China faces up to a ratings downgrade

This morning we have received news about the world’s second largest economy. The Ratings Agency Moodys issued this statement.

Moodys Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook from negative to stable.

As you can see from the statement this was not a complete surprise as the outlook had been negative although in some ways the timing was as not so long ago the IMF had told us this. From Reuters on the 18th of April.

The IMF upgraded its estimate for China’s 2017 growth to 6.6 percent from 6.5 percent, which it made in January. It also raised its forecast for growth next year to 6.2 percent from the previous 6.0 percent.

This added to the upgrade it has given China in January when it had raised the economic growth forecast for 2017 from 6.2%. In fact only on the 9th if this month the IMF had repeated this message.

In China, the region’s biggest and the world’s second largest economy, policy stimulus is expected to keep supporting demand. Although still robust with 2017 first quarter growth slightly stronger than expected, growth is projected to decelerate to 6.6 percent in 2017 and 6.2 in 2018.


This slowdown is predicated on a cooling housing market, partly reflecting recent tightening measures, weaker wage and consumption growth, and a stable fiscal deficit.

Although whilst it was relatively upbeat the IMF has warned about credit expansion.

Why did Moodys act?

As the quote from the Financial Times below shows Moodys are concerned about the financial system in China.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” Marie Diron, the agency’s associate managing director for sovereign risk, wrote in an announcement on Wednesday.

Indeed if we look at the statement they expect China to go along at least part of the journey that us westerners have travelled.

While China’s GDP will remain very large, and growth will remain high compared to other sovereigns, potential growth is likely to fall in the coming years. The importance the Chinese authorities attach to growth suggests that the corresponding fall in official growth targets is likely to be more gradual, rendering the economy increasingly reliant on policy stimulus.

Of course their economic growth is officially recorded at higher levels than ours but it looks like the Chinese will have to accept a sort of new normal where economic growth is lower just like we have.

GDP growth has decelerated in recent years from a peak of 10.6% in 2010 to 6.7% in 2016.

If we look at the situation in terms of the national debt to GDP ratio we have looked at for Greece and the UK this week already then it looks as if China is currently in a lot better place.

Moody’s expects China’s direct fiscal debt to reach 40 per cent of gross domestic product by the end of next year and 45 per cent by 2020. ( Financial Times).

However in a development which is very familiar just like us Westerners the Chinese do all they can to keep what is public-sector debt off the official books.

In addition, it notes that China’s reliance on disguised fiscal spending through off-budget special purpose vehicles owned by local governments is likely to persist. The Financial Times reported this month on a confidential World Bank assessment warning of risks from so-called local government financing vehicles.

Moodys are expecting further growth in this area.

Similar increases in financing and spending by the broader public sector are likely to continue in the next few years in order to maintain GDP growth around the official targets.

Let us look at the wider debt burden in China which is something I looked at back on January 5th.

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements.

Moodys thinks that this will happen going forwards.

More broadly, we forecast that economy-wide debt of the government, households and non-financial corporates will continue to rise, from 256% of GDP at the end of last year according to the Institute of International Finance. This is consistent with the gradual approach to deleveraging being taken by the Chinese authorities and will happen because economic activity is largely financed by debt in the absence of a sizeable equity market and sufficiently large surpluses in the corporate and government sectors.

I would counsel caution about the use of averages here as not only can they be misleading without an idea of dispersion it could be signalling a group going over the cliff together.

Debt and Demographics

Should debt continue to rise then China will share a problem that is affecting more than a few of the evil western capitalist imperialists. From my article on January 5th.

“In 10 to 15 years, China’s demographic decline will become more prominent, and the labour force will be declining by about 5m people per year,” says Brian Jackson, senior economist at the Beijing office of IHS, a consultancy.

Commodity prices updates us on the trends for Iron Ore.

The Northern China import price for 62% Fe iron ore fines was $61.90 a tonne on Monday, down more than 20% year-to-date on growing fears of an oversupplied market.

There is quite a bit going on as the Chinese increasingly use scrap iron in production but it is hard not to think of the Iron Ore which was used as collateral in financial deals as we looked at some time back.How much of that is in today’s 5% fall in the price of Iron Ore futures is hard to say. Dr.Copper rallied at the end of 2016 after several years of decline but seems to have mostly flat lined in 2017 at around US $2.50.

The outlook

This month’s business surveys recorded something of a slow down.

The Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled a further slowdown in growth momentum at the start of the second quarter. This was highlighted by the Composite Output Index posting 51.2 in April, down from 52.1 in March, and the lowest reading for ten months.

The ratio between the numbers here and official levels of economic growth are very different to what we see in the west but any slow down will not be welcome.


There are a few things to consider here. Firstly we are unlikely to see much of a fall in bond prices and rises in yields in response to this as used to happen. The Chinese bond market is almost entirely ( ~ 96% ) domestically owned making it rather like Japan meaning that any selling by foreign investors is not that likely to be significant. Also these days central banks mostly intervene to stop such things don’t they?

Moving onto the economy we see that monetary conditions are the issue and for this to end well the Chinese will have to make a much better job of dealing with a credit boom than we did in the west. Will they be able to continue to tighten policy if economic growth slows further? As to outflows of money we are regularly assured these days that they have pretty much stopped but to my mind there is a worrying signal which is the continuing rise in the price of bitcoin.

The average price of Bitcoin across all exchanges is 2326.72 USD ( @bitcoinprice )

Finally these things are not the same without an official denial are they? From Xinhua News.

China’s Finance Ministry on Wednesday dismissed a decision by international rating agency Moody’s to downgrade China’s long-term local currency and foreign currency issuer ratings.


Greece, how long can it keep going like this?

Today’s topic reminds me of the famous quote by Karl Marx.

History repeats itself, first as tragedy, second as farce.

Sadly Karl did not tell us what to do on the 4th,5th and 6th occasions of the same thing as I note the news from Reuters on Friday.

The legislation contains more austerity measures, including pension cuts and a higher tax burden that will go into effect in 2019-20 to ensure a primary budget surplus, excluding debt servicing outlays, of 3.5 percent of gross domestic product.

This sounds so so familiar doesn’t it which of course poses its own problem in the circumstances. This continues if we look at the detail.

The income tax exemption is reduced to 5,600-5,700 euros from 8,600 euros to generate revenues of about 1.9 billion euros. The lower threshold will mean an increased tax burden of about 650 euros for taxpayers.

Up to 18 percent cuts in main and supplementary pensions and freezing of benefits thereafter until 2022. The cuts will result in savings of 2.3 billion euros.

I do not know about you but if I was raising taxes in Greece I would not be raising them on the poorest as lowering the lower income tax threshold will hit them disproportionately. After all it was the very rich who helped precipitate this crisis by not paying tax not the poor. But the underlying principle’s are pretty much what we have seen since the spring of 2010 especially if we add in this part.

Sale of stakes in railways, Thessaloniki port, Athens International Airport, Hellenic Petroleum and real estate assets to generate targeted privatization revenue of 2.15 billion euros this year and 2.07 billion euros in 2018.

This reminds me of the original target which was for 50 billion Euros of revenue from privatisations by 2015. As you can see the objectives are much smaller now after all the failures in this area and of course these days assets in Greece have a much lower price due to the economic depression which has raged for the last 7 years. Back then for example the General Index at the Athens Stock Exchange was around 1500 as opposed to just below 800 now suggesting that this is yet another area where Greek finances are chasing their tail.

The same result?

Last week saw yet more sad economic news from Greece.

The available seasonally adjusted data indicate that in the 1 st quarter of 2017 the Gross Domestic Product (GDP) in volume terms decreased by 0.1% in comparison with the 4 th quarter of 2016, while it decreased by 0.5% in comparison with the 1 st quarter of 2016. ( Greece Statistics).

This meant that yet another recession had begun which will be a feature of the ongoing economic depression. Another feature of this era has been the official denials an example of which from the 8th of March is below.

Greece’s Prime Minister Alexis Tsipras was confident that the times of recession were over and that “Greece has returned back to growth” as he told his cabinet ministers……..After seven years of recession, Greece has returned to positive growth rates he underlined.

He was not alone as European Commissioner Pierre Moscovici was regularly telling us that the Greek economy had recovered. This means that as we look at the period of austerity where such people have regularly trumpeted success the reality is that the Greek economy has collapsed. The scale of this collapse retains the power to shock as the peak pre credit crunch quarterly economic output of 63.3 billion Euros ( 2010 prices) fell to 59 billion in 2010 which led to the Euro area stepping in. However rather than the promised boom with economic growth returning in 2012 and then continuing at 2%+ as forecast the economy collapsed in that year at an annual rate of between 8% and 10% and as of the opening of 2017 quarterly GDP was 45.8 billion Euros.

What is astonishing is that even after all the mishaps of 2015 with the bank run and monetary crisis there has been no recovery so far. The downwards cycle of austerity, economic collapse and then more austerity continues in a type of Status Quo.

Again again again again, again again again again

The Time Problem

The problem here is simply how long this has gone on for added to the fact that things are still getting worse or at best holding station in economic output terms. This means that numbers like those below have become long-term issues.

The seasonally adjusted unemployment rate in February 2017 was 23.2% compared to 23.9% in February 2016 and the downward revised 23.3% in January 2017.

It is nice to see a fall but falls at the rate of 0.9% per annum would mean the unemployment rate would still be around 20% at the end of the decade following the “rescue” programme which I sincerely hope is not the “shock and awe” that Christine Lagarde proclaimed back then. If we move to the individual level there must be a large group of people who now are completely out of touch with what it means to work. I see a sign of this in the 25-34 age group where unemployment was 30.4% in February compared to 29.3% in the same month in 2012. This looks like a consequence of the young unemployed ( rate still 47.9%) simply getting older. As the female unemployment rate is higher I dread to think what the situation is for young women.

Meanwhile tractor production continues its rise apparently according to the German Finance Minister.

Schaeuble: Reforms Agreed By Greece Are Remarkable, Goal Is To Get Greece Competitive, It Is Not There Yet ( @LiveSquawk )

It reminds me of last summer’s hit song “7 Years” but after all this time if we had seen reform things would be better. The fact is that there has been so little of it. Putting it another way the IMF ( International Monetary Fund) has completely failed in what used to be its objective which was helping with Balance of Payments crises. Even after all the economic pain described above the Bank of Greece has reported this today.

Mar C/A deficit at €1.32 bln from €772.4 mln last year, 3-month C/A deficit at €2.53 bln from €2.37 bln last year ( h/t Macropolis )

QE for Greece

This is being presented as a type of solution but there are more than a few issues here. Firstly the reform one discussed above as Greece does not qualify. But also there is little gain for a country where its debt is so substantially in official hands anyway and the bodies involved ( ESM, EFSF) let Greece borrow so cheaply for so long. In fact ever more cheaply and ever longer as each debt crunch arrives. It would likely end up paying more for its debt in a QE world where it issues on its own and the ECB buys it later! So it could be proclaimed as a political triumph but quickly turn into a financial disaster especially as the ECB is likely to continue to taper the programme.

Also people seem to have forgotten that the ECB did buy a lot of Greek debt but more recently has been offloading it to other Euro area bodies who have treated Greece better than it did. One set of possible winners is holders of Greek government bonds right now who have had a good 2017 as prices have risen and yields fallen and good luck to them. But the media which trumpets this seems to have forgotten the bigger picture here and that if the hedge funds sell these at large profits to the ECB then the taxpayer has provided them with profits one more time.


So we arrive at yet another Eurogroup meeting on Greece and its problems. It is rather familiar that the economy is shrinking and the debt has grown again to 326.5 billion Euros in the first quarter of this year. There will be the usual proclamations of help and assistance but at the next meeting things are invariably worse. Is there any hope?

Well there is this from Greek Reporter.

The size of Greece’s underground economy — where transactions take place out of the radar of tax authorities — is estimated to be about one quarter of the country’s official GDP, according to University of Macedonia Professor Vassilis Vlachos….. Among the main factors contributing to the shadow economy increase, according to Vlachos, is the citizens’ sense that the tax burden is not distributed fairly and that there is a poor return in term of public services, as well as inadequate tax inspections……Based on the findings of the survey, participation in the shadow economy is at 60 percent for the general population and rises to 71.6 percent among the unemployed.

If he is correct then this is of course yet another fail for the Troika/Institutions. As to the official data there are some flickers of hope such as the recent industry figures and retail sales so let us cross our fingers.


Portugal is struggling to escape from its economic woes

Late on Friday (at least for those of us mere mortals who do not get the 24 hour warning) came the news that the ratings agency DBRS had reduced Italy to a BBB rating. These things do not cause the panic they once did for two reasons the first is that the ECB is providing a back stop for Euro area bonds with its QE purchases and the second is that the agencies themselves have been discredited. However there is an immediate impact on the banks of Italy as the Bank of Italy has already pointed out.

Italy’s DBRS downgrade: a manageable increase in funding costs…..Haircuts on collateral posted by Italian banks: the value of the government bonds collateral pool alone would increase by ~8bn. ( h/t @fwred )

However this also makes me think of another country which is terms of economics is something of a twin of Italy and that is Portugal.

When we do so we see that Portugal has also struggled to sustain economic growth and even in the good years it has rarely pushed above 1% per annum. There have also been problems with the banking system which has been exposed as not only wobbly but prone to corruption. Also there is a high level of the national debt which is being subsidised by the QE purchases of the ECB as otherwise there is a danger that it would quickly begin to look rather insolvent. In spite of the ECB purchases the Portuguese ten-year yield is at 3.93% or some 2% higher than that of Italy which suggests it is perceived to be a larger risk. Also more cynically perhaps investors think that little Portugal can be treated more harshly than its much larger Euro colleague.

The state of play

This has been highlighted by the December Economic Bulletin of the Bank of Portugal.

Over the projection horizon, the Portuguese economy is expected to maintain the moderate recovery trajectory that has characterised recent years . Thus, following 1.2 per cent growth in 2016, gross domestic product (GDP) is projected to accelerate to 1.4 per cent in 2017, stabilising its growth rate at 1.5 per cent for the following years.

So it is expecting growth but when you consider the -0.4% deposit rate of the ECB, its ongoing QE programme and the lower value of the Euro you might have hoped for better than this. Or to put it another way not far off normal service for Portugal. Also even such better news means that Portugal will have suffered from its own lost decade.

This implies that at the end of the projection horizon, GDP will reach a level identical to that recorded in 2008.

This is taken further as we are told this.

In the period 2017-19, GDP growth is expected to be close to, albeit lower than, that projected for the euro area, not reverting the negative differential accumulated between 2010 and 2013

You see after the recession and indeed depression that has hit Portugal you might reasonably have expected a strong growth spurt afterwards like its neighbour Spain. Instead of that sort of “V” shaped recovery we are seeing what is called an “L” shaped one and the official reasons for this are given below.

This lack of real convergence with the euro area reflects persisting structural constraints to the growth of the Portuguese economy, in which high levels of public and private sector indebtedness, unfavourable demographic developments and persisting inefficiencies in the employment and product markets play an important role, requiring the deepening of the structural reform process.

After an economic growth rate of 0.8% in the third quarter of 2016 you might have expected a little more official optimism as they in fact knew them but say their cut-off date was beforehand, but I guess they are also looking at numbers like this.

According to EUROSTAT, the Portuguese volume index of GDP per-capita (GDP-Pc), expressed in purchasing power parities represented 76.8% the EU average (EU28=100) in 2015, a value similar to the observed in 2014.

It is at the level of the Baltic Republics, oh and someone needs to take a look at the extraordinary numbers and variation in the measures of Luxembourg!

House Prices

Here we see some numbers to cheer any central banker’s heart.

In the third quarter of 2016, the House Price Index (HPI) increased by 7.6% when compared to the same period of 2015 (6.3% in the previous quarter). This was the highest price increase ever observed and the third consecutive quarter in which the HPI recorded an annual rate of change above the 6%. When compared to the second quarter, the HPI rose by 1.3% from July to September 2016, 1.8 percentage points (p.p.) lower than in the previous period.

What is interesting is the similarity to the position in the UK in some respects as we see that house price growth went positive in 2013 although until now it has been a fair bit lower than in the UK. Of course whilst central bankers may be happy the ordinary Portuguese buyer will not be so pleased as we see yet another country where house price rises are way above economic performance. Indeed a problem with “pump it up” economic theory in Portugal is the existing level of indebtedness.

the high level of indebtedness of the different economic sectors – households, non-financial corporations and public sector – ( Bank of Portugal )

The debt situation

In terms of numbers Portuguese households have been deleveraging but by the end of the third quarter of last year the total was 78.6% of GDP, whilst the corporate non banking sector owed some 110.8% of GDP. At the same time the situation for the public-sector using the Eurostat method was 133.2 % of GDP.

Going forwards Portugal needs new funding for businesses but seems more set to see property lending recover if what has happened elsewhere after house price rises is any guide. Also the state is supposed to be reducing its debt position but we keep being told that.

The banks

It always comes down to this sector doesn’t it? Portugal has had lots of banking woe summarised by The Portugal News here just before Christmas.

The Portuguese state provided €14.348 billion in support to the banking sector between 2008 and 2015, according to a written opinion submitted by the country’s audit commission, the Tribunal de Contas, last year and made public on Tuesday.

That’s a tidy sum in a relatively small country and we see that the banking sector shrunk in size by some 3.4% in asset terms in the year to the end of the third quarter of 2016. In terms of bad debts then we are told that “credit impairments” are some 8.2% of the total although the recent Italian experience has reminded us again that such numbers should be treated as a minimum.

Last week the Financial Times reminded us that the price of past troubles was still being paid.

Shares in Millennium BCP fell by more than 13 per cent in early trading on Tuesday after Portugal’s largest listed lender approved a capital increase of up to €1.33bn in which China’s Fosun will seek to lift its stake from 16.7 per cent to 30 per cent.

Oh and this bit is very revealing I think.

The rights issue, which is bigger than BCP’s market value,


Let us start with some better news which is from the labour market in Portugal.

The provisional unemployment rate estimate for November 2016 was 10.5%

This represents a solid improvement on the 12.3% of 2015 although as so often these days unemployment decreases comes with this.

These developments in productivity against a background of economic recovery fall well short of those seen in previous cycles……. Following a slight reduction in 2016, annual labour productivity growth is projected to be approximately 0.5 per cent over the projection horizon.

Also there is the issue of demographics and an ageing population which the Bank of Portugal puts like this.

the evolution of the resident population,
which has presented a downward trend,

I like Portugal and its people so let us hope that The Portugal News is right about this.

Portugal has been named as the cheapest holiday destination in the world for Britons this year. The country’s Algarve region came top in the Post Office’s annual Holiday Costs Barometer, which takes into account the average price of eight essential purchases, including an evening meal for two, a beer, a coffee and a bottle of suncream, in 44 popular holiday spot around the world.

That’s an interesting list of essential purchases isn’t it? But more tourism would help Portugal although the woes of the UK Pound seem set to limit it from the UK.





6 years down the line and Greece is still arguing with its creditors

A clear candidate for the saddest story and indeed theme of my time on here has been the economic depression inflicted on Greece. If I had my way Christine Lagarde could finish at the current trial she is involved in and then could move onto one with her former Euro area colleagues about proclaiming “shock and awe” for Greece back in 2010. This involved promising an economic recovery in 2012 which in fact turned into an economy shrinking by 4% in that year alone. Compared to when she and her colleagues were already boasting about future success, the Greek economy has shrunk by 19%, which means that the total credit crunch contraction became 26%. I also recall the bailout supporters attacking those like me arguing for another way ( default and devalue) for saying we would create an economic depression which in the circumstances was and indeed is simply shameful. Instead they found an economy on its knees and chopped off its arms too.

A new hope?

We have seen some better economic news from Greece as 2016 has headed towards irs end. An example of this came yesterday.

The unemployment rate was 22.6% compared to 23.1% in the previous quarter, and 24%  in the corresponding quarter of 2015……The number of unemployed persons decreased by 1.8% compared with the previous quarter and by 5.9% compared with the 3rd quarter of 2015.

As an economic signal we need also to look at employment trends.

The number of employed persons increased by 0.9% compared with the previous quarter and by 1.8% compared with the 3rd quarter of 2015.

Thus we see an improvement which backs up the recent information on economic growth.

The available seasonally adjusted data indicate that in the 3 rd quarter of 2016 the Gross Domestic Product (GDP) in volume terms increased by 0.8% in comparison with the 2 nd quarter of 2016…… In comparison with the 3rd quarter of 2015, it increased by 1.8% against the increase of 1.5% that was announced for the flash estimate of the 3rd quarter.

So we have some growth although sadly more of the L shaped variety so far than the V shape one might expect after such a severe economic shock. Another anti-achievement for the program. But there are hopes for next year according to the Bank of Greece.

Specifically, the Bank of Greece expects GDP to grow by a marginal 0.1% in 2016, before picking up to 2.5% in 2017 and further to 3% in 2018 and 2019, supported by investment, consumption and exports.

Let us hope so although we have hear this sort of thing plenty of times before. Indeed those thinking that Fake News is something only from 2016 might like to look back at the officials and their media acolytes who pushed the Grecovery theme around 2013. Also this by the Bank of Greece as its highlight needs to be considered in the light of the economic depression I have described above.

An unprecedented fiscal consolidation was achieved, with an improvement in the “structural” primary budget balance by 17 percentage points of potential GDP over the period 2009-2015, twice as much as the adjustment in other Member States that were in EU-IMF programmes;

Not everything is sweetness and light

The obvious issue is the way that a lost decade ( so far..) has caused something of a lost generation.

the highest unemployment rate is recorded among young people in the age group of 15-24 years (44.2%). For young females the unemployment rate is 46.9%.

Also the Bank of Greece gives us its own fake news unless of course Mario Draghi is wrong at every ECB press conference.

Substantial structural reforms have been implemented in the labour and product markets, as well as in public administration.


One way of looking at this comes from the current trend to issue policy statements on Twitter as everyone apes President-Elect Trump. From the IMF on Monday.

debt highly unsustainable; no debt sustainability without both structural reforms and debt relief

Of course we have known that for years and perhaps it might like to talk to the Bank of Greece about structural reforms! The next day we got this.

Debt relief AND structural reforms essential to make ’s debt sustainable & bring back growth.

The IMF has in effect told us that it is no longer willing to join in with the Euro area austerity fanatics.

On the contrary, when the Greek Government agreed with its European partners in the context of the ESM program to push the Greek economy to a primary fiscal surplus of 3.5 percent by 2018, we warned that this would generate a degree of austerity that could prevent the nascent recovery from taking hold. We projected that the measures in the ESM program will deliver a surplus of only 1.5 percent of GDP, and said this would be enough for us to support a program.

There are two main issues here where we see the path of austerity but also debt relief. The latter is a big issue as you see private-sector creditors took their pain in 2012 but the ECB has been unwilling to allow the official creditors to take their share and at most has been willing only to contribute the profits it made on its Greek bond holdings. Profits out of such pain spoke for its past attitude eloquently I think. Going forwards though this is an official creditor issue as they own the vast majority of Greek debt now.

The European Union’s commissioner for economic affairs was quick to respond.

Writing in the Financial Times, Pierre Moscovici rebuffed claims made by senior IMF officials this week that Greece’s debt is “highly unsustainable” and that the country needs further comprehensive tax and pensions reform.

Monsieur Moscovici has made all sorts of ridiculous statements in my time of following this issue such that it makes me wonder if he has any grasp of the concept of truth, which is quite an irony when he goes on to say this.

In this era of ‘post-truth’ politics, it is more important than ever not to let certain claims go unchallenged,

It may not have been the best of times for the main lending vehicle the ESM (European Stability Mechanism) which of course has produced anything but in Greece, to call 2016 “exciting” and predict this ” 2017 will be another exciting year”. Still it does now have a Governor of the Day and a Wheel of Governors which it is rumoured sees the Italian and Greek ones spin into the distance if you get it right or should that be wrong?

Meanwhile there is something rather familiar about 2017.

Compared to previous announcements, this means an increase of, in total, €7 billion. The EFSF funding volumes are increased by €13 billion to execute the short-term measures for Greece.

To give you an idea of the scale here Greece owes the EFSF some 130.9 billion Euros and the ESM 31.7 billion which is part of an 86 billion Euro plan. This means that these days when you see headlines about yields on Greek bonds they are much less relevant as Greece borrows from official sources. Frankly it would immediately be insolvent if it did not.


There are lots of issues here but let me use the IMF statement to highlight the crux of the matter.

While Greece has undertaken a huge fiscal adjustment, it has increasingly done so without addressing two key problems—an income tax regime that exempts more than half of households from any obligation (the average for the rest of the Euro Zone is 8 percent) and an extremely generous pension system that costs the budget nearly 11 percent of GDP annually (versus the average for the rest of the Euro Zone of 2¼ percent of GDP).

You see this in essence is where the crisis began. An inability to tax, often meaning the better-off, which combined with a generous pension system was also looking like a car-crash relationship. Yet 6 years of reforms later we are at deja vu which the appropriate sorry seems to be the hardest word of Elton John tells us is.

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

Meanwhile the current government has done this as Maria Kagelidou of ITV News tells us.

promises 1.6 million pensioners on less than €850/month will receive one off 13th pension. €300 min. Total €617mil

A nice Christmas gift? In isolation of course but how can Greece afford this? Maria sent me some details which I will omit because they are identifiable but I will simply say that tax payments have been accelerated and it looks like the money has been borrowed from the future one more time.





It is time to put Student Loans back in the UK debt numbers

This morning has seen some updated statistics for the amount of debt in the UK released by The Money Charity. In it was something to grab the headlines as this from the BBC shows.

Household debts have spiralled to a whopping £1.5tn in the UK for the first time, new statistics show.

If we go to The Money Charity itself we are told this and apologies for their enthusiasm for capitals.


So we cross a threshold and indeed are given a troubling view of the future.


So debt has risen and is forecast to continue doing so at what must be a faster rate than we have seen. I will look at the position in a moment but we cannot move on without pointing out that the OBR ( Office of Budget Responsibility) forecasts lots of things but even so does not get many right!

Bringing this to a household and individual level

The Money Charity presents us figures for debt per UK household.


And also per person.


It is interesting to see the numbers compared to average earnings but care is needed. A better comparison would be with net or post-tax earnings and even with that there is the issue that as a minimum one has to eat to survive and pay other essential bills.

What does this cost in terms of interest?

Lets take a look at what we are told.


If we look at this overall we see that such a number comes from us living in an era of relatively low interest-rates although the 3.4% to 3.5% is nothing like the near zero interest-rate policy that has been applied to UK government debt.  I will break the numbers down in a moment but for now here are some daily and per household numbers.


What are the interest-rates paid?

We discover that the vast amount of the debt must be secured or mortgage debt otherwise the interest-rate would not be possible. From the Bank of England.

The effective rate on the stock of outstanding secured loans (mortgages) decreased by 10bps to 2.74% in September and the new secured loans rate fell to 2.27%, a decrease of 4bps on the month. The rate on outstanding other loans decreased by 2bps to 6.76% in September and the new other loans rate decreased by 37bps to 6.65%

The fact that the numbers are decreasing will lower the monthly burden per unit of debt and no doubt would have the Bank of England slapping itself on the back.  However its effective interest-rates series somehow misses what is happening in the world of credit cards and overdrafts so let me help out from its underlying database.

The credit card interest-rate it calculates was 17.94% in October. This is a lot more awkward as you see it was around 15% as we hit the peak of the last boom in the summer of 2007. If we move to the overdraft interest-rate it calculates it was 19.7% October and if we make the same comparison with the summer of 2007 it was around 17.7% or 2% lower back then. Perhaps the soon to be closed staff accounts at the Bank of England have had quite different interest-rates and it occurred to no-one that the wider population was seeing higher as opposed to the officially claimed lower interest-rates. Of course there is an issue of bad debts here but interest-rates of 17.94% and 19.7% when Bank Rate is 0.25% seem to raise the spectre of that of fashioned word usury.

Where is the debt?

Most of it is mortgage debt but as I pointed out last Monday unsecured debt is growing quickly.



This means that the situation is currently as shown below.

Consumer credit increased by £1.4 billion in September, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.6% and 10.3% respectively.

This means the following on a household level.


Also just under a third of this is one of the most expensive forms which is credit card debt.

Time for some perspective

Let us take Kylie’s advice and step back in time for some perspective. I have chosen to go back to September 2007 as it was then as Northern Rock went cap in hand to the Bank of England that warning lights of “trouble,trouble,trouble” were flashing.

Total UK personal debt at the end of September 2007 stood at £1,380bn. The growth rate increased to 10.0% for the previous 12 months which equates to an increase of £120bn. Total secured lending on homes at the end of September 2007 stood at £1,163bn. This has increased 10.9% in the last 12 months. Total consumer credit lending to individuals in September 2007 was £217bn. This has increased 5.8% in the last 12 months.

Back then they were much less keen on using capitals! Also I note that unsecured debt was growing much more slowly then.although it was in total more than now.

Now the theme that we cut our lending in this area has a problem. Let mt take you to a 2012 paper on the subject from the Bank of England.

The stock of student loans has doubled over the five years to 5 April 2012 to £47 billion, and now represents more than 20% of the stock of overall consumer credit. With student loans unlikely to be affected by the same factors that influence the other components of consumer credit, the Bank is proposing a new measure of consumer credit that excludes student loans

Consumer credit fell from £207 billion in June 2012 to £156 billion in August. Problem solved at a stroke…oh hang on!

So yes we cut consumer credit but not as much as the unwary might think.

Student Loans

Sadly we do not have a UK series but here are the numbers for England as they are much the largest component.

The balance outstanding (including loans not yet due for repayment) at the end of the financial year 2015-16 was £76.3 billion, an increase of 18% when compared with 2014-15.

The total is growing fairly quickly as indeed we would have expected.

The amount lent in financial year 2015-16 was £11.8 billion, an increase of 11% when compared with 2014-15.

Thus if they went back into the consumer credit numbers we would see a rather different picture.


So on today’s journey we have reminded ourselves that the comforting official view on UK household and in particular unsecured credit has been strongly influenced by the removal of student loans from it in the summer of 2012. Otherwise today’s headline would be household debts are now circa £1.6 trillion. A bit like the situation with the official consumer inflation measure where the fastest growing sector of owner occupied housing costs somehow got omitted. The UK establishment has been meaning to put it back for over a decade now!

Meanwhile what to measure this against poses its own problems. Some would argue that a higher value for the housing stock via higher house prices makes the mortgage lending even more secure. The catch of course is that the house prices depend on the lending which the Bank of England fired up with its Funding for Lending Scheme in the summer of 2013. If we move to real incomes then in spite of recent growth it is hard to be reassured as according to the official figures we are still 4% below the summer of 2007.

Meanwhile something troubling for the Bank of England nirvana of higher mortgage debt and house prices emerged over the weekend.

A large house price depreciation can be good for economic growth, research finds ( World Economic Forum)

France continues to see its economy struggle

It is time for us to cross the Channel or La Manche if you prefer and take a look at the economy of France. The UK media seldom get past what is happening around Calais these days although the Financial Times is keen to point out the efforts France is making to get business from the UK.

France will this week step up efforts to attract business from London in the wake of the Brexit vote by appointing a team of corporate leaders and politicians to drive the campaign.

I may well see them as you see French is certainly the secondary and sometimes the primary language in Battersea Park these days. The Ecole at South Kensington has been added to by I believe a couple of others in Battersea. Even the FT finds itself having to admit by default why so many moved the other way.

The inflexibility of the French labour code, along with high taxes, is one of the main reasons some financial groups say they will be reluctant to move to Paris.

Relative Stagnation

Another issue has been the travails of the French economy. Initially it rebounded from the impact of the credit crunch but then it struggled and stagnated. Whilst it evaded the main issues of the Euro area crisis there plainly was some impact as France found economic growth hard to achieve. The latest official numbers tell us that for half of 2016 the economy pretty much stood still.

In Q3 2016, gross domestic product (GDP) in volume terms* recovered: +0.2%, after -0.1% in Q2.

If we look into the numbers whilst there was a return to growth it relied on a very large swing in inventories which of course cannot go on for ever.

In Q3, changes in inventories contributed to GDP growth by +0.6 points, after -0.8 points in Q2.

Domestic demand was only marginally higher ( it added 0.1% to GDP) which has to be a disappointment when you consider that the ECB ( European Central Bank) has an official interest-rate of -0.4% and QE. Actually there is another troubling issue where the French look rather like the UK.

All in all, foreign trade balance contributed negatively to GDP growth (-0.5 points after +0.6 points).

If we look into this more deeply we see this.

In Q3 2016, imports recovered sharply (+2.2% after -1.7%), particularly due to purchases of raw hydrocarbons and transport equipment. At the same time, exports accelerated moderately (+0.6% after +0.2%)

Overall this means that the French economy grew by 1.2% in 2015 and so far in 2016 is growing at an annual rate of 1.!%. The ECB has thrown the equivalent of a monetary kitchen sink looking at Euro area economic  growth and so will be noting that this is the sort of economic growth which has caused trouble for both Italy and Portugal.

National Debt

When you lack economic growth the lesson taught us by Italy and Portugal is that the national debt sings along to the Electric Light Orchestra.

higher and higher it’s a living thing

The latest numbers for France tell us this.

At the end of Q2 2016, the Maastricht debt amounted to €2,170.6 billion, a €31.7 billion increase in comparison to Q1 2016. It accounted for 98.4% of GDP, 0.9 points higher than the Q1 2016’s level.

It is edging towards 100% which these days is mostly symbolic as of course the bond buyers of the ECB are chomping away on French government bonds like Pac men and women. They have bought some 202.5 billion  Euros worth and rising so far. This means that the ten-year yield is a mere 0.5% or so and the five-year is -0.28%.

In 2015 France’s fiscal deficit was 3.6% of its GDP. If we go back to my subject of yesterday it is yet another economy which contrary to the establishment line has been receiving a fiscal boost. However it has stability and growth pact rules applying in the opposite direction and so far in 2016 has trimmed borrowing a little. By the way rules needs to go into my financial lexicon for these times.

As you can see various problems emerge here. France continues to run a deficit and if economic growth fails to pick up the national debt to GDP ratio will start “slip,sliding away” . If you think about it this poses a real problem for the ECB as should it begin to “taper” its QE then presumably French bond yields would rise and it would make its fiscal deficit worse. This is one of the reasons why I think any taper is not on the immediate horizon.

Also debt full stop may well turn out to be an issue for France as marketwatch pointed out back in May.

while France’s equivalent (total) debt is around 280% of GDP, up 66% (since 2007). This tally ignores unfunded pension and health-care obligations, as well as contingent commitments to euro zone bailouts.

Latest News

We get a bit of ying and yang here as yesterday’s news on the automotive sector was disappointing. From Reuters.

PARIS — French new-car registrations fell 4 percent in October to 155,202 after sales at domestic automakers Renault and PSA Group both dropped, the CCFA industry association said today.

This seemed to be concentrated in the French manufacturers.

Renault’s sales declined by 9.2 percent last month, while PSA’s registrations fell 5.8 percent. Renault’s sister company Nissan saw its volume fall 18 percent.

In better news the Markit PMI business survey has shown a pick-up for French manufacturing.

The latest survey data signalled an improvement in the French manufacturing sector, underlined by a solid expansion in production. New orders also increased for the first time this year, albeit at a more subdued pace.

Although care is needed as 51.8 is growth but not a lot of it and compares with 53.5 for the Euro area as a whole.

House Prices

There is a clear divergence here with the UK and is illustrated by the official numbers below.

Year-on-year, house prices increased in Q2 2016 (+0.8%), for the second consecutive quarter. New dwellings prices grew a little more (+1.0% y-o-y) than second-hand dwellings prices (+0.7%).

This is made clearer by the overall house price index being set at 100 in 2010 and being 100.4 now!


There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal. Now is it the changes in the UK housing market that have made much of the difference where there is some economic growth but in my opinion we also count inflation as growth.

There are a lot of similarities as Jeremy Smith of Prime Economics pointed out in April 2015.

The total population size is almost the same…….For 2014, the OECD puts France at $2,525,962m, and the UK at $2,552,152m (in current prices and current PPP, or purchasing power parity)……..Or take the structure of the economy – the UK and France each has a manufacturing sector which is 10-12% of the total economy (production as a whole is 15%) while the service sector for each is 79%……And last but not least in similarities, both have gaping trade in goods deficits, which added together come to roughly the equivalent of Germany’s trade surplus!

The differences are the housing market and in particular house prices and the exchange rate system with the UK having its own and France sharing the Euro. But perhaps the biggest difference is the labour market with the UK having an unemployment rate of 4.9% and France 9.9%. From that come all sorts of issues for productivity and wages.

It is all about the debt for the International Monetary Fund

The International Monetary Fund has had a troubled credit crunch. A major factor in this has been the way that its Managing Directors which as it happens have both been French politicians have moved it away from its original methodology. It used to help with balance of payments problems and whilst its austerity and devaluation/depreciation policies did not always work they did have plenty of successes. However it has increasingly become an organisation which helps with fiscal problems in the Euro area which have not always come with trade problems as for example Ireland had many years of surpluses. The move into the Euro area the major problem that devaluation was replaced with “internal competitiveness” which has pushed Greece into a depression and after a brief flurry Portugal is struggling again. It of course also had the issue that the Euro area is overall wealthy and could have financed it by itself.

Also there is the issue of a lamentable forecasting record as summarised below. From @ChristianFraser.

IMF on June 18th: “Brexit will trigger UK recession”

IMF on Sept 4th: “Britain will be fastest growing G7 economy this year”.

Is it all about the debt?

This is in some ways an economic virtue and in other ways a vice and perhaps even a four-letter word. The IMF has come up with some new analysis so let us steel ourselves for the inevitable barrage of very large numbers.

The global gross debt of the nonfinancial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion in 2015. About two-thirds of this debt consists of liabilities of the private sector.

In all the analysis of public-sector debt the issue of private-sector debt is often more of a backwater so it is good to see it being looked at. Also we get an estimate of how we can compare the debt level to economic output.

Although there is no consensus about how much is too much, current debt levels, at 225 percent of world GDP , are at an all-time high.

There is the issue that we are comparing a stock (national debt) with a flow (GDP or Gross Domestic Product) but it does at least give some sort of guide. We also are taken through the problem that has been created.

The negative implications of excessive private debt (or what is often termed a “debt overhang”) for growth and financial stability are well documented in the literature, underscoring the need for private sector deleveraging in some countries.

However the IMF fails to see that this may be a feature and indeed theme rather than coincidence.

The current low-nominal-growth environment, however, is making the adjustment very difficult, setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown.

There is a real swerve here which may be overlooked and this is that the “nominal growth” the IMF is apparently so keen on includes the good which is real growth but from the point of view of the ordinary worker or consumer the bad which is inflation. The more of the latter we see then an improvement in the spread sheets of the IMF will be accompanied by a deterioration in the economic experience of the ordinary person. Putting this another way we now see in my opinion the real reason why central banks want to target consumer inflation at 2% per annum and some want an even faster rate. For example my debating opponent on BBC Radio 4’s Money Box the ex Bank of England economist Tony Yates called for a 4% inflation target in March 2015. In my view that improves Ivory Tower style spreadsheets whilst harming the ordinary person.

How did we get here?

Twisting slightly the lyrics of Talking Heads we find out this.

The genesis of the global debt overhang problem resides squarely within advanced economies’ private sector. Enabled by the globalization of banking and a period of easy access to credit, nonfinancial private debt increased by 35 percent of GDP in advanced economies in the six years leading up to the global financial crisis.

So it was us although not quite everyone reading this as looking at the readership by country from yesterday Zambia was 7th and Thailand 8th. It was nice to see that I get around.

Meanwhile the situation with public-sector debt was much more restrained.

Interestingly, public debt declined across all country groups up to 2007, particularly among low-income countries—mainly as a result of debt relief under the Heav-ily Indebted Poor Countries and Multilateral Debt Relief Initiatives.

That makes the IMF switch to dealing with public-sector debt and in particular it in the Euro area even harder to explain. After all it is now in favour of fiscal stimuli which must make very hard reading in the countries in Southern Europe and particularly Greece which suffered under its fiscal yoke called austerity.

This may suggest that fiscal policy and, in particular, the early tightening in the latter (Euro area) may not have helped in facilitating the adjustment.

In essence the IMF is arguing that this was a good thing.

As private debt started to retrench, public debt picked up, increasing by 25 percent of GDP over 2008–15.

It is also true that some of this was the socialisation of what was private debt as bank debt found its way onto the ledgers of taxpayers in more than a few nations.

The good, the bad and the ugly

The IMF occupies all three positions on extra debt. First we get the implication that it would be good here.

In particular, there
is evidence that some European banks—burdened by
high levels of impaired assets and a low-growth environment—may
not be in a position to extend the necessary
credit flows to sustain normal economic activity, contributing
to a deeper economic slump

But later the implication is that it is bad in that we need to deleverage.

Private sector deleveraging in advanced economies
thus far has been much slower than previous successful
experiences, indicating that the adjustment will have to

which is repeated here.

Data for a sample of advanced economies suggest
that private debt is high in some cases, even after assets
are accounted for, a harbinger of possible deleveraging

Then we reference to Brazil and China in particular we get the view that it is getting ugly.

Meanwhile, easier financial conditions in the aftermath
of the global financial crisis have led to a private
debt boom in some emerging markets, particularly
in the nonfinancial corporate sector


The IMF here is following the FPC (Financial Policy Committee) of the Bank of England in simultaneously wanting more and less debt. I still remember Lord Turner apologising for telling banks on the one hand to deleverage and on the other to expand lending. That may work in an Ivory Tower but not in the real world.

Next we have the issue that the policies that are supposed to have helped in this such as lower interest-rates ( 102 official reductions so far this year according to @ReutersJamie) and lower bond yields via QE have not helped. The IMF points out that economic growth is still struggling relatively but fails to grasp the fact that I for example have argued from the beginning that such policies have side-effects ( as I analysed yesterday) and in some cases reduce economic growth.

Also it is hard to know whether to laugh or cry as the IMF of Euro area fiscal austerity which plunged Greece into an economic depression that is ongoing calling for this.

Premature tightening of fiscal policy in depressed economies with weakened financial systems should be avoided to the extent possible……..Targeted fiscal interventions could be used to facilitate balance sheet repair.


Me on TipTV Finance

What is the true situation about UK household debt?

The issue of debt and what to do about it was of course one of the causes of the credit crunch and has been debated constantly during it. Today as it is often misrepresented I wish to look at household debt in the UK. But before I turn to it the national debt of the United States passed another threshold on Monday so let us doff our caps to the US $19 trillion threshold and move on. Oh and in case you were wondering about the debt ceiling it has been suspended until March next year which if you consider the chaos it created for no particular sustained gain that is probably the for the best.

UK Household debt

There has been some rather chilling research on this subject released this morning so let’s get straight to it. From City-AM.

The average Brit will not pay off unsecured debt, like credit cards and certain loans, until they are 64, a survey by the Centre for Economics & Business Research (Cebr) for peer-to-peer lender Zopa found.

That rises to 69 once mortgages are included.

Well at least they are being sensible and paying off the most expensive debt first! Actually if you read it again that is not what it is saying. So it is not only the younger generation who are facing a lifetime of debt singing along to LunchMoney Lewis.

I got Bills I gotta pay
So I’m gonn’ work, work, work every day
I got mouths I gotta feed
So I’m gonn’ make sure everybody eats
I got Bills

Perhaps the prospect of all this is behind this reported by the Office for National Statistics yesterday.

Ratings of life satisfaction and happiness were at their lowest, on average, for those aged 45 to 59.

On current trends they may well have to raise the ages named here.

those aged 65 to 79 tended to report the highest average levels of personal well-being

Actually for Londoners like me there may well be quite a different set of age bands.

Londoners may have to wait until they reach 77 to live debt-free, according to new research…….Londoners are saddled the longest as they typically take on more unsecured debt and secure mortgages later, despite their higher wages.

Those of you who live in the North-East can have a laugh at our expenses as you pass the threshold at 57. In fact you are the only group of people who have expectations that approach reality.

The survey also found a big gap in expectations: Britons expect to start a debt-free life when they hit 57 – 12 years earlier than they are likely to.

I am not sure if it is a good thing or a bad think that the younger generation are the most out with their view of their future.

Those aged 16 to 24 are the most optimistic – they expect to be rid of unsecured debt at just 38.

That also makes them wildly wrong: if they buy a home with a mortgage they’ll be waiting until age 74.

There are obvious caveats in such research but it does highlight existing trends.

A space oddity

There is an institutional problem in having debts at ever later ages in the UK and it has been given the oxygen of publicity this week too. From

Peter Day wanted to extend his mortgage in order to pay for his daughter’s wedding. At the time he was 59 and close to paying off his mortgage, but asked to extend his term by five years.

However, despite having three final salary pensions ready to cover him in retirement, he was turned down for the mortgage extension by Co-operative Bank.

For foreign readers UK mortgage providers have long had rules that say that you have to have a provable income to repay it which poses problems at retirement so the state retirement age of 65 was a potential issue as was 60 for those who were lucky enough to have a pension from then. It would seem that much of the financial sector has not kept up with the times. Who da thunk it? As Turkish pointed out in the film Snatch.

That by the way is the same financial sector who requires very highly paid staff because they have such valuable skills and abilities.

Number crunching

The research quotes these numbers.

The average British debt per household was £53,904 in December including mortgages, according to the Money Charity.

That works out at £28,891 per adult, which is 112 per cent of average earnings.

Based on December’s figures, Brits each spend an average of £1,037 on interest repayments every year –four per cent of a typical salary.

The debt figure quoted is in fact including mortgages and if you want a total it comes to this.


Apologies for the capitals and the estimated cost of this is shown below.


 The official denial

We know how to treat these and at Davos Mark Carney gave us one and the Financial Times joined it as it prepared for the first question at the next Bank of England press conference.

But household consumption has grown slower than the economy since the recovery started and the appetite for debt has fallen sharply. Households have increased their outstanding debts £5.1bn on average every quarter since 2009, nearly four times less than the £22bn rate between 1997 and 2009.

These numbers are no doubt true but miss some important points. If you argue that the amount of debt was an issue pre credit crunch then the fact it has risen since poses a question. Also yes household consumption and debt have slowed over the time period quoted but more recently they have picked up. For example retail sales were very strong in 2015 and the December lending data told us this.

The three-month annualised and twelve-month growth rates were 4.0% and 3.3% respectively.

So the economy is growing at around 2% per annum but we have no inflation so debt has risen relatively here. Also there is an important sectoral shift which matters as some groups are piling up debt as others repay creating quite different groups. This is highlighted by the mortgage data.

Gross lending secured on dwellings was £19.5 billion and repayments were £16.0 billion.

Also unsecured credit is on something of a tear.

Consumer credit increased by £1.2 billion in December, compared to the average monthly increase of £1.3 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.1% and 8.6% respectively.

The acceleration which began in late summer 2014 continues.


The Financial Times also made the point that if you look at debt you need to look at assets and here is its view.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.

The point is valid but of course it is using a marginal price and I would argue an inflated one for house prices which are the biggest asset by far. As Feeling QEzy points out in the comments what could go wrong?

For example UK housing stock annual turnover is circa 4% while 30% of homes have a mortgage, and as we all know it is the marginal seller that drives the price in a weak market.

Whilst I am no fan of the projections of the Office for Budget Responsibility they do pose a question as they project rises in household debt although typically they have changed it in 2021 to 163% of income from 172%. That shows a danger in this sort of analysis.

So where do we stand? Not quite in the quicksand that some argue. But we are seeing rises in unsecured debt again and you do not have to take my word for this just check the absence of the phrase “household debt levels are falling” in recent Bank of England speeches. This poses a problem as for a start how can they raise interest-rates in such an environment? Also if you are wondering what is the big deal here the US National Bureau of Economic Research takes up the story.

In a study summarized in the January edition of The NBER Digest, researchers find that a rise in household debt relative to a nation’s GDP is often associated with a subsequent economic contraction, and that this debt ratio increased in many countries prior to the decline in global GDP growth in 2007-12.

Oh and the area which is supposed to be benefiting from Bank of England policy smaller businesses how is that going?

Net lending to SMEs was £0.0 billion ( in December 2015)

Portugal faces it debt demons at exactly the wrong time

Much is happening in Portugal at the moment as we note that the socialist parties used their parliamentary majority to over throw the government of Passos Coelho on Tuesday. As I pointed out on October 30th this was always likely in spite of the way that the hashtag PortugalCoup had become so prevalent. Of course we do not know what happens next as we await to see how the Portuguese President will respond. One thing that it seems likely to change is the way that Portugal has until now accepted Euro area austerity lock stock and two smoking barrels. Also we will see how the Euro area responds to such a challenge as we wonder if the Portuguese will get the opportunity to vote again. Rather amusingly @Weayl has suggested they may learn something about tactics and strategy from Star Trek.

The Portuguese economy

Unfortunately nobody has managed to described Portugal’s economic malaise with the panache that “girlfriend in a coma” by Bill Emmott did for Italy. Both share the problem of a lack of economic growth and as I shall discuss later this leads straight to a debt problem. I put it thus on October 30th.

let me open with the central issue which is that for some time now the Portuguese economy has struggled to sustain economic growth. Even in the better years it has managed GDP (Gross Domestic Product) growth of only 1% per annum.

Not much is it? The meant that even before what we now consider to be the era of the Euro crisis Portugal was in relative decline as the Economist pointed out in 2007.

Look at any table of European economic data and Portugal stands out.GDP growth last year, at 1.3%, was the lowest not just in the European Union but in all of Europe…….Portuguese GDP per head has fallen from just over 80% of the EU 25 average in 1999 to just over 70% last year.

It sends a chill down my spine to recall that the Euro area “solution” was austerity something with which we are now all too familiar with especially when it comes to the consequences.

Today’s data

It is quite clear from today’s update from Portugal Statistics what has revived thoughts about the themes above.

Comparing with the second quarter, GDP registered a null change rate in real terms in the third quarter (0.5% in the second quarter). The contribution of domestic demand was negative, mainly due to the reduction of Investment, while net external demand contributed positively, with Imports of Goods and Services decreasing more intensely than Exports of Goods and Services.

They cannot quite bring themselves to type 0% can they? And you have to look a little way down the report for this so for balance let me show the top bit.

The Portuguese Gross Domestic Product (GDP) increased by 1.4% in volume in the third quarter 2015, compared with the same period of 2014 (1.6% in the second quarter 2015).

Even put this way there is a slowing and if you are familiar with the economic history of Portugal you are bound to be wondering along the lines of the famous line from Muhammed Ali to George Foreman in the Rumble in the Jungle.

Is that all you have got George?

If so what was the pain of austerity for?

Breaking it down

We do not get the detail we would like but this even bare statement below has several worries in it.

The contribution of domestic demand was negative, mainly due to the reduction of Investment.

Falling domestic demand reminds us of the austerity era and falling investment speaks for itself. I pointed out on the 30th of October that Portugal had improved its trade performance but even this may well have been more of a poisoned chalice this time around.

net external demand contributed positively, with Imports of Goods and Services decreasing more intensely than Exports of Goods and Services.

This is a “bad” trade performance and not the use of the word employed by Michael Jackson as we see falling imports backing up the fall in domestic demand. We only have one quarter’s evidence but this again is a reminder of one of the problems of the austerity era experience.

i regularly point out that due to their inaccuracy we should not put too much emphasis on minor GDP growth changes. But it is hard not to be troubled by a sequence which has gone 0.4%,0.5%,0.5% and now 0%. We go from hopes of the “escape velocity” of Mark Carney to pondering the power of gravity. Or as Lumidee put it.

Uh oh, uh oh, uh oh, uh oh.

Some Perspective

If there was a year in the credit crunch era which should be good this is it. As I only discussed yesterday commodity prices have fallen which should be a net benefit for Portugal and its economy. Indeed it should be benefiting the very domestic demand which has just fallen! After all that is what we have observed in the UK,Spain and Ireland in 2015 and to bring it up to date both France and Germany have declared this morning.

Also there is the European Central Bank which if the speech from Mario Draghi yesterday is any guide seems determined to press the monetary expansion pedal even closer to the metal. Actually maybe even through its lower bound. The recent Open Mouth Operations have pushed the Euro into the 1.07s versus the US Dollar and the trade weighted index to 91. We only have to wait until the beginning of December for the promised further action.

What about the debt?

Ordinarily this focuses on the problems that Portugal has with its national debt but let us widen out the discussion. Bridging Europe has looked at total debt and come to this conclusion.

Portugal has the highest public and private debt, counting for 530.5% of GDP, far beyond the other three crisis-affected member-states – Greece, Spain, and Italy.

So we see a private-sector debt to GDP  ratio of pretty much 400% and it is the corporate sector leading the way.

This year, corporate debt is expected to reach 240.1% of GDP.

If it keeps borrowing and the economy of Portugal does not grow what could go wrong?

Oh and household debt is high too but it does not quite reach the peak in Spain.


I like Portugal very much so I review that state of play with sadness and regret. The essential problem is its inability to grow which has persisted for quite some time now. Hopefully it has shifted its ability to trade in a favourable direction but if domestic demand remains troubled that will take a very long time to change things. Meanwhile the debt burden will grow and grow and look ever more unbalanced. The risk of a Black Swan event grows.

For the moment the ECB is dealing with the interest-rate cost of this and in fact may soon help even more. In spite of the current political uncertainty the ten-year yield is only 2.82%. This is basically because the ECB is munching its way through Portugal’s government bonds “like a powered up Pac Man” as the Kaiser Chiefs put it. If Mario Draghi’s hints are true then the ECB may also start buying more of the corporate debt too which will be more welcome in Lisbon than anywhere else.

But speaking of Black Swans one may pop up later on if the DBRS ratings agency should downgrade Portugal. At that point Portugal is in danger of not qualifying for ECB Quantitative Easing anymore. So in true Eurovision style the DBRS switchboard will no doubt already have had the opportunity to hear this.

Hello Mario Draghi speaking……

If only Portugal could have a coup concerning its economy

Today sees the wearing in of the new Portuguese minority government. The situation has created a lot of media headlines and a Twitter hashtag of #PortugalCoup but it would not be the first country to ever have a minority government.It is a moot point to wonder if this would have been the state of play of Passos Coelho and his government had not been so pro Euro? But of the nations which got into trouble Portugal has been the model school pupil in terms of attitude all along. Quite how this will progress though does not look so clear as the electors gave the minority government 108 seats whereas the combined opposition parties can muster 122.

However as ever the economic situation is the priority here and let me open with the central issue which is that for some time now the Portuguese economy has struggled to sustain economic growth. Even in the better years it has managed GDP (Gross Domestic Product) growth of only 1% per annum. Back in April 2007 the Economist labelled it as a new sick man of Europe and of course that was exactly the wrong position to face what was about to happen next. But what it noted was instructive.

Look at any table of European economic data and Portugal stands out. GDP growth last year, at 1.3%, was the lowest not just in the European Union but in all of Europe…….Portuguese GDP per head has fallen from just over 80% of the EU 25 average in 1999 to just over 70% last year.

So we can see that Portugal underperformed its peers in the Euro era.

Since 2000 the Czech Republic, Greece, Malta and Slovenia have all overtaken Portugal in terms of GDP per head.

The response of the Euro area to the troubles was something with which we are now more than familiar.

The commission thinks Portugal’s sin was to let public spending soar out of control, pushing the forecast deficit in early 2005 up to 6.8% of GDP, the highest in the euro zone.

The Commissioner should have issued such edicts with a red face as it was none other than one of the people responsible Jose Manuel Barosso who was an ex-prime minister. Also of course he was then responsible for applying pressure on Portugal to raise VAT to 21%, raise the pension age to 65 and other austerity measures which slowed its economy just as it was about to face a crisis. Bad Timing.

Other Problems

Partly as a result of the economic travails Portugal has had demographic problems for some time where its best educated citizens have a high propensity to emigrate abroad. VoxEurope overplayed its hand with this in 2012 but you get the idea.

Will the Portuguese be extinct by 2204?

The long-standing problem was exacerbated by the credit crunch and Euro area crisis and the population dropped in 2010 and 11 by 55,000 each year. At some point on that road a place not far from me called Stockwell by most and St. Ockwell by estate agents acquired another name “Little Portugal”. Of course migration of the better educated and economic growth problems are now in a chicken and egg style circle. In its latest Bulletin the Bank of Portugal puts it like this.

it is worth noting that the total population and the working-age population decreased (by approximately 2.0 and 5.5 per cent respectively between the beginning of 2010 and mid- 2015), driven by the recent dynamics of migratory flows and the population’s ageing.

The other fundamental problem in Portugal is the concentration of so much economic power in a few families. As each crisis emerges from its chrysalis we invariably discover issues at yet another family owned business and rather disturbingly for the taxpayer the losses get socialised as they mull who got the profits. As Pink Floyd so eloquently put it.

Us and them
And after all we’re only ordinary men.
Me and you
God only knows it’s not what we would choose to do.

‘Forward’ he cried from the rear
And the front rank died.
The general is sat and the lines on the map
Move from side to side.

Portugal has plenty of economic links with Angola and as we mull which takes the lead these days there is the issue of Angola having pretty much the same problem.

If you want it put another way the Bank of Portugal summarises the issues here.

the correction of the inefficient allocation of resources accumulated during several decades

What about now?

There is a bit of ying and yang about the latest Bulletin from the Bank of Portugal so let’s start with the good bit.

Projections for the Portuguese economy point to 1.7 per cent growth of the Gross Domestic Product (GDP) in 2015

Also there are genuine signs of something that has changed for the better here.

there was an increase of approximately 10 percentage points (p.p.) in the weight of exports on Gross Domestic Product (GDP) between 2008 and the first half of 2015 (from 31 to around 41 per cent), amid strong growth of exports in volume (an increase of 25 per cent over the same period).

This is hopeful as trade issues have seen Portugal make trips to the IMF before. However currently imports on rising strongly too which brings echoes of a troubled past with it.

Underlying these projections is higher import penetration,

Also if the Portuguese look across the nearest border they see that they are again being eclipsed by Spain which has this morning declared an annual economic growth rate of 3.4%.

Looking Forwards

Yesterday we got the official surveys for the Portuguese economy which told us this.

The Consumer confidence indicator slightly diminished in October……In Manufacturing Industry, the confidence indicator slightly diminished in October. The Services’ confidence indicator decreased in the last month,

It looks as though manufacturing confidence weakened over the summer which is something that has become a pattern now. As to consumer confidence this is a long running series (1987) but it is hard to judge a series where the peak is -5.5! As we stand it is at -17.4% and the low has been -59.8.

We will have to see what happens going forwards but the economic climate indicator has dipped from 1.4 to 1.2. If we note that its average has been 1.6 since 1989 and remind ourselves of the issues above this looks well in the words of David Byrne.

Same as it ever was

Same as it ever was


If we look on the sunny side then the hope for Portugal is that it can continue with its export performance improvement. It will welcome the efforts of Mario Draghi to drive the Euro later and also will hope for more UK holidaymakers tempted by a near 1.40 exchange-rate. Also consumption will have been helped by a lower oil price and lower inflation. On the other side of the coin gains from crude oil processing will be hard to repeat at current prices and having 2% of your GDP from Volkswagen has its issues right now! Although I understand that the plant produces models so far not affected by the scandal.

Now let me introduce a consequence of Portugal’s problems which is its national debt of 129% of its GDP. Right now with Mario Draghi helping out by buying so far some 7.77 billion Euros of Portuguese bonds it is easy to see that there is no current problem with a ten-year yield just over 2%. But can Portugal regain ground  in a debt sustainability sense as to do that it would have to grow consistently something it has consistently failed to do? After all it has a private-debt to GDP ratio of 255% according to the IMF as well.

So my conclusion is that it is a lovely country which I like very much but that it still needs to follow the advice of Tears for Fears.

You can change


I nearly forgot to add that I did an interview about Portugal for Australian public radio about 10 days ago. Here is a link to it.

You might like to note the implied view from Australia.