Let us continue to remember what has been inflicted on Greece

Yesterday the Financial Times revealed the results of an intriguing poll in Greece,

More than half of all Greeks agreed it was a mistake to have joined the euro. Barely a third of Greeks thought the euro wasn’t a mistake. Even among those who wanted to remain in the euro area at the end of 2015, fewer than half would have chosen to join again if given the chance to go back in time and warn their fellow citizens.

That survey took place almost two years ago. Since then, Walter finds that support for the euro has dropped by 10 percentage points.

Frankly I find it a bit of a surprise that even more Greeks do not think that joining the Euro was a mistake! But in life we see so often that some support the status quo again and again almost regardless of what it is. After all so many in the media and in my profession have sung along to Blur about Euro area membership for Greece.

There’s no other way
There’s no other way
All that you can do is watch them play

Regular readers will be aware that I have been arguing there was and indeed is another way since 2011. One of the saddest parts of this sorry saga has been the way that those who have plunged Greece into a severe economic depression accused those suggesting alternatives of heading for economic catastrophe.

If we look at the current state of play we see this.

The available seasonally adjusted data indicate that in the 2nd quarter of 2017 the Gross Domestic Product (GDP) in volume terms increased by 0.5% in comparison with the 1 st quarter of 2017, while in comparison with the 2nd quarter of 2016, it increased by 0.8%.

So economic growth but not very much especially if we note that this is a good year for the Euro area in total. So far not much of that has fed through to Greece although any signs of growth are welcome. To put this in economic terms this is an L-shaped recovery as opposed to the V-shaped one in my scenario. The horizontal part of the L is the fact that growth after the drop has been weak. The vertical drop in the L is illustrated by the fact that twice during its crisis the Greek economy shrank at an annual rate of 10% leaving an economy which had quarterly GDP of 63 billion Euros as 2008 opened now has one of 46.4 billion Euros. By anyone’s standards that is quite an economic depression.

Some good news

Here I would like to switch to what used to be the objective of the International Monetary Fund or IMF which is trade. In essence it helped countries with trade deficits by suggesting programme’s involving reform, austerity and devaluation/depreciation. The French managing directors of the IMF were never going to be keen on devaluation for Greece for obvious reasons and as to reform well you hear Mario Draghi call for that at every single European Central Bank press conference which only left austerity.

This was a shame as you see there was quite a problem. From the Bank of Greece.

In 2010, the current account deficit fell by €1.8 billion or 6.9% in comparison with 2009 and came to €24.0 billion or 10.5% of GDP (2009: 11.0% of GDP).

Even the improvement back then was bad as it was caused by this.

Specifically, the import bill for goods excluding oil and ships fell by €3.9 billion or 12.6%,

The deficit improvement was caused by the economic collapse. Now let us take the TARDIS of Dr. Who and leap forwards in time to the present.

In the January-August 2017 period, the current account improved year-on-year, as the €211 million deficit turned into a €123 million surplus.

This was driven by a welcome rise in tourism to Greece.

In August 2017, the current account showed a surplus of €1.8 billion, up by €163 million year-on-year………The rise in the surplus of the services balance is due to an improvement mostly in the travel balance, since non-residents’ arrivals and the corresponding receipts increased by 14.3% and 16.4%, respectively.

The Bank of Greece is so pleased with the new state of play that it did some in-depth research to discover that it is essentially a European thing.

In January-August 2017, travel receipts increased by 9.1%, relative to the same period of 2016, to €10,524 million. This development is attributed to a 14.5% rise in receipts from within the EU28 to €7,117 million,

I am pleased to note that my country is doing its bit to help Greece which with the weaker Pound £ might not have been expected and that Germans seem both welcome and willing to go.

as did receipts from Germany, by 29.0% to €1,638 million. Receipts from the United Kingdom also increased, by 17.7% to €1,512 million.

So finally we have some better news but there are two catches sadly. The first is that it has taken so long and the second is that Greek should have a solid surplus in terms of scale after such a depression.

Money Money Money

A sign of what Taylor Swift would call “trouble,trouble,trouble” can be found in the monetary system. The media world may have moved onto pastures new but Greece is still suffering from the capital flight of 2015.

On 26 October 2017 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €28.6 billion, up to and including Wednesday, 8 November 2017, following a request by the Bank of Greece.

The amount of Emergency Liquidity Assistance is shrinking but it remains a presence indicating that the banking system still cannot stand on its own two feet. This means that the flow of credit is still not what it should be.

In September 2017, the annual growth rate of total credit extended to the economy stood at -1.5%, unchanged from the previous month and the monthly net flow was negative at €552 million, compared with a negative net flow of €241 million in the previous month.

Also in a country where the central bank has official interest-rates of 0% and -0.4% we see that banks remain afraid to spread the word to ordinary depositors.

The overall weighted average interest rate on all new deposits stood at 0.29%, unchanged from the previous month.

Also we learn that negative official interest-rates are not destructive to bank profits and how banks plan to recover profits in one go.

The spread* between loan and deposit rates stood at 4.26 percentage points from 4.28 points in the previous month.


There is a lot to consider here but we can see clearly that the “internal devaluation” economic model or if you prefer the suppression of real wages has been a disaster on an epic scale. Economic output collapsed as wages dropped and unemployment soared. Even now the unemployment rate is 21% and the youth unemployment is 42.8%, how many of the latter will never find employment? As for the outlook well in the positive situation that the Euro area sees overall this from Markit on Greek manufacturing prospects is a disappointment.

“The latest PMI data continue to paint a positive
picture of the Greek manufacturing sector, with the
headline PMI signalling an improvement in
business conditions for the fifth month in
succession……….There was, however, a notable slowdown in output growth, which poses a slight cause for concern
going forward.

A bit more than a slight concern I would say.

Meanwhile I note that the media emphasis has moved on as this from Bloomberg Gadfly indicates.

Greece is taking a step closer to get the respect it deserves from Europe.

It is how?

Yields on the country’s government bonds, which have already taken great strides lower this year, hit a new low last week on news the government is preparing a major debt swap.

I have no idea how the latter means the former but let us analyse the state of play. Lower bond yields for Greece are welcome but are currently irrelevant as it is essentially funded by the institutions and mostly by the European Stability Mechanism. There are in fact so few bonds to trade.

So Greece will have an opportunity to issue debt more expensively than it can fund itself via the ESM now? Why would it do that? We come back to the fact that it would get it out of the austerity programme! Not quite the Respect sung about by Aretha Franklin is it?



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….


The Greek crisis continues on its road to nowhere

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

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

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

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

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

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

Debt relief

The problem here comes from the number below.

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

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

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

It calculates the savings for Greece as follows.

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

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

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

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

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


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

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


The medicine

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

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

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

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

What is the economic outlook for Greece?

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

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

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

3.7% (rise) in the Manufacturing Production Index.

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

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

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

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


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

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

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

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

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

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

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



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.





Of Monte Paschi, Mario Draghi and the ECB

Today let us turn our attention to the long-running theme which is the Italian banking sector and in particular Banca Monte dei Paschi di Siena (BMPS) the world’s oldest bank. There was always going to be action post the Italian referendum actually whichever way the vote went but in particular with a no vote. This morning our favourite penny stock has been giving us an example of this as highlighted below by the Financial Times.

Care is needed with the chart as the old Y axis trick is at stake and misses past vastly larger falls in the share price of BMPS. But let us examine the news which has brought us here. Reuters was on the case yesterday afternoon.

The Italian treasury is considering raising its stake in Monte dei Paschi di Siena (MI:BMPS) to help the ailing lender remain in business by buying subordinated debt held by retail investors and converting it into equity, two sources with knowledge of the matter said.

The classic leak to see what the reaction is, trial balloon! Is there an Italian version of Yes Prime Minister? After all such a move would be against Euro area banking rules. It would also be something of an electoral bribe as the retail investors who bought bank debt stock ( what could go wrong?) get the equivalent of the PPI payouts in the UK, although the difference would be that the Italian taxpayer was explicitly paying for it.

On top of that the treasury would buy junior debt held by retail investors to ensure they do not suffer any losses, one of the sources said.

A second source within Italy’s government confirmed the plan. Some 40,000 retail investors hold around 2 billion euros of the Tuscan bank’s junior bonds.

This morning

The written equivalent of rhetoric has gained pace according to La Stampa via Google Translate.

But the only rescue of Siena would be like closing a hole in a tank full of holes. The decree to which the Treasury works worth far more than the three-five billion invoked the market for Siena, and at the moment does not provide for the direct intervention of the state, but that of Europe through the bottom Save-States ESM. The dancing figure indicated by two concordant sources of the Treasury is 15 billion euro.

I did enjoy “like closing a hole in a tank full of holes” as a description of BMPS and wonder what the Italian phrase is for this? Also there is a problem with using the ESM.

The ESM funds are formally a loan and therefore involve the signing of an agreement with Europe which requires those in technical jargon are called “conditionality.”

So what was called the Troika until that came to be debased and is now called the institutions ( a bit like the leaky Windscale nuclear reprocessing plant in the UK became leak-fee Sellafield) would be setting rules for Italy. Although them being applied seems unlikely with La Stampa pointing out that Spain applied them in theory rather than in practice. The other main issue is that Euro area banking rules have changed and now require bail-ins rather than bailouts although of course even the “rules-based organisation” the ECB has bypassed a few rules in its time.

How did we get here?

The meeting on Monday for the 5 billion Euro debt for equity swap does not seem to have got anyone to put their hands in their wallets or purses. I can’t say I blame them.

The time line of a banking bailout

I have posted this several times before but it seems appropriate to give it another airing.

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

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

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

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

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

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

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

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

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

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

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

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

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

We seem to find ourselves at point 7 although I must warn you that point 8 can then arrive faster than Usain Bolt.

Enter Mario Draghi

The President of the European Central Bank has been involved in this issue for years and indeed decades as I pointed out on the 21st of January.

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

Of course Mario issued his “everything it takes” speech in the summer of 2012 which was explicitly for the Euro but also has implicitly helped the Italian banks. For example the sovereign bond buying of its QE program has given profits to their large holdings of Italian government debt. The purchases of mortgage debt must have helped their mortgage books as well. Yet in spite of this we are where we are.

Actually he went further before the referendum when he promised to step-up purchases of Italian government bonds should the vote be no. So my argument against Italy going to the ESM would be that it could issue the debt itself very cheaply with Mario’s bond buyers hovering in the background and maybe foreground. Awkward though if his bond buying allows Italy to break the new ECB driven bank bail in rules. After all he keeps telling us that the ECB is a “rules based organisation”.

I expect him to announce tomorrow that the ECB programs will not end in March and give us something along the lines of  a 6 month extension. His committees well report but have lost a lot of their modus operandi with the post Trump rise in bond yields although there is still the “safe haven” issue of Germany’s 2 year debt being issued today at -0.71%.


This has been a very long-running saga but one of my markers is back in play.

Italy is not preparing a request for a loan from the European Stability Mechanism (ESM) to support its banking sector, a Treasury spokesman said on Wednesday, denying a newspaper report.

Never believe anything until it is officially denied!

Of course the media produce all sorts of stories as we see in the world of football transfers where all sorts of inflated numbers appear as click bait. But some of them like Paul Pogba to Manchester United do happen. This is where we find ourselves as for example saying this makes Italy insolvent is not quite true. The QE dam of Mario Draghi holds back that flood for now and maybe “To Infinity! And Beyond” so point 9 of my banking timeline may be skipped. However without QE Italy would face solvency questions which a bank bailout would merely add to.

I bet they now wish they had like used the ESM in 2012 like Spain did.

Number Crunching

For BMPS from here on the 21st of January.

MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn ( h/t Macrocredit )

For Italy from Istat earlier.

The unemployment rate remained stable for the fourth consecutive quarter in comparison to the previous quarter and up 0.4 points from the same quarter of 2015, with a growth rate of 132 thousand unemployed.

Not much sign of any recovery there…

6 years later the “shock and awe” is at the ongoing economic depression in Greece

The last 6 years in Greece have proven the wit and wisdom of the late Yogi Berra to be very prescient.

It’s like deja-vu, all over again.

One clear example of that is that there is an extraordinary Eurogroup meeting of ministers today to discuss yet more plans for Greek austerity. It will also discuss how they can provide Greece with even more debt relief. Oh and just to add to the repetition all of this has to be done before the next set of bonds owned by the European Central Bank mature in July as Greece is unable to repay them on its own. There has been an extraordinary inflation in the number of Eurogroup meetings on the subject of Greece which is odd don’t you think when we are so regularly told how well things are going?

The Official View

Only on Friday Klaus Regling who as the head of the European Stability Mechanism is the main lender to Greece told us this in an interview with Corriere della Sera.

. The situation has improved compared to some years ago:

Poor old Klaus hits trouble in the same interview later as he tells us that Italy is not Greece!

Also, the two countries are not really comparable, Greece is in a completely different situation: it lost market access five years ago and needed huge amounts of money to stay in the euro area.

That does not seem like much of an improvement to me I do not know about you. Indeed Klaus hits more trouble as he tries to blow the trumpet for the program for Greece.

Greece has now a primary surplus, so it doesn’t need money every month to finance its budget. At the end of July, there is a real need for liquidity due to a sizeable debt repayment.

So it can finance itself except it cannot. Actually the primary surplus point is particularly important as it was presented back in the days of “Shock and Awe” from Christine Lagarde amongst others as a sort of Holy Grail. Once it was achieved the economy would grow – believe it or not but these clowns forecast 2.1% economic growth in Greece in 2012- and the debt burden would fall.Instead of course an economic depression was worsened and the debt burden rose. This means that Klaus needs to try to rewrite history and hope that nobody notices that it is the opposite of the May 2010 and following PR spin and hype.

the starting position in terms of economic problems was far more serious than that of the other programme countries.

The Debt Burden

Let us take a look at how much Greece now owes. First let us remind ourselves as to what the IMF forecast back in May 2010.

In Greece, debt would peak at 149 percent of GDP only in 2013. A pending data revision was expected to raise this projection by 5–7 percentage points.

Remember that we had the debt default called PSI in 2012 as the numbers instead ballooned. So with the success trumpeted by Klaus Regling it is now in better shape? Er no.

Greece owes some 321 billion Euros according to the latest estimates. This represents some 184% of Greek GDP which means that in this respect the original program failed in two ways. Firstly this debt peak has been some 30% or so higher compared to GDP so far at least and secondly the time-span was three years longer and counting..

The various flaws outlined here means that the official creditors of Greece have it in hock to just under 126% of its GDP. Klaus himself is responsible for debt totalling 87% of GDP. This is why he feels it necessary to churn out phrases like this.

So we are not close to any default.

The IMF holds a relatively small 14.7 billion Euros of Greek debt or about 8.4% of GDP. So you see the Euro area could easily replace it. What it cannot replace is the credibility that an IMF stamp on proceedings provides. When you review how far IMF credibility has fallen in recent years that is another sign of how bad things are.

The ECB is also a player here with 20.5 billion Euros left of the Securities Markets Program. Back in the early days it skulked off into the background with the profits from this but even the Euro area bureaucracy spotted that it was round-tripping the Euro area taxpayer and it now puts such money back in the pot.

Along that road you may note that media references to Greek bond yields are much less important than they once were as the real game is elsewhere.

Economic Depression

Euro area ministers try to distract us from this in the manner of “look away now” or “move along, nothing to see here” but the reality has been a 6 year economic depression as opposed to the sunny uplands they promised. This has been the major player in everything else going wrong as the 2.1% economic growth promised in 2012 turned into a near 10% decline. That had a good go at wiping out all the gains from the 2012 PSI default.

In the first quarter of 2010 as in just before “shock and awe” Greek GDP was 59 billion Euros as opposed to the 46.1 billion of the last quarter in 2015. So we see a near 22% decline which is how you define an economic depression and perhaps the worst part is that according to the latest piece of data it is still getting worse.

The seasonally adjusted overall volume index in February 2016 compared with the corresponding index of January 2016 recorded a decrease of 3.0%.

Those retail sales numbers are an example of one of the deepest parts of the economic depression as the volume index were 2010=100 is 64.6. To put that another way they are buying less than two-thirds of what they did back then. Currently the most troubling aspect is the 5% fall in food purchases as the amount spent was already much lower. I guess the establishment can ignore that as they so often tell us such purchases are “non-core” . Even the sentiment indices are still struggling with the Markit manufacturing PMI at 49.7 still indicating stagnation.

This is happening when the rest of the Euro area has just had its best quarter for a while, due in my opinion to the beneficial impact of the lower oil price and the lagged impact of the past fall in the value of the Euro. Yet Greece seems unable to hitch much of a ride.


There is a rather wearying repetition as triumphant statement begets economic disarray and is followed by yet another triumphant statement. From the Guardian.

Greece has ‘basically achieved’ reform goals, says Jean-Claude Juncker.

Ah “basically achieved”, what again? Of course the man who told us he finds it necessary to lie has his own credibility problem! Meanwhile the Greek face yet another austerity program and yet more cuts to pensions. From Kathimerini

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.

Each time this medicine has been applied before the patient has become even more ill rather than improving as it turns out that the mathematics was supplied by Yogi Berra.

Baseball is 90 percent mental and the other half is physical.


It is now 6 years since the Euro area met to discuss and then approve the “shock and awe” program of May 2010. What they created was in fact a severe and long-lasting economic depression which is showing few if any signs of ending even now. This result is the opposite of the promises made back then. Greece was on a downwards trajectory but what it needed was a rope thrown to it to pull it up not a further shove in the back. Later we learned from US Treasury Secretary Geithner that more than a few at the meetings wanted to punish Greece and sadly that is the one part which did suceed.

Meanwhile the ordinary Greek has suffered from the economic depression which ensued. In essence the problem was this from the IMF.

Greece embarked on a far-reaching program of reforms in May 2010.

If it had then we would not be where we are and the first incarnation of the Syriza government looked hopeful but then engaged reverse gear. So the Greeks have been let down on so many levels. Even the latest austerity program will hit them again and miss the wealthy with of course the irony that if the truly wealthy had been taxed much of this would never have been necessary. Still there is Europe Day to celebrate.


Yet another deadline day arrives and passes for Greece

The Greek saga has certainly seen inflation in the number of deadline days it faces! Nobody in authority in the Euro area seem to think through the consequences of this on economic expectations and prospects for the Greek economy. The effect can only be a bad one. Today’s has been driven by a piece of can-kicking which took place early in the Greek crisis. This was when under the “shock and awe” program so beloved of Christine Lagarde the European Central Bank was instructed to buy Greek government bonds. The plan if you can call it that was to stabilise the Greek bond market amongst others and then to sell the bonds back to private investors later. The program time span was supposed to be 3 years as according to the forecast Greece would be on the road to recovery rather than as it turned out the road to nowhere.

Back in June 2010 ECB Executive Board member Jose Manuel Gonzalez-Paramo told us this.

Even though the non-standard measures have served the economy well, we are fully aware that keeping them for longer than necessary would entail risks that should be avoided,

He even used one of the most popular words in my financial lexicon for these times “temporary”. Actually that does not sit quite so well on the day that one of the bonds bought by the ECB expires and it still owns it! That is about as permanent as you can get although as we will see in a moment actually we will get a new definition of permanent. Perhaps someone might like to ask him how this served the Greek economy well as 5 years later the Greek government does not have the money to repay it.


A rule of the Euro area crisis applied by the ECB has been that a Euro area country cannot default and hence all sovereign bonds will be repaid at par or 100. In its arcane world it was buying bonds at say 50 or 60 and then booking them at 100 and now is one of the occasions when it gets its 100 plus interest.  If Greece could repay it then you might say it was a job well done but of course that is not the case.

Step forwards the European Stability Mechanism (ESM)

The obvious solution to an expanding balance sheet at the ECB for a Eurocrat was to create a vehicle which was off-balance sheet. After all we don’t want to scare the taxpaying horses do we? So we ended up with a Special Purpose Vehicle or SPV which is rather different from the one usually driven by Captain Blue although it may have as many lives as Captain Scarlet. After a debacle called EFSF we now have the ESM and it has stepped forwards this morning.

The European Stability Mechanism (ESM) approved the first tranche of financial assistance for Greece of €26 billion.

Some of it is arriving as a banking faster payment.

The Board also decided to immediately disburse €13 billion to Greece. Today’s disbursement is the first part of a sub-tranche of €16 billion, to be used for budget financing and debt servicing needs.

Debt Monetisation

If we cut to the chase we see that The Euro area taxpayer backed ECB is being paid out by the Euro area taxpayer backed ESM. The only change is that the latter is an off-balance sheet although the attempt to stop it being recorded in national accounts was foiled by Eurostat. But there are problems here as there are clear Ponzi style elements to this and in fact debt monetisation especially if you believe that it will be an extremely long time before Greece is ever (if at all) able to repay this. From Hugo Dixon.

This loan will have a very long average maturity (32.5 years) and a very low interest rate which starts at 1%.

Thus the original 3 years became 5 plus and now we can add another 32.5 years to that in an “to infinity and beyond” type of way. I did argue at the beginning that these bonds would become perpetuals and for most if not all of those involved in the negotiations that is what they will be.

Care is needed with the interest-rate as it is not always a fixed rate but for now it is very cheap. With apologies to Middle of the Road the Eurogroup finance ministers view can be summed up by this.

Ooh we, chirpy, chirpy, cheap, cheap
Chirpy, chirpy, cheap, cheap, chirp

If we return to the issue of debt monetisation then the St.Louis Fed defines it thus.

a permanent source of financing for government spending

I will let readers decide for themselves whether what has been described above falls into that category.

Meanwhile the asset-stripping begins

From Keep Talking Greece.

A German company, airport operator FRAPORT won the bid to operate and maintain 14 regional airports, considered to be top of the top in Greece. With an offer of 1.23 billion euro, the consortium of Fraport -Slentel (a unit of Greek energy group Copelouzos) won the bid to lease the regional airports for 40+10 years.

The term of that seems rather permanent too doesn’t it?

What about Currency Wars?

Regular readers will be aware that I have argued that a devaluation and presumably a departure from the Euro was needed in Greece’s situation. In recent times the ECB has moved in that direction as its QE program has pushed the Euro lower. But the world is moving on including a neighbour and competitor with Greece for tourism business. From AFP.

Turkey’s embattled lira Thursday hit a new historic low in value against the U.S. dollar, breaking the ceiling of three lira to the dollar for the first time.

Also the Currency Wars drumbeat is being hammered out in Kazakhstan. From Bloomberg.

Kazakhstan’s tenge plunged a record 23 percent after the country relinquished control of its exchange rate,

Even the Swiss Finance Minister has popped up with a call for the Swiss Franc to return to 1.22 versus the Euro. As Snoopy would say “Good luck with that one!”

Fishing for a solution

The Wall Street Journal has looked at this.

And Greeks have earned a living from fish for eons. It is the country’s second-largest agricultural export, behind fruit and nuts but ahead of olive oil and cheese.

But sadly the news is grim.

A collapse in household buying power has demolished demand for fish, and with it fishermen’s income. Aquaculture companies, once a shining star in the marine economy, are drowning in debts. Fish processors are struggling with high costs for finance and relentless price pressure among strapped shoppers.

What especially caught my eye was the “high costs for finance” because if you look earlier in this article in official terms it is ever cheaper. Or if you like another example of my theme of the large gap between the finance sector and the real economy.

After five years of a supposed rescue that is about as big an indictment as you can get of what has gone on here.


The situation in Greece is one that can be described under the banner of round-tripping with most of it being corresponding debits and credits at different accounts backed by Euro area taxpayers. Whilst the statement below has been issued the fact is that the ESM in Luxembourg has paid the ECB in Frankfurt so some of the money has not really touched Greece at all!

gov’t pays on time €3.4bn bond held by the . (@YanniKouts )

Another 7.1 billion Euros repays the EFSM taking UK and other non-Euro members off the hook. You get the idea.

Meanwhile as Greece continues its economic depression and the refugees there live in squalor we have a let them eat cake style announcement.

has made sure programme is socially fair & protects most vulnerable throughout. ( European Commissioner for Employment, Social Affairs, Skills and Labour Mobility Marianne Thyssen).

The International Herald Tribune is right.