

Depositors can also get some interest albeit not much.

The overall weighted average interest rate on all new deposits decreased by 7 basis points, compared with the previous month, to 0.62%.

So what is called the transmission mechanism for monetary policy is pretty much broken if we look beneath the hype.

Another problem for Greek banks

So often and particularly in my own country I report on banks getting a back door bailout via house prices (assets against the banks loan book) rising. However in Greece things are very different. From the Bank of Greece.

According to data collected from credit institutions, nominal apartment prices are estimated to have declined on average by 6.1% year-on-year in the third quarter of 2015. According to revised data, for the first and second quarters of 2015 apartment prices fell at an annual rate of 3.9% and 5.0% respectively, whereas for 2014 as a whole the average annual decline was 7.5%.

Or as Alicia Keys would put it.

I keep on

Please do not misunderstand me I am not arguing for house prices and another bank bailout what i am saying is that under current conditions how can the Greek banking sector support the real economy?

QE for Greece

I have written before that the ECB has its finger on the trigger of approving QE for Greece, or to be more specific it is dangling it as a carrot in front of the Greek govenrment.The quid pro quo would be some economic reforms. This will be a two stage process where Greek banks return to normal liquidity operations. Yesterday it dropped another heavy hint about this.

that could even happen before the conclusion of the review, if we would be close enough to that end of the review and we would be convinced that the review would become successful.

Sadly nobody had the wit to reply with how this affects the constant proclaiming that the ECB is a “rules based organisation”. Next would come admittal to QE.

What would it be worth? Well for holders of Greek bonds quite a lot as one might expect the ten-year bond yield to halve from the current 8%. For Greece itself then issuing bonds would be cheaper than otherwise, but and here is the rub, still much more expensive than going to the ESM.


The Greek financial system remains very troubled and a lot of time has been wasted in 2015. The ECB has a very difficult job as repairing the banks will first help hedge and vulture funds more than Greek investors and taxpayers. Also in spite of the proclamations of success the deposits that left have not returned.

Meanwhile the real issue is how the banking system can support the real economy where nearly 3 years after the “Grecovery” rhetoric began we see this. From Greek Statistics.

in the 3rd quarter of 2015 the Gross Domestic Product (GDP) in volume terms decreased by 0.9% compared with the 2nd quarter of 2015


The volume of retail trade (i.e. turnover in retail trade at constant prices) in September 2015, recorded a decrease of 3.2% compared with the corresponding index of September 2014, while compared with the corresponding index of August 2015, recorded a decrease of 8.5%.

The underlying index for retail sales is stuck firmly in depression territory at 69.6 where 2010 when “shock and awe” according to Christine Lagarde began was 100. So how is the too big to fail and banking bailout strategy going?




European Central Bank monetary policy and Greece

The Greek saga has now continued for over five years and it has managed to produce an economic depression to rank with the falls of the Great Depression of the 1920s and 30s. At the beginning the European Central Bank was relegated to the back as Euro area politicians proclaimed their “shock and awe” program which produced the disaster that has unfolded since but very quickly it was required to take action. In the melee which has followed it is easy to forget that a type of Quantitative Easing began in Greece back in May 2010 as the ECB purchased its government bonds. The official view was that it was not QE because there was a weekly sterlisation auction to withdraw the liquidity created but this ignored various effects. Firstly the Greek bond market was supported, secondly holders of Greek bonds (banks for example…) were given a taxpayer-funded exit,and thirdly whilst some funds were withdrawn they were across the Euro area rather than specific to Greece. Also the liquidity withdrawal was of weekly funds as opposed to the 3/4 year maturity of the bonds purchased and that matters. You do not have to take my word for it as the Federal Reserve and Bank of England think so otherwise they would never have instituted Operation Twist style strategies which depend on precisely that.

So there was a time when the ECB was a friend to Greece if I may put it like that. There were also other programs such as the trillion Euro LTROs (Long-Term Repurchase Operations) which indirectly benefited Greece as well as the cut in the main interest-rate to -0.2%. However times have changed and it is now operating expansionary monetary policy elsewhere but has been keeping the monetary sector in Greece on a much shorter leash.

Euro area monetary policy

This is very accommodative right now. In addition to the measures described above the ECB commenced a formal program of QE in January. Up until this date it had a couple of relatively minor programs but the effort since has been expanded to 60 billion Euros a month and now includes sovereign bonds.As of the 19th of June some 182.2 billion Euros had been spent on operations in this area.

Today’s update on monetary data does show how these sums are in some instances flooding into the Euro area monetary system.

the annual growth rate of M1 increased to 11.2% in May 2015, from 10.5% in April.

However as I have discussed before as we move to wider monetary aggregates the impact fades considerably.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in May 2015, from 5.3% in April 2015.

If we move to the area of credit the numbers are much lower.

Among the components of credit to the private sector, the annual growth rate of loans increased to 0.5% in May, from 0.0% in the previous month (adjusted for loan sales and securitisation , the rate increased to 1.0%, from 0.8% in the previous month).

Indeed for businesses the situation has in fact deteriorated.

The annual growth rate of loans to non-financial corporations stood at -0.3% in May, compared with -0.4% in the previous month.

As you can see the ECB is making an extraordinary effort which as we go into the wider measures of the monetary system fades away quite fast. It has produced a more clear cut rise in another area but I will let readers decide if this is a success or not.

The annual growth rate of lending for house purchase, the most important component of household loans, increased to 1.4% in May, from 0.1% in the previous month.

Perhaps it is copying the policy of the Bank of England which enjoys pumping up the housing market. As an aside this is an area which is also awkward for the ECB as of course if we look at Spain which has seen official estimates of annual economic growth vary between 3.1% and 4% this week what is does not need is a new housing related boom.

Accordingly we see that even with what would only a few short years ago have seemed an extraordinary effort the ECB is seeing patchy results especially if we recall that it had expansionary policies in place before its new QE effort. However the tap is definitely tuned on.

What about Greece?

Here we have a complete contrast in terms of monetary action especially as this is the Euro area country you might think would most benefit from a monetary boost. This point was made in the Economist magazine by its Finance Minister Yanis Varoufakis back in late January.

Ideally, bond purchases should be proportional to a member-state’s debt overhang and its output gap or investment shortfall.

By all three measures Greece would be at number one in the charts rather than being excluded. There are a couple of awkward issues here because Greece has already benefitted from the  QE style purchases by the ECB discussed above which is one of the reasons it is not active there now. Put simply it cannot buy the same bonds twice! Rolling the bonds over on maturity would not only look like debt monetisation it would be.

In spite of the other expansionary monetary efforts we see that the Greek money supply continues to shrink. Todays’s official data brings us up to the beginning of this month and it does not make good reading.

Total deposits at Greek banks which were some 159.6 billion Euros at the end of November had fallen to 125.2 billion at the end of May. If we move to the household sector alone deposits fell from 136.5 billion Euros to 111.8 billion over the same period. If we look at May on its own then the Greek household sector withdrew some 3 billion Euros from Greek banks. Putting it another way this is what economic and finance text books mean when the use the phrases capital flight and deposit flight. Actually we are in fact simply in a faster phase of it because is we look back to the end of 2009 total deposits at Greek banks were 234.5 billion Euros.

Thus if we look at a type of pure monetarism we are left with a very troubling though because the original crisis with its deposit falls was followed by an economic depression. So further falls which we believe have accelerated even more in June point to a grim economic future for Greece.

The ECB has a specific policy to combat this which is called ELA (Emergency Liquidity Assistance). But the way that it grudgingly gave weekly increases to the amount of ELA only made things worse in my opinion because it gave the impression that it could stop doing so. Frankly the ECB undermined its own actions by doing this and something which was supposed to calm the crisis in fact exacerbated it. Indeed in something of an irony it was forced into a volte face with a change to daily announcements and actions. Today was better in the sense that no increase was required but of course the money that can leave probably already has.


The founders of the Euro area left its central bank with quite a list of problems. For example the UK has regions with economic problems but by contrast it is a nation-state with fiscal and political union.Now here is a really dark thought for you which is that some Euro area supporters may not be that upset over the Greek crisis as it provides an opportunity to press for exactly that where fiscal union creates a federal state. As Frances Coppola points out below something along those lines appeared on Monday.

Today, the five Presidents – European Commission PresidentJean-Claude Juncker, together with the President of the Euro Summit, Donald Tusk, the President of the Eurogroup,Jeroen Dijsselbloem, the President of the European Central Bank, Mario Draghi, and the President of the European Parliament, Martin Schulz – have revealed ambitious plans on how to deepen the Economic and Monetary Union (EMU) as of 1 July 2015 and how to complete it by latest 2025

This has been added to by Euro area politicians who put a fiscal squeeze on Greece when it was already in crisis. As I discussed only on Wednesday that seems to be the plan going forwards too.

However if we return to pure monetary policy we find that the ECB is pursuing what it considers to be an extremely expansionary policy except that it is not reaching Greece. Putting it the words of Governor Carney monetary policy there looks “maxxed-out”. It is to use a past analogy “pushing on a string” as fear offsets its efforts. As the chance of capital controls being introduced rises ECB policy gets undermined as what Keynes called “animal spirits” take charge. What a mess!

A Video Version

I was interviewed by Kumutha Ramanathan of World Finance magazine on Tuesday on the subject of Greece and for those who prefer a video analysis it is shown below.

Central banks are supposed to stop bank runs and capital flight not feed them!

Last night was an extraordinary one in the development of the Greek crisis and let’s face it after some 5 years or so we have become somewhat numbed to events there. Some such as BBC Newsnight economics correspondent Duncan Weldon seemed to suggest we were heading for a deal  saying “a few optimistic straws are in the wind. ” However even he now admits it all fell apart. A more realistic view was that more posturing was likely on all three sides ( Europe, The International Monetary Fund or IMF and the Greek government). After all we have been supposedly “close” to a deal for weeks as that word moves into my financial lexicon for these times and frankly it has seemed much longer. Still I suppose the group Europe are pleased that their biggest hit continues to get free publicity nearly 30 years later.

It’s the final countdown
The final countdown
The final countdown
(Final countdown). Ohhh oh oh ohhhh
The final countdown.

Although there is a bit more food for thought in the part of the lyric quoted below.

We’re leaving together
But still it’s farewell

That makes quite a counterpoint to the famous line from Hotel California which sums up the Euro area attitude to Greece’s use of the currency.

Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “

Deposit flight

We find ourselves returning to the subject of Mondays article so quickly and one reason for this is that what I feared was already in play before last night’s events. From Bloomberg.

Greek savers pulled more than 1 billion euros from banks in one day on Thursday, three senior banking sources told Reuters, with the pace of withdrawals gaining speed since talks between the government and its creditors collapsed last weekend.

The withdrawals between Monday and Thursday have reached about 3 billion euros ($3.39 billion), representing about 2.2 percent of household and corporate deposits held by Greekbanks at the end of April.

This is a different form of credit crunch as it is individual to Greece but these latest flows come on top of previous departures.

As you can see deposits have been fleeing Greece and it has increased the demand for cash too as presumably some money is now being stored in the equivalent of under the mattress as well as going abroad. Of course those are just the official figures which do not include the deposit flight from the beginning of May. They would look much worse now as flows have accelerated.

Just for clarity as I have been asked this on twitter the phrase capital flight is something of a misnomer. Yes it is capital flight from Greece but for the banks it is a loss of deposits rather than capital and is therefore a cash flow issue. This,of course poses its own problems as they have to reshuffle their own financial position as they are forced to hold ever more liquid assets so they can supply the cash withdrawals and transfers out. There has also been help from the central bank which I will analyse in a moment.

This must be a brake on bank lending in Greece which is one of the things it badly needs to help it escape an economic situation which is of a depression combined with a recession. Even before this latest phase the position was poor and I fear for what it is right now.

In April 2015, the annual growth rate of total credit extended to the domestic private sector remained almost unchanged at -2.4%, against -2.5% in the previous month.

On Wednesday the Annual Report of the Bank of Greece expressed the same fears.

The deterioration of economic sentiment indicators and financing conditions in the private sector suggest that the slowdown of the economy is likely to accelerate in the second quarter of 2015, putting the economy at risk for a renewed bout of recession.

Cars as cash vehicles

A comment yesterday pointed out that more than the usual number of new cars with Greek number plates are being seen in Bulgaria. It is true that against the recessionary and indeed depressionary trend in Greece car sales have pushed a fair bit higher in 2015. Up to the end of May they were 15.7% higher with the increase accelerating to 21.6% in May itself.

So cars seem to be a vehicle for moving cash. It poses all sorts of questions for the value of money at a time like this as of course they are a depreciating asset which usually depreciates substantially on the first drive. Desperate times indeed. It makes you wonder if some are round-tripping this by borrowing in Greece and then disappearing over the horizon in their car expecting some form of debt forgiveness.

Official help or ELA

The mechanism which is supposed to help in these circumstances is called ELA or Emergency Liquidity Assistance. As the second graph above shows it has been going inexorably higher recently as the central bank tries to stop the banking system from grinding to a complete halt. Every Wednesday the ECB sits down to review whether it should give the Bank of Greece permission to increase the ELA limit. In itself that raises fears that one week it may say “no” or perhaps more accurately “nein” and it poses real questions for the concept of “lender of last resort” in Greece. Let’s be clear here if I was Mario Draghi I would be asking for daily reports on the banking outflows as dealing with such matters is a fundamental role for a central bank. Anyway its hand was forced on Wednesday as it oiled the wheels one more time. From Bloomberg.

Greece received a 1.1 billion-euro ($1.25 billion) increase in ELA that took the cap to 84.1 billion euros.

This inexorable rise poses its own problems for the ECB which finds itself ever more exposed to the Greek banking system and indeed to Greece itself. This was something which until recently Mario Draghi was prone to boasting about.

So far, we have reached an exposure to Greece of €110 billion, which is the highest in the euro area in relation to GDP.

Well it is a fair bit higher now which may have led to something of a crisis of confidence at the ECB if this from last night is any guide. This is ECB Governing Council Member Benoit Coeure on Greek banks being able to open.

“Tomorrow yes. Monday I don’t know.”

Both he and whoever leaked this would be made to put on a jesters uniform and wear a clowns hat if I was in charge as this is exactly how you start or to be more precise in this instance exacerbate a bank run. Those wondering about the truth of this would have had a wry smile as the official denial came very quickly as of course we know what official denials mean! It is not as if Benoit Coeure does not have form as this happened only a month ago.

Hedge Fund Diners Get ECB’s Market-Moving News Hours Early

Time for him to do the decent thing and fall on his sword I think.

The consequence was to make everything worse including for the ECB itself as Kathimerini points out.

Sources said that the BoG (Bank of Greece) has asked for additional funding of 3.5 billion euros to cover the growing needs.

That is for this morning and the ECB Governing Council is discussing it right now. If it is the “rules-based organisation” it regularly claims to be then the teleconference should last only as long as it takes to say yes. On this road it has tied itself ever more into Greece without the backstop of being directly linked to and backed by the Greek Treasury. I guess ECB staff are crawling all over the collateral it has received from Greece right now hoping not to have to echo the phrase of “phantom securities” used by the Bank of England when it found that it has been gamed.


There is much to consider in all of this as the flaws in the structure of central banking in the Euro area come home to roost. Let’s face it you know you are in a bad way when the government of Vladimir Putin thinks there is something to be gained by offering “help”. The situation has developed so far that even the Euro supporting Financial Times has published a piece suggesting that there is another way.

Conventional wisdom holds that it would be an unmitigated disaster for Greece if it left the euro. This is, after all, why the country has continued to cling to the single currency despite the catastrophic decline in employment and output. But what if those costs have been grossly overstated?

Only five years too late and past the best moment but it would get Greece out of its current mess and remains the best chance for genuine reform or as Aretha Franklin put it.

Oh freedom (freedom), freedom (freedom), freedom, yeah freedom
Freedom (freedom), freedom (freedom), freedom, ooh freedom

Yeah, think (think) think about what you’re trying to do to me
Yeah, think (think, think), let your mind go, let yourself be free

Or as another part of Hotel California puts it.

Up ahead in the distance, I saw a shimmering light

Meanwhile the beat goes on for one of the players who helped cause this whole saga. From the FT.

UK govt picks Goldman for RBS and Lloyds deals

The tentacles of the Vampire Squid have us all by the throat.