What is happening to the economy of Italy right now?

Today has brought the economy of Italy back into focus and before I look at the economics let me express my deepest sympathy for also those affected by the Corona Virus there.

Like a soul without a mind
In a body without a heart
I’m missing every part, ( Massive Attack)

Returning to the economics there were hopes from Italy of some financial and economic relief from the overnight Eurogroup meeting so let me hand you over to its President Mario Centeno.

After 16h of discussions we came close to a deal but we are not there yet. I suspended the #Eurogroup & continue tomorrow, thu. My goal remains: A strong EU safety net against fallout of #covid19 (to shield workers, firms &countries)& commit/ to a sizeable recovery plan

Let us consider what it could do? There are essentially four topics at play. Firstly there is the issue of extra spending.

Diplomatic sources and officials said a feud between Italy and the Netherlands over what conditions should be attached to euro zone credit for governments fighting the pandemic was blocking progress on half a trillion euros worth of aid. ( Reuters)

Although actually in a copying of the Juncker Plan that regular readers will recall a lot of this is borrowing and money from Special Purpose Vehicles.

Further proposals under discussions include credit lines from the euro zone bailout fund that would be worth up to 2% of a country’s economic output, or 240 billion euros in total. The conditions for gaining access to this money remain a sticking point.

Granting the European Investment Bank 25 billion euros of extra guarantees so it can step up lending to companies by a further 200 billion euros is another option.

The third is support for the EU executive’s plan to raise 100 billion euros on the market against 25 billion euros of guarantees from all governments in the bloc to subsidise wages so that firms can cut working hours rather than sack people. ( Reuters).

Actually there were apparently requests for even more money to be deployed.

ECB urges measures worth 1.5 trillion euros this year to tackle virus crisis . ( @TradingFloorAudio )

The next issue is how this will be paid for? We have already tip-toed onto that subject because the reference to the Euro bailout fund refers to the European Stability Mechanism or ESM. The catch with it is the issue of conditionality or if you prefer terms. This is awkward on two counts as the two main bits are that a country has to have lost access to market financing which is not true and that it is supposed to present a macroeconomic adjustment programme of austerity when in fact the plan would be to “Spend! Spend!Spend!”

The use of the European Investment Bank is complicated by the UK still being a 14% shareholder.

Finally in this sweep we have the elephant in the room which is the issuing of joint Euro area bonds or as they have been rebranded Corona Bonds. This has collided with a regular problem which is that the countries which would in effect be financing this are not keen at all whereas those that would benefit are very keen but cannot persuade the former. We have been down this road so many times now and have always ended up singing along with Talking Heads.

We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride

Italy GDP

Before I look at the impact of the above on Italy we need to see where it stands in economic terms. The opening salvo was fired by the IHS Markit survey from only five days ago which now feels a bit like forever.

The Composite Output Index* dropped from 50.7 in February to 20.2 in March, falling a record 30.5 points and signalling the sharpest contraction in Italian private sector output since the series began in January 1998.
The downturn was most marked in the service sector,
although both services providers and manufactures reported record reductions in output during March.

This came with the lowest PMI number I can recall which was 17.4 for the services sector. We have learnt over time to take these surveys with several pinches of salt but it was clear we were seeing a large fall in economic output which in the case of Italy comes on the back of at best stagnation.

Yesterday the Italian Statistics Office produced its Monthly Report.

First signals of COVID -19 economic effects are displayed by March consumer and business surveys -which deteriorated sharply- and February extra EU trade and retail trade.

Okay let’s look back to February.

Extra Eu trade preliminary figures were influenced by the sharp fall of exports towards China (-21.6% with respect to
the same month of the previous year) were the epidemic originated. Retail trade improved possibly due to the
increase of precautionary expenditure for food in the first phases of the health emergency.

So the only good news was some precautionary buying of food and other essentials.

Now March and as BBC children’s TV used to say, are you sitting comfortably?

In March, the consumer confidence climate slumped. The heavy deterioration affected all index components. More
specifically, the economic climate current and future and the expectation on unemployment plummeted. These
negative signals suggest that there might be in the coming months a deterioration in income, consumption and labour
market figures.

They have modelled what they think the impact will be from this.

We provide two different scenarios, the first in which the lockdown will be concentrated in March and April and
the second in which the lockdown will last until June. In the first case consumption will be reduced by 4.1% on
yearly basis in the second case by 9.9% . The consumption fall would determine a value added contraction by 1.9% and 4.5% respectively.

If we now add in the other sectors we get an even larger GDP fall for example there is this.

More precisely, for sectors in lockdown or for which we assume that the turnover is near zero
(i.e. tourism) we evaluate the overall reduction of production and its impact on consumption.

If we factor in tourism as being virtually zero then the fall in GDP implied above doubles at least as it would be seen in the exports numbers rather than consumption.

Comment

If we look at the Italian situation we see that its own spending plans dwarf the Euro area ones. Here is Prime Minister Giuseppe Conte from Monday via Google Translate.

Today’s decree brings 400 billion of liquidity for businesses, with the #CuraItalia we had freed 350. We are talking about 750 billion, almost half of our GDP. The state is there and immediately puts its firepower into the engine of the economy. When Italy gets up it runs.

The next context is that this is way beyond the ability of the ESM to deal with alone.

 The ESM, with its unused financial firepower of €410 billion, could provide credit lines at low interest rates. ( Klaus Regling)

Actually that is more than we have been told in the past but as you can see the numbers are so large here even 10 billion is not especially material. As there would be calls from countries other than Italy the ESM presently needs more ammo.

If we look at the public debt of Italy it was 2.44 trillion Euros at the end of the third quarter of last year. So if the spending plans above come to fruition we will see it rise to more like 3.2 trillion. With the economy shrinking we could see a debt to GDP figure of the order of 200% for a time. The real issue is for how long a time?

As to the bond vigilantes then they have mostly been anaesthetised by the QE buying of the ECB which is likely to be around 15 billion Euros or so per month. Whilst the Eurogroup indecison has raised the benchmark ten-year yield by 0.08% today ( and I am assuming the ECB is buying more today to resist this) it is at 1.67% under control. But as you can see even the powered up Pac-Man of the ECB is in danger of being swamped by the size of the bond issuance.

Oh and as to Eurobonds well actually they do exist.

When both the EIB and the ESM increase their actions, they need to issue bonds to finance their lending. The EIB – and to a smaller extent the European Commission – issue such debt for all 27 EU Member States, and the ESM for the 19 euro area countries. These three institutions have issued mutualised debt, i.e. European debt, for many years already. Today, these institutions have around €800 billion in outstanding European debt. ( Klaus Regling)

Let me finish with something more optimistic Italy has a large grey economy estimated at over 200 billion Euros and it is a nation of savers.

The saving rate of consumer households was 8.2%, 0.1 percentage points lower than in the previous quarter. ( Istat)

Let us cross our fingers and hope that it can mobilise both.

 

 

Greece meets its final countdown one more time

A constant sad theme of this website has been the way that Greece got into economic trouble and then had a so-called “shock and awe” rescue which made everything worse and plunged it into what can now be called a great depression. Last week’s official national accounts detail just continued the gloom.

The available seasonally adjusted data indicate that in the 4 th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% in comparison with the 3 rd quarter of 2016, while it increased by 0.3% in comparison with the 4 th quarter of 2015.

I pointed out last week that the trumpeting of European Commissioner Moscovici only a day before was in very bad taste.

After returning to growth in 2016, economic activity in is expected to expand strongly in 2017-18.

You see Monsieur Moscovici and his colleagues have a serial record of saying a recovery is just around the corner. For example the 0.3% annual increase in GDP compares with 2.9% forecast in the spring of 2015.  There is a familiar theme here because if we look at the forecasts from the spring of 2016 they forecast more or less the same ( 2.7%) for 2017. This repeated failure where an optimistic forecast bears no relationship to reality has gone on since 2012 which was when the original 2010 bailout forecasts told us Greece would return to economic growth and from 2013 onwards would grow by you’ve guessed it by 2%+ per annum. As PM Dawn told us.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine.

The truth was that Greece had to be forecast as growing as otherwise the national debt numbers would look out of control and could not be forecast to be 120% of GDP in 2020. That was a farcical benchmark which exploded as it was chosen so as not to embarrass Portugal and Italy who cruised through it anyway. Greece of course blasted through it and the major reason was the economic depression.

The Great Depression

I will keep this simple so GDP in the third quarter of 2008 was the peak for Greece at 60.8 billion Euros and at the end of 2016 it was 44.1 billion Euros. So a decline of 27.5% which certainly qualifies as a Great Depression.

Austerity

Macropolis has pointed out the scale of the austerity applied to Greece and let us start with taxes.

The Greek economy has been burdened with 35.6 billion euros in all sorts of taxes on income, consumption, duties, stamps, corporate taxation and increases in social security contributions. When totting all this up, it is remarkable that the economy still manages to function.

Of course you could easily argue that in more than a few respects it does not function as we switch to the expenditure or spending ledger.

During the same period, the state has also found savings of 37.4 billion euros from cutting salaries, pensions, benefits and operational expenses.

So 5 months worth of economic output at current levels. Also like a dog chasing its tail they cry has gone up for what can be called “Moar, moar”.

The IMF’s Thomsen, now the director of its European Department, recently argued that Greece doesn’t need any more austerity but brave policy implementation. Somehow, though, the discussion has ended up being about finding another 3.5 billion euros in taxes and cuts to pension spending.

Of course dog’s have the intelligence to eventually tire of chasing their tale whereas the Euro area establishment continue with the same old song.

The official view

The ESM or European Stability Mechanism is the main supplier of finance to Greece these days and its head Klaus Regling has this on repeat.

Then, public creditors eased lending conditions significantly. This reduced the economic value of the country’s debt by around 40 per cent. As a result, Greece enjoys budgetary savings of about €8 billion annually — the equivalent of about 4.5 per cent of gross domestic product — and will continue to do so for years to come.

Sometimes what is true can be misleading. You see it is summed up in the word timing. Greece had an austerity program front loaded onto it and it was hit hard by it as I have described. Later the Euro area changed tack and made the loans much cheaper but by then it was too late as Greece was plunging into an economic depression at a rate exceeding 8% per annum in 2011 and much of 2012.

In spite of the calamitous situation Klaus told the Financial Times in late January  that the future was bright.

Greek debt levels are no longer cause for alarm

Of course Klaus has to churn out such a line in an attempt to distract attention from this.

The European Financial Stability Facility and the European Stability Mechanism, the eurozone’s rescue funds, have disbursed €174 billion to Greece.

This brings me to a point where Bloomberg are to some extent peddling what might be labelled fake news today.

The 2-year yield is now 180 basis points higher than the 10-year yield

You see Greek bond yield twitter if I may put it like that refers to something which exists but is not the source of funding for Greece any more a reflects a market which as I have pointed out many times barely trades. Even Bloomberg points this out.

volumes are low, with just 26 million euros trading during January on the inter-dealer platform.

With volumes so low it is easy for those with vested interests to manipulate such a market.

Trouble ahead

Where a crunch can come is when a bond needs redeeming. This is where all the proclamations to triumph and success met a hard reality of a lack of cash or another form of credit crunch. Eyes are already turning to July on that front.

Greece faces a few maturities in the coming months, but the heavy lifting is in July, when 6.2 billion euros of debt matures.

This is the capital issue I highlighted on the 30th of January.

We can bring in that poor battered can now because the Euro area and the IMF thought they had kicked it far enough into the future not to matter whereas the IMF is now having second thoughts.

The Euro area can talk all it likes about interest repayments but this ignores the fact that it cannot repay the capital which might make Euro area taxpayers mull another of the promises of Klaus Regling.

We would not have lent this amount if we did not think we would get our money back.

In a couple of months time another 1.4 billion Euros is due. This is owed to the ECB and we know that the first rule of it’s debt fight club is that every last cent must be repaid.

The IMF

My theme about the IMF has been that it has been twisted by politicians so that it no longer is an institution dealing with trade balance problems. The Greek data for 2016 bear this out as with all the improvements Greece should be exporting more especially as many of its economic partners had a better economic year.

The total value of exports-dispatches, for the 12-month period from January to December 2016 amounted to 25,411.4 million euros (28,198.4 million dollars) in comparison with 25,879.3 million euros (28,776.8 million dollars) for the corresponding period of the year 2015, recording a drop, in euros, of 1.8%

So simply no as we mull again the lack of economic reform in Greece and note that the trade issue got worse and not better.

The deficit of the Trade Balance, for the 12-month period from January to December 2016 amounted to 18,551.2 million euros (20,310.3 million dollars) in comparison with 17,745.3 million euros (19,439.6 million dollars) for the corresponding period of the year 2015, recording an increase, in euros, of 4.5%.

Comment

Today’s Eurogroup meeting in Greece is being badged as a “last chance saloon” which of course is a phrase that long ago went into my financial lexicon for these times as it occurs so regularly. Still did the band Europe know how much free publicity the future would provide for their biggest hit?

It’s the final countdown.
The final countdown

Meanwhile as its economic prospects are kicked around like a football Greece itself is pretty much a bystander. If only it was a final countdown to a default and devaluation meaning it would leave the Euro. Meanwhile some reports are bizarre as this from the fast FT twitter feed last week proves.

Greece made a stunning exit from three years of deflation and low price growth in January

Greek workers and consumers however will be rueing any rises in prices as we wonder how higher prices in the UK can be a disaster according to the FT but higher prices in Greece are “stunning”?

Podcasts

I have been running a private trial of putting these updates out as podcasts as the world continues to change and move on. I thought I would ask how many of you use podcasts?

“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.

Comment

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.