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 reaches a Euro area target or standard

Yesterday saw an announcement by the European Commission back on social media by a video of the Greek flag flying proudly.

The Commission has decided to recommend to the Council to close the Excessive Deficit Procedure (EDP) for Greece. This follows the substantial efforts in recent years made by the country to consolidate its public finances coupled with the progress made in the implementation of the European Stability Mechanism (ESM) support programme for Greece.

It sounds good although of course the detail quickly becomes more problematic.

Greece has been subject to the corrective arm of the Stability and Growth Pact since 2009. The deadline to correct its excessive deficit was extended several times. It was last set in August 2015 to be corrected, at the latest, by 2017.

That reminds us that even before the “Shock and Awe” of spring 2010 Greece had hit economic trouble. It also reminds us that the Euro area has seen this whole issue through the lens of fiscal deficits in spite of calamitous consequences elsewhere in both the economy and the country. I also note that “the corrective arm” is a rather chilling phrase. Here is the size of the change.

The general government balance has improved from a deficit of 15.1% in 2009 to a surplus of 0.7% in 2016

Greeks may have a wry smile at who is left behind in the procedure as one is at the heart of the project, one has been growing strongly and one is looking for the exit door.

If the Council follows the Commission’s recommendation, only three Member States would remain under the corrective arm of the Stability and Growth Pact (France, Spain and the United Kingdom), down from 24 countries during the financial crisis in 2011.

Let us wish Greece better luck than when it left this procedure in 2007. Also let us note some very curious rhetoric from Commissioner Dombrovskis.

Our recommendation to close the Excessive Deficit Procedure for Greece is another positive signal of financial stability and economic recovery in the country. I invite Greece to build on its achievements and continue to strengthen confidence in its economy, which is important for Greece to prepare its return to the financial markets.

Another positive signal?

That rather ignores this situation which I pointed out on the 22nd of May.

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.

Achievements? To achieve the holy grail of a target of a fiscal deficit on 3% of GDP they collapsed the economy. They also claimed that the economy would return to growth in 2012 and in the case of Commissioner Moscovici have claimed it every year since.

A return to financial markets?

Whilst politically this may sound rather grand this has more than a few economic issues with it. Firstly there is the issue of the current stock of debt as highlighted by this from the European Stability Mechanism on Monday.

Holding over 51% of the Greek public
debt, we are by far Greece’s biggest creditor a long-term partner

I note that the only reply points out that a creditor is not a partner.

The ESM already disbursed €39.4 bn to and combining EFSF it adds up to € 181.2 bn.

That is of course a stock measure so let us look at flow.

I am happy to announce the ESM
has today effectively disbursed €7.7 bn to Greece

I am sure he is happy as he has a job for life whether Greek and Euro area taxpayers are happy is an entirely different matter especially as we note this.

Of this disbursement, €6.9 bn will be used for debt servicing and €0.8 bn for arrears clearance

Hardly investment in Greece is it? Also we are reminded of the first rule of ECB ( European Central Bank ) club that it must always be repaid as much of the money will be heading to it. This gives us a return to markets round-tripping saga.

You see the ESM repays the ECB so that Greece can issue bonds which it hopes the ECB will buy as part of its QE programme. Elvis sang about this many years ago.

Return to sender
Return to sender

There is also something worse as we recall this from the ESM.

the EFSF and ESM loans lead to substantially lower financing costs for the country.

Okay why?

That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment. Greece will not have to start repaying its loans to the ESM before 2034, for instance.

Indeed and according to a speech given by ESM President Regling on the 29th of June this saves Greece a lot of money.

We have disbursed €175 billion to Greece already. This saves the Greek budget €10 billion each year because of the low lending costs of the ESM. This amounts to 5.6 percent of GDP, and allows Greece the breathing space to return to fiscal responsibility, healthy economic developments and debt sustainability.

No wonder the most recent plans involved Greece aiming for a fairly permanent budget surplus of 3.5% of GDP. With the higher debt costs would that be enough. If we are generous and say Greece will be treated by the markets like Portugal and it gets admitted to the ECB QE programme then its ten-year yield will be say 3% much more than it pays now. Also debt will have a fixed maturity as opposed to the “extend and pretend” employed so far by the ESM.

What if Greece joining the ECB QE programme coincides with further “tapers” or an end to it?

If you wish to gloss over all that then there is this from the Peterson Institute for International Economics.


Is austerity really over?

There are issues with imposing austerity again so you can say it is now over. I looked at this on the 22nd of May.

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.

It was noticeable that one of the tax rises was in the amount allowed to be earned before tax which will hit the poorest hardest. But according to Kathimerini yesterday the process continues.

The government is slashing state expenditure by 500 million euros for next year……..The purge will mainly concern health spending, while credit for salaries and pensions will be increased.


The background economic environment for Greece is as good as it has been for some time. Its Euro area colleagues are in a good phase for growth which should help exports and trade. According to Markit this is beginning to help its manufacturing sector.

Having endured a miserable start to 2017, the latest survey data is welcome news for Greek manufacturers as the headline PMI pointed to growth for the first time since August last year.

If we look for another hopeful signal it is from this as employment has been a leading indicator elsewhere.

The number of employed persons increased by 79,833 persons compared with April 2016 (a 2.2% rate of increase) and by 23,943 persons compared with March 2017 (a 0.6% rate of increase).

The catch is that in spite of the barrage of official rhetoric about reform that Greek economy has gone -1.1% and +0.4% in the last two quarters with the latter number being revised up from negative territory. But the worrying part is that elsewhere in the Euro area things are much better when Greece should be a coiled spring for economic growth. Let me give you an example from the building industry where it is good that the numbers are finally rising. But you see annual building was 80 million cubic meters in 2007 and 10 million yes 10 million in 2016. That is an economic depression and a half….


Can Portugal escape its economic history?

It is time for us to take a trip again to the Iberian peninsular and indeed to the delightful country of Portugal. Back on January 16th I highlighted the economic issues facing it thus.

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 mentions of Italy come about because there are quite a few similarities between the two twins. Both had similar weak economic growth in the better times, both have seen banking crisis which were ignored for as long as possible, and both have elevated national debts currently being alleviated by the bond buying of the ECB. Actually bond markets seem to have caught onto this since we last took a look as Portugal has seen an improvement with its ten-year yield at 3.03% only some 0.86% over that of Italy. This has been happening in spite of the fact that the ECB has in relative terms been buying more Italian than Portuguese bonds. Although sadly for Portugal’s taxpayers the gain from this has been missed to some extent as it issued 3 billion Euros of ten-year debt with a coupon of 4.125% back in January.

What about economic growth?

Back in January the Bank of Portugal was expecting this.

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.

Actually Portugal managed to nearly meet the 2017 expectations in the first quarter of this year.

In comparison with the fourth quarter of 2016, GDP increased 1.0% in real terms (quarter-on-quarter change rate of 0.7% in the previous quarter). The contribution of net external demand changed from negative to positive, driven by a strong increase in Exports of Goods and Services………Portuguese Gross Domestic Product (GDP) increased by 2.8% in volume in the first quarter 2017, compared with the same period of 2016 (2.0% in the fourth quarter 2016).

As you can see there was strong export-led economic growth to be seen. This had a very welcome consequence.

In the first quarter 2017, seasonally adjusted employment registered a year-on-year change rate of 3.2%,

This makes Portugal look like its neighbour Spain although care is needed as a couple of strong quarters are not the same as 2/3 better years. Also the Portuguese economy is still just over 3% smaller than it was at its pre credit crunch peak. A fair proportion of this is the fall in investment because whilst it has grown by 5.5% over the past year the level in the latest quarter of 7.7 billion Euros was still a long way below the 10.9 billion Euros of the second quarter of 2008.

The National Debt

A consequence of the lost decade or so for Portugal in terms of economic growth has been upwards pressure on the relative size of the national debt which of course has been made worse by the bank bailouts.

This means that Portugal has a national debt to GDP ratio of 133%. Whilst this is not currently a large issue in terms of funding due to low bond yields it does pose a question going forwards. There are two awkward scenarios here. The first is that the ECB continues to reduce or taper its purchases and the second is that it runs up to its self-imposed limit on Portuguese bonds. Actually the latter was supposed to have already happened but the ECB has shown what it calls flexibility as we have a wry smile at all the previous proclamations of it being a “rules based organisation”.

The banks

The various bailouts have added to the debt issue in spite of the various machinations and manipulations to try to keep them out if the numbers. There is also a sort of never-ending story about all of this as we mull that Novo Banco was supposed to be a clean good bank  Let us step back in time to what the Bank of Portugal told us just under 3 years ago,

The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets

Sorted? Er not quite as I note this news from Reuters yesterday,

The sale of Portugal’s state-rescued Novo Banco to U.S. private equity firm Lone Star should be concluded by November following a 500 million euro ($566 million) debt swap that will be launched soon, deputy finance minister said on Wednesday.

That was yet another kicking of the can into the future as we discovered that November is the new August. Meanwhile somethings have taken place such as a 25% cut in the workforce and a 20% cut in branch numbers.

Bank Lending

The recent economic improvement does not seem to have been driven by any surge of bank lending as we peruse the latest data from the Bank of Portugal.

In May 2017 the annual rate of change (a.r.) in loans granted to non-financial corporations stood at -3.3%, ……In May 2017 the a.r. in loans granted to households stood at -1.0%, reflecting a positive change of 0.1 p.p. compared with April

So we see that neither all the easing from the ECB nor the improved economic growth situation have got lending into the positive zone. Mind you the numbers below suggest that the banks have their own problems still.

The share of borrowers with overdue loans decreased by 0.1 p.p., to 27.1% ( companies)……… The share of borrowers with overdue loans in the household sector declined by 0.1 p.p. from April, to stand at 13.2%.

Mind you the Portuguese banks do seem to have learned something from British visitors.

The consumption and other purposes segment also posted a positive change of 0.2 p.p., standing at 4.6%

House prices

Is there a boom here responding to the easy monetary policy?

In the first quarter of 2017, the House Price Index (HPI) increased 7.9 % when compared to the same quarter of the previous year, 0.3 percentage points (p.p.) more than in the last quarter of 2016…….When compared with the last quarter of 2016, the HPI increased 2.1%, 0.9 p.p. higher than in the previous period.

Turning British? Maybe in a way as there is something familiar in the way that house prices began to rise again in late 2013.


One very welcome feature of the improved economic situation in Portugal has been the much improved situation regarding unemployment.

The April 2017 unemployment rate stood at 9.5%, down by 0.3 percentage points (p.p.) from the previous month’s level and by 0.6 p.p. from three months before….. and is the lowest observed estimate since December 2008 (9.3%).

If it can keep this up it may move into the success column but there are also issues. Portugal has briefly done this before only to then fade away. The banking sector still has problems and we now know ( post 2007) that readings like this can swish away like the sting of a scorpion’s tale.

The Consumer confidence indicator increased in June, resuming the positive path observed since the beginning of 2013 and reaching a new maximum level of the series started in November 1997.

Let us wish Portugal well as it needs to get ahead of the game as we note another issue hovering on the horizon.

Since 2010 Portugal lost 264,000 Inhabitants……..In 2016, the mean age of the resident population in Portugal was 43.9 years, an increase of about 3 years in the last decade.

Let us not be too mean spirited though as some of the latter is a welcome rise in life expectancy.

Me on FXStreet

Brazil has hopes for an economic recovery but it has little to do with Rio2016

The biggest show on Earth otherwise known as the Olympics is now in full flow in Brazil. Indeed there is a golden tinge now from a UK perspective after Adam Peaty broke the world 100 metres breaststroke record twice so congratulations to him. However more of a metaphor for the economic situation came from the two Olympic road races which were admittedly exciting but also very dangerous on the descent part. Of the four leaders at that point in the two races only one remained on her bike and the fall of Annemiek van Vleuten was sickening. I am pleased to hear she is recovering but concussion is an odd business so we cannot yet be sure, but we do know that cycling seemed to have elements of the film Rollerball for a while.

The economic situation

The IMF produced its review of Latin America in April and told us this.

Economic activity contracted by 3.8 percent in 2015 and is projected to decline again in 2016 at the same rate

Not exactly auspicious to hold an Olympics during what is clearly a recession and looking backwards may yet be defined as depression. What is the outlook?

sequential growth is projected to turn positive during 2017; nevertheless, output on average will likely remain unchanged from the previous year.

As to the list of causes of this situation it appears to be rather long.

Economic activity has been contracting because of low business and consumer confidence, high domestic policy uncertainty, weakening export prices, tightening financial conditions, and low competitiveness.


There has been a succession of these as the ratings agencies try as ever to catch up with reality. The Financial Times pointed out this in June.

Many blame Ms Rousseff’s government, which through the granting of ad hoc tax breaks and intervention in the economy sharply increased gross public debt to 67.5 per cent of GDP from just over 52 per cent in mid-2014.

In terms of the Euro area crisis these are by no means large numbers although of course it does exceed the levels of the Stability and Growth Pact but everyone ignored those! However I note that the latest Fitch downgrade from May shows a continued rise in the expected level of government debt.

Fitch forecasts the general government deficit to average over 8% of GDP in 2016-17, down from over 10% in 2015. On current policy settings, Fitch forecasts that Brazil will continue to incur primary deficits during 2016-17. The general government debt burden is expected to reach nearly 80% of GDP by 2017 (making Brazil one of the most indebted sovereigns in the ‘BB’ category) and remain on a rising trend unless growth recovers more materially and fiscal consolidation gains pace.

One factor that is very different to what has become considered to be a modern normal is the price Brazil has to pay to borrow. The ten-year Brazilian government bond yield is at 11.75% so we do see at least one country which the much maligned bond vigilantes have been at play! More seriously we see that debt costs seem set to be an increasing problem for Brazil as it borrows more. The world-wide move to lower bond yields has not passed Brazil by just merely that it started at a very high level of over 16% at the turn of the year.

Foreign investors will have had a good 2016 as not only have bond prices risen but the Brazilian Real has too from above 4 to the US Dollar to 3.16 now.

Interest-Rates and Inflation

With an economy in a severe recession then modern central banking theory would presumably have the official interest-rate in negative territory. Not the Banco Central De Brasil.

Therefore, the Copom unanimously decided to maintain the Selic rate at 14.25% p.a., without bias.

The reason that it has such a high interest-rate is the problem Brazil is experiencing with inflation.

For regulated prices, the Committee forecasts an increase of 6.6% in 2016, 0.2 p.p. lower than the forecast in the June Copom meeting. For 2017, the current forecast of a 5.3% increase in regulated prices is 0.3 p.p. higher than the forecast in the last Copom meeting.

Thus we see a central bank which is pretty much a pure inflation targeter and unfashionably for these times is pretty much ignoring the ongoing recession. The inflation target is higher than we are used to at 4.5% which provokes a wry smile as do not places like the IMF and many economists tell us that higher inflation is a form of economic nirvana?

The central bank also gives us a clear guide to how severe the fiscal problem in Brazil is.

The nominal result, which includes the primary result and nominal interests appropriated on an accrual basis, posted a deficit of R$32.2 billion in June. In the year, the nominal deficit totaled R$197.1 billion, compared with a deficit of R$209.6 billion in the same period of the previous year. In the 12-month period up to June, the nominal result posted a deficit of R$600.5 billion (9.96% of GDP), falling by 0.12 p.p. of GDP when compared with the May’s result.


Sadly this is soaring in response to the recession.

The unemployed population (11.6 million persons) rose 4.5% in relation to the quarter between January and March (11.1 million persons), a rise of 497 thousand persons looking for a job. Compared with the same quarter last year, this estimate increased 38.7%, a rise of 3.2 million unemployed persons in the workforce.

The unemployment rate has risen to 11.3% which is up 0.4% on the previously quarter and a chilling 3% compared to a year before.

In terms of an economy we have learnt that it is also important to look at employment trends as well.

The employed population (90.8 million persons) remained stable when compared with the quarter of January to March 2016. In comparison to the same quarter 2015, when the total employed persons was 92.2 million people, there was decrease of 1.5%, a reduction of 1.4 million persons among the employed.

The employment numbers may be suggesting an end to the current economic decline but the picture for real wages is grim.

The average usual real earnings from all jobs (R$ 1,972) fell 1.5% over the same quarter from January to March of 2016 (R$ 2,002) and had a drop of 4.2% in relation to the same quarter of the previous year (R$ 2,058).

Misery Index

It used to be fashionable to calculate a Misery Index which involved adding the inflation rate to the unemployment rate. Perhaps it got redacted as we began to be told that inflation is good for us. Anyway in Brazil the index is of the order of a thoroughly miserable 17%.

Will the Olympics help much?

Apparently not according to Fitch via Forbes.

Total Olympics infrastructure investment between 2009-2015 reached around R$38.5 billion ($12 billion), a small sum compared to the country’s $2.2 trillion economy. Tourism is expected to generate R$1.3 billion ($400 million) and increase real growth by just 0.02 percentage points – less than half amount originally estimated.


There is much to consider here and if we look for some perspective we see a period where Brazil rode the commodity price boom by exporting in essence to China. This was the era described by the then Finance Minister as the “Currency Wars” as the Real rose in response. This meant that Brazil had a type of Dutch Disease as other production such as manufacturing slowed. Whilst it had successes it is always worrying to see economic systems described as a model as that of President Lula was. There only way is invariably not up after that.

So bust followed and inflation accompanied it as the Real fell. Now we see unemployment rising strongly too. The immediate outlook is not good according to the latest business surveys.

Consequently, the seasonally adjusted Markit Brazil Composite Output Index climbed from 42.3 in June to 46.4 in July, its highest mark since March 2015.

However the decline appears to be slowing and let us hope that such a situation continues. There are plenty of challenges for the new government which includes all the ongoing corruption scandals that have so plagued modern-day Brazil. There is an irony though in that the turn coincides with the Olympics rather than being caused by it. At least there is now some hope that the decline will slow and then stop.

Number Crunching

Brexit seems to have had very little impact on UK football transfers from Europe as opposed to the “devastating consequences” promised by Karen Brady to the BBC. However there is one clear consequence so far.

Pogba fee is €105 million. That’s £89 million. Would’ve been £74 million had he been bought before the pound crashed ( @andymitten)

At that exchange rate he was previously sold by Manchester United for just over 1 million Euros so storming business for Juventus. Oh and of course it assumes no exchange-rate hedging.

“Breakthroughs” for Greece actually mean more debt for longer

There are many sad components of the Greek crisis and only on the 9th of this month I pointed out how the whole episode is like groundhog day or more realistically year. An example of this occurred late last night.  Here is Eurogroup President Jeroen Dijesselbloem.

We achieved a major breakthrough on which enables us to enter a new phase in the Greek financial assistance programme.

We have learned to be very careful with phrases like “major breakthrough” as the original hype of “shock and awe” reminds us. The Financial Times also decided to join in with the hype.

Greece reaches breakthrough deal with creditors

Care is needed with headlines written at 5 am after a long night and as discussed above particular care is needed with Greece so let us take a look at the deal.

Greece needs more funding

This is a regular feature of the ongoing story where despite all the hype Greece remains unable to fund itself in the financial markets but needs to refinance in debt. In particular the first rule of Greek fight club is on its way. That is that the ECB (European Central Bank) must always be repaid whatever the circumstances! Some 3.5 billion Euros is required by July if we include a component for the IMF (International Monetary Fund) as well. This meant that Greece did have something of a hold on its creditors but it has not used it. Also it is hard to avoid the thought that two of the main creditors the ECB and the IMF always insist on 100% repayment of capital which of course blocks debt relief.

The details of the funding to be provided are shown below.

The second tranche under the ESM programme amounting to EUR 10.3 bn will be disbursed to Greece in several disbursements, starting with a first disbursement in June (EUR 7.5 bn) to cover debt servicing needs and to allow a clearance of an initial part of arrears as a means to support the real economy. The subsequent disbursements to be used for arrears clearance and further debt servicing needs will be made after the summer.

You may note that this only mentions debt servicing and clearing arrears and not boosting the Greek economy for example. This is a rather dystopian style future which seems to be all about the debt and not about the people. Indeed those who have claimed that this whole process is like something from the world of the novel Dune do get support from this.

Do the Greek people get anything?

This does not seem to be much of a reward.

The Eurogroup also welcomes the adoption by the Greek parliament of most of the agreed prior actions for the first review, notably the adoption of legislation to deliver fiscal parametric measures amounting to 3% of GDP that should allow to meet the fiscal targets in 2018,

Ah so austerity is now spelt “fiscal parametric measures” in the way that the leaky Windscale nuclear processing plant became the leak-free Sellafield. What do the Greeks have to do? Well here it is.

the pension reform

Back on the 9th of this month I pointed out what this actually means in practice.

Sunday night of overhauls of the Greek tax and pension systems…..All 153 coalition lawmakers backed the legislation, which is worth 5.4 billion euros in budget savings.

In other words the Greek economy will be given another push downwards. This is happening in a country which has not be growing at over 2% per annum since 2012 in the original “shock and awe” “breakthrough” but as of the latest data has done this.

Available seasonally adjusted data indicate that in the 1 st quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% in comparison with the 4 th quarter of 2015, while it decreased by 1.3% in comparison with the 1 st quarter of 2015.

The economy is still shrinking in what we must now call a DEPRESSION. This is a human crisis on a large-scale which seems to have been forgotten in the hype above. Also anyone with any sense can see that such a situation makes the debt ever more unaffordable and in that sense is self-defeating.

What about debt relief?

The cat was put amongst the pigeons by this from the IMF.

So Greece is the new Japan or at least it would be. Except of course Japan has surpluses elsewhere and can finance itself extremely cheaply and these days even be paid to finance itself. Of the two graphs it is the second which is the most significant and let me show you the IMF text on it.

Gross financing needs cross the 15 percent-of-GDP threshold already by 2024 and the 20 percent threshold by 2029, reaching around 30 percent by 2040 and close to 60 percent of GDP by 2060.

Firstly the situation is now so bad the numbers which first went to 2020 and then 2040 now go to 2060 in a confirmation of my To Infinity! And Beyond! Theme. But also there is a debt filled future where in 2060 Greece will be spending 60% of its GDP on financing its GDP. This even had the IMF singing along to the nutty boys.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain.

What have they done?

Right now they have done nothing at all except make sure that the left hand of the Euro area taxpayer ( represented by the European Stability Mechanism) pays out the right hand of the Euro area taxpayer as represented by the ECB. Or an example of round-tripping.

Of course the last effort at debt restructuring did not go so well mostly because of the first rule of ECB fight club. Here is the Jubilee Debt Strategy.

At the end of 2011, before the ‘debt relief’, Greece’s government debt was 162% of GDP

Ah so the “breakthrough” is for it to rise to 250% by 2060?! Most people can see the problem there. However rather than a solution what we have seen overnight is yet more can-kicking as nothing will be done until 2018. As Oasis so aptly put it Definitely Maybe.

For the medium term, the Eurogroup expects to implement a possible second set of measures following the successful implementation of the ESM programme.

Oh and considering the track record so far this is simply breath-taking.

For the long-term, the Eurogroup is confident that the implementation of this agreement on the main features for debt measures, together with a successful implementation of the Greek ESM programme and the fulfilment of the primary surplus targets as mentioned above, will bring Greece’s public debt back on a sustainable path over the medium to long run.


So we see that the “breakthrough” is in fact yet another example of kicking the problem a couple of years ahead. This passes a few elections and the UK Brexit referendum but will weaken the Greek economy even more. It is a particular shame that at least part of the Financial Times seems to have joined the trend to copy and pasting official communiques.

Meanwhile ever more heroic efforts are required from the ordinary Greek for what exactly? Every number is fudged as for example the IMF view on trend growth goes from -0.6% per annum to 1.3%. If this were true it would be an oasis of good news in a desert but the truth is that this is backwards financial engineering so that the debt numbers do not look even worse. A bit like this really from the IMF.

it is no longer tenable to base the DSA on the
assumption that Greece can quickly move from having one of the lowest to having the highest productivity growth rates in the eurozone.

Hands up anyone who actually believed that?

Meanwhile let me end with some lighter relief even if it is of the wry variety. I need to pick my words carefully so let me say that there have been rumours that the Clintons ( yes those 2…) never had a loss making futures trade putting them ahead of Buffett and Soros. Well this does not apparently apply to all the family. as if their son-in-law had not closed large losses on his Greek bond fund he might be in profit today.



Whatever happened to the economic recovery promised for Greece?

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

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

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

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

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

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

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

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

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

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

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

Greek loans and bank deposits fall again

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

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

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

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

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

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

The Greek banks

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

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

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

What is the economic outlook?

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

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

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

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

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

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

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

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


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

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

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

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

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

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







What is really happening to world trade?

One of the features of economic life used to be that the world economy grew and that world trade grew even faster. This was a welcome development albeit one marred by the fact that there is an element of double-counting in world trade called the Rotterdam Effect. Back on the 12th of October I explained the OECD definition of it.

Traditional measures of trade record gross flows of goods and services each and every time they cross borders. This ‘multiple counting’ of trade can, to some extent, overstate the importance of exports to GDP.

I added to that the effect on some countries is very large and the Netherlands is once hence the name.

If we switch from Gross exports to value added then 36% of her exports in 2009 vanished into thin air,which has quite an impact on one’s view of her as an exporter.

Others are on the list as well.

Belgium may be grateful for the phrase Rotterdam effect as otherwise there might be an “Antwerp effect” as 35% of her gross exports vanish using a value added system……Luxembourg. Of its 2009 exports some 59% vanished if we move to measuring value added……….

Also trade figures have all sorts of problems as I pointed out back then and let me illustrate that with an example of a commodity which has been on the move in 2016 which is gold and my own country the UK.

The range of these revisions to the annual trade balance is between negative £5.0 billion and positive £3.0 billion. (announced in the 2014 Pink Book)

Makes you wonder does it not about the accuracy of it all as that money was shuffled from the financial account to the trade one? Time for The Stone Roses.

I’m standing alone
You’re weighing the gold
I’m watching you sinking
Fool’s gold

Indeed it is time for some revisionism about The Stone Roses as of course these days it would not only be their music which adds to GDP but the drugs too.


There has been some doom mongering in Shanghai already at the G-20 meeting with ABC News summarising it like this.

Global growth is at its lowest in two years and forecasters say the danger of recession is rising. The IMF cut this year’s global growth forecast by 0.2 percentage points last month to 3.4 percent. It said another downgrade is likely in April.

I do like the idea of the IMF being able to forecast economic growth to 0.2%! Regular readers here will of course be thinking it was wrong yet again. Oh and its Managing Director is bleating on about reforms, yes the same reforms that were promised at G-20 in 2014 as Groundhog Day returns. The 2% of extra economic growth will only come apparently if all that hot air reaches a wind farm.

The OECD has been on the case to as well according to Reuters.

Global growth prospects remain clouded in the near term, with emerging-market economies losing steam, world trade slowing down and the recovery in advanced economies being dragged down by persistently weak investment.

This was reinforced by hints of more easing from the People’s Bank of China which is convenient with the G-20 circus being in Shanghai. So let us move on with the mood music being downbeat.

The world trade figures

The Financial Times has been doing some click bait scaremongering overnight.

The value of goods that crossed international borders last year fell 13.8 per cent in dollar terms — the first contraction since 2009 — according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor.

Have you spotted what they have done? They have used the strong US Dollar as a measure of value whereas if you move to volume and the bottom of the article we see this.

Measured in volume terms the picture was not as grim, with global trade growing 2.5 per cent. But that fell below global economic growth of 3.1 per cent, extending a depressing trend in the global economy.

So we do have a concern albeit one of a lesser order that if world trade growth is slowing so presumably is world growth unless something is taking up the slack. Although this is a little awkward as much of it is  lower oil and commodity prices which may do just that! what we can say is that trade did fall in November and December as we wonder what happens next.


Even JP Morgan seems to have caught onto the mood music in this area.

Private equity is turning its back on shipping after a glut of funding over the last five years contributed to overcapacity in the industry, according to Andrian Dacy, the head of JPMorgan Asset Management’s Global Maritime business.

This overcapacity has been a contributor to the fall in the Baltic Dry Index as we wonder why JP Morgan is telling people to get out at something of a nadir for it. Furthermore at a time of ever shortening horizons it is very revealing when someone talks of a 25 year time period don’t you think? If we look at its values we see that the BDI has bounced a little recently to 325 but that it a fair bit lower than the 500s of last February and a world away from the 1200s of last August.

If we move on from the BDI wondering how the relative impacts of overcapacity and demand interrelate we can find some help in the calmer waters of the Harpex Index. It covers seven classes of ships and gives us some insight into trade of consumer goods. What it is telling us is that there has been a slowing in this area. The recent peak of of 546 in the early summer of 2015 has been replaced by a drop to 364 where the weekly reading has remained for the last few weeks (okay one 363 ..).

Thus shipping is in a bear market and at least some aspects are in a depression but for the wider economy the picture is muddied and mixed by lower oil and commodity prices.


It is sadly ironic with apologies to Alanis Morrisette that the central bankers who proclaim Forward Guidance are pumping out an atmosphere of fear right now.

The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium.  For the past seven years, growth has serially disappointed—sometimes spectacularly,

That was Bank of England Governor Mark Carney who at least has not flown out to Shanghai to lecture us again on the risks of global warming. But the man who told us that monetary policy was not “maxxed out” seems to have undertaken yet another U-Turn.

It is a reminder that demand stimulus on its own can do little to counteract longer-term forces of demographic change and productivity growth.

After a few paragraphs of waffle claiming reforms have happened Mark then provides ammunition for critics like me who have long argued that one of the moral hazards of what central bankers have done is as shown below.

In most advanced economies, difficult structural reforms have been deferred.

Well you and your colleagues financed that Mark with your monetary policies. Also we got a confirmation that he plans to push the UK Pound £ lower as he morphs into Mervyn King.

Currencies’ values fell, boosting competitiveness – the exchange rate channel.

Except as Mark gets lost in his own land of confusion this apparently does not work because it is a zero sum game.

But for the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero sum game.

We also got a confession that my critiques may have hit home, “several commentators are peddling the myth that monetary policy is “out of ammunition.”  Is “the only game in town” over?”. Feel free to join the comments section Mark with stuff as shown below so people can reply.

Low interest real rates have bought time by bringing forward demand to today from tomorrow…..However, the effect of QE on the wealth channel cannot last forever.

Also those who remortgaged on the back of his Forward Guidance may wonder about how they lost and the banks gained.

And determined central bank action and forward guidance put a floor under inflation expectations and bolstered sentiment – the confidence channel.

Ah is that the same confidence channel his scaremongering is now undermining or a different one? Oh and what about the banks.

To be clear, monetary policy is conducted to achieve price stability not for the benefit of bank shareholders.

Never believe anything until it is officially denied……..