Eurobonds To be? Or not to be?

We find that some topics have a habit of recurring mostly because they never get quite settled, at least not to everyone’s satisfaction. At the time however triumph is declared as we enter a new era until reality intervenes, often quite quickly. So last night’s Franco-German announcement after a virtual summit caught the newswires.

France and Germany are proposing a €500bn ($545bn; £448bn) European recovery fund to be distributed to EU countries worst affected by Covid-19.

In talks on Monday, French President Emmanuel Macron and German Chancellor Angela Merkel agreed that the funds should be provided as grants.

The proposal represents a significant shift in Mrs Merkel’s position.

Mr Macron said it was a major step forward and was “what the eurozone needs to remain united”. ( BBC)

Okay and there was also this reported by the BBC.

Mrs Merkel, who had previously rejected the idea of nations sharing debt, said the European Commission would raise money for the fund by borrowing on the markets, which would be repaid gradually from the EU’s overall budget.

There are a couple of familiar features here as we see politicians wanted to spend now and have future politicians ( i.e not them face the issues of paying for it). There is an undercut right now in that the choice of Frau Merkel reminds those of us who follow bond markets that Germany is being paid to borrow with even its thirty-year yield being -0.05%. So in essence the other countries want a slice of that pie as opposed to hearing this from Germany.

Money, it’s a crime
Share it fairly but don’t take a slice of my pie
Money, so they say
Is the root of all evil today
But if you ask for a raise it’s no surprise that they’re
Giving none away, away, away ( Pink Floyd)

Actually France is often paid to borrow as well ( ten-year yield is -0.04%) but even it must be looking rather jealously at Germany.Here is how Katya Adler of the BBC summarised its significance.

Chancellor Merkel has conceded a lot. She openly agreed with the French that any money from this fund, allocated to a needy EU country, should be a grant, not a loan. Importantly, this means not increasing the debts of economies already weak before the pandemic.

President Macron gave ground, too. He had wanted a huge fund of a trillion or more euros. But a trillion euros of grants was probably too much for Mrs Merkel to swallow on behalf of fellow German taxpayers.

She has made a technical error, however, as Eurostat tends to allocate such borrowing to each country on the grounds of its ECB capital share. So lower borrowing for say Italy but not necessarily zero.

The ECB

Its President Christine Lagarde was quickly in the press.

So there is zero risk to the euro?

Yes. And I would remind you that the euro is irreversible, it’s written in the EU Treaty.

Of course history is a long list of treaties which have been reversed. Also there was the standard tactic when challenged on debt which is whataboutery.

Every country in the world is seeing its debt level increase – according to the IMF’s projections, the debt level of the United States will reach more than 130% of GDP by the end of this year, while the euro area’s debt will be below 100% of GDP.

Actually by trying to be clever there, she has stepped on something of a land mine. Let me hand you over to the French Finance Minister.

French Finance Minister Bruno Le Maire said on Tuesday, the European Union (EU) recovery fund probably will not be available until 2021.

The 500 bln euro recovery fund idea is a historic step because it finances budget spending through debt, he added. ( FXStreet )

So the height of the pandemic and the economic collapse will be over before it starts? That is an issue which has dogged the Euro area response to not only this crisis but the Greek and wider Euro area one too. It is very slow moving and in the case of Greece by the time it upped its game we had seen the claimed 2% per annum economic growth morph into around a 10% decline meaning the boat had sailed. In economic policy there is always the issue of timing and in this instance whatever you think of the details of US policy for instance it has got on with it quickly which matters in a crisis.

Speaking of shooting yourself in the foot there was also this.

Growth levels and prevailing interest rates should be taken into account, as these are the two key elements.

The latter is true and as I pointed out earlier is a strength for many Euro area countries but the former has been quite a problem. Unless we see a marked change we can only expect the same poor to average performance going ahead. Mind you we did see a hint that her predecessor had played something of a Jedi Mind Trick on financial markets.

Outright Monetary Transactions, or OMTs, are an important instrument in the European toolbox, but they were designed for the 2011-12 crisis, which was very different from this one. I don’t think it is the tool that would be best suited to tackling the economic consequences of the public health crisis created by COVID-19.

They had success without ever being used.

Market Response

Things have gone rather well so far. The Euro has rallied versus the US Dollar towards 1.10 although it has dipped against the UK Pound. Bond markets are more clear cut with the Italian bond future rising over a point and a half to above 140 reducing its ten-year yield to 1.62%. The ten-year yield in Spain has fallen to 0.7% as well. It seems a bit harsh to include Spain after the economic growth spurt we have seen but nonetheless maybe it did not reach escape velocity.

Comment

Actually there already are some Eurobonds in that the ESM ( European Stability Mechanism) has issued bonds in the assistance programmes for Greece, Italy, Portugal and Spain. Although they were secondary market moves mostly allowing countries to borrow more cheaply rather than spend more. On that subject I guess life can sometimes come at you fast as how is this going?

Taking into account these measures, the
government remains committed to meeting the
primary fiscal surplus for 2020 and forecasts a
primary surplus at  3.6% of GDP ( Greece Debt Office)

On the other side of the coin it will be grateful for this.

81% of the debt stock is held by official sector creditors,
allowing for long term maturity profile and low interest
rates

On a Greek style scale the 500 billion Euros is significant but now we switch to Italy we see that suddenly the same sum of money shrinks a lot. I notice that Five Star ( political party not the band) have already been on the case.

It’s just too little, too late
A little too long
And I can’t wait ( JoJo)

This brings me to the two real issues here of which the first is generic. In its history fiscal policy finds that it can not respond quickly enough which is why the “first responder” is monetary policy. The problem is that the ECB has done this so much it is struggling to do much more and the European Union is always slow to use fiscal policy. Such as it has then the use has been in the other direction via the Stability and Growth Pact.

Next comes the fact that there are 19 national treasuries to deal with for the Euro and 27 for the European Union as I note that last night’s deal was between only 2 of them. Perhaps the most important ones but only 2.

Is it the ECB which is the Euro area bad bank?

A feature of the credit crunch era is that some subjects have never gone away in spite of all the official denials. Another is that establishment’s use crises to try to introduce policies which they would not be able to get away with in ordinary times. As today we are looking at a central bank this is of course about the subject closest to their hearts which is “The Precious! The Precious!” which for newer readers is the banking sector. So let us get straight to the issue in the Financial Times which has taken a brief holiday from its role as the house journal of the Bank of England to bid for the same role for the ECB or European Central Bank.

European Central Bank officials have held high-level talks with counterparts in Brussels about creating a eurozone bad bank to remove billions of euros in toxic debts from lenders’ balance sheets.

After my reply I somehow doubt I will be getting the role.

But they already have Deutsche Bank?

Indeed this is quite a different message from the one given to the European Parliament by Mario Draghi in February 2016.

However, we have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole. Banks have built higher and better quality capital
buffers, have reduced leverage and improved their funding profiles.

I have emphasised the use of central banking language as I have picked out that word for some time. He emphasised the point later.

In the euro area, the situation in the banking sector now is very different from what it was in 2012……….making them more resilient to adverse shocks.

Indeed the non performing loans we are now supposed to be worried about were apparently fixed.

There is a subset of banks with elevated levels of non-performing loans (NPLs). However, these NPLs were identified during the Comprehensive Assessment, using for the first time a common definition, and have since been adequately provisioned for. Therefore, we are in a
good position to bring down NPLs in an orderly manner over the next few years.

Er, well we have had a few years since so…..

Geography

The article gives us a good idea of one of the countries pressing for this.

“The lesson from the crisis is that only with a bad bank can you quickly get rid of the NPLs,” Yannis Stournaras, governor of the Bank of Greece and member of the ECB governing council, told the Financial Times. “It could be a European one or a national one. But it needs to happen quickly.”

I have no idea how you could form a Greek bad bank but anyway that would have even less of a life than a May Fly so let’s not worry too much. If we switch to the state of play it does not seem to have progressed as Mario Draghi told us four years ago.

Greek banks have by far the highest level of soured loans on their balance sheets of any eurozone country, making up 35 per cent of their total loan books — a legacy of the 2010-15 debt crisis that pushed the country to the brink of exiting the eurozone.

Yes the numbers are down but the crisis started in 2010 so we are a decade on now. When will it ever go away?

But plans by Greece’s big four lenders to sell more than €32bn of NPLs — almost half the total in the country — are likely to be disrupted by the coronavirus crisis,

We could have a quiz as we wonder how much would be paid for that and whether it would help much? Regular readers will recall that we were told it was a triumph when some of the NPLs of the Italian banks were sold. Would you want them now? I rather suspect the problem has been kicked like a can elsewhere. I note the Bank of Italy reporting this in its latest Economic Bulletin.

approving a debt moratorium on outstanding bank loans, and increasing public guarantees on new loans to firms.

The latest Financial Stability Report was somewhat upbeat on the subject.

At the end of June, the stock of NPLs net of
provisions fell to €84 billion (€177 billion gross
of provisions), 7 per cent less than at the end
of 2018.

Although even by then ( November) the Bank of Italy was troubled by the slow down in the Italian economy and of course now we know that essentially 2019 saw no economic growth at all.

In the fourth quarter of 2019 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.3 per cent over the previous quarter and increased by 0.1 per cent in comparison with the fourth quarter of 2018. ( Istat)

So we can see why Italy would be keen especially as we note this development.

In June, Italian banks’ exposure to emerging economies was €165 billion (about 5 per cent of assets),
6.4 per cent higher than at the end of 2018.

They got into trouble with this last time around.

Returning to the FT there is also a mention of a couple of places which the official and FT lines had been ones of recovery.

Total NPLs in the biggest 121 eurozone banks almost halved in four years to €506bn, or 3.2 per cent of their loan books, by the end of last year. But Greek, Cypriot, Portuguese and Italian banks still have NPL ratios above 6 per cent.

Portugal had been in a better economic run but those who followed the debacle at Novo Banco will be aware of the banking system problems.

Comment

There are quite a few issues for us to pick our way through. For example with the expansion of its role is the ECB already a bad bank itself? Let me hand you over the the present ECB President Christine Lagarde.

Second, we are buying public and private sector bonds in large volume to ensure that all sectors of the economy can benefit from easy financing conditions…….We have also extended our asset purchases to commercial paper, which is an important source of liquidity for firms.

It is also lending but with wider ( aka weaker) collateral requirements. I raise this issue because back at the height of the credit crunch issue the Bank of England ended one of its schemes early because of “Phantom Securities”. I am sure you get the drift.

A reply to the FT from Italicus raises another issue.

So the idea is to remove NPL from the balance sheets of banks so that they can keep on lending to people and businesses who can keep on not repaying their debts?

As Pink Floyd so aptly put it.

Tired of lying in the sunshine staying home to watch the rain.
You are young and life is long and there is time to kill today.
And then one day you find ten years have got behind you.
No one told you when to run, you missed the starting gun.

Next comes the issue that rules for banks are only applied when the seas are calm which is the reverse of what should happen.

The European Central Bank (ECB) today announced a temporary reduction in capital requirements for market risk, by allowing banks to adjust the supervisory component of these requirements.

Next comes the issue of what are Special Purpose Vehicles. The Italian versions for bad loans called variously Atlas and Atlante have rather faded from view. Not before some rather spectacular write downs though which weakened the banking sector they were supposed to support.

Also there is Deutsche Bank with its share price of 5.88 Euros.

Podcast

 

Can the ECB save the Euro again?

A feature of the credit crunch and the Euro area crisis has been the behaviour of the European Central Bank or ECB. It’s role has massively expanded from the official one of aiming for an inflation rate ( CPI and thereby ignoring owner-occupied housing) of close to but just below 2%. In fact in his valedictory speech the former ECB President Jean Claude Trichet defined it as 1.97%. However times have changed and the next President upped the ante with his “Whatever it takes ( to save the Euro) speech giving the ECB roles beyond inflation targeting. But Mario Draghi also regularly told us that the ECB was a “rules-based organisation.”

On 18 March 2020, the Governing Council also decided that to the extent some self-imposed limits might hamper
action that the Eurosystem is required to take in order to fulfil its mandate, the Governing Council will consider
revising them to the extent necessary to make its action proportionate to the risks faced. ( ECB )

Well not those rules anyway which limited purchases to 33% of a bond. Oh and the rules against monetary financing seem to be getting more shall we say flexible too.

The residual maturity of public sector securities purchased under the PEPP ranges from 70 days up to 30 years and 364 days. For private securities eligible under the CSPP, the maturity range is from 28 days up to 30 years and 364 days. For ABSPP and CBPP3-eligible securities, no maturity restrictions apply. ( ECB)

There were rules which meant that Greece would not qualify for QE too but as we noted before they have gone.

 In addition, the PEPP includes a waiver of the eligibility requirements for securities issued by the Greek Government.

So as you can see the rules are only there until they become inconvenient. What we do not so far have unlike as has been claimed by some if that this policy is unlimited, although of course after all the ch-ch-changes it would hardly be a surprise if the new 750 billion Euro programme ended up being larger. Oh and they join their central banking cousins with this.

The additional temporary envelope of €750 billion under the PEPP is separate from and in addition to the net purchases under the APP.

Ah Temporary we know what that means…..

Bond Markets

These will be regarded as a success by the ECB as for example the ten-year yield in Germany is -0.44%. So in spite of the announcement of an extra 350 billion in debt to be issued Germany continues to be paid to borrow. So the ECB will regard itself as essentially financing the new German fiscal policy.

At the other end of the spectrum is Italy where the public finances are much worse. But the ten-year yield is 1.3% which is far below the nearly 3% it rose to after ECB President Lagarde stated that it was not its role to deal with “bond spreads” managing in one sentence to undo the main aim of her predecessor. As you can see the bond yield is under control in fact very strict control and I will return to this later.

Fiscal Policy

The ECB will be happy to see individual countries loosen the purse strings and especially Germany. The latter is something it has been keen on as the credit crunch develops. It is after all the largest economy and has had the most flexibility to do so. It would also help with the imbalances in both the Euro and world economies. However the collective response will have disappointed it.

We take note of the progress made by the Eurogroup. At this stage, we invite the Eurogroup to present proposals to us within two weeks.

At a time like this that seems a lot more than just leisurely. From the US Department of Labor.

In the week ending March 21, the advance figure for seasonally adjusted initial claims was 3,283,000, an increase of 3,001,000 from the previous week’s revised level. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series. The previous high was 695,000 in October of 1982.

That is for the US and not the Euro area but it does give us a handle on the size of the economic shock reverberating around the world. If it was a drum beat then it would require Keith Moon to play it.

Italy

We have some economic news from Italy but before I get to it we were updated this month by the IMF.

Compared to the staff report, staff have revised the growth forecast for 2020 down from about ½ percent to about ‒½ percent.

Actually that’s what we thought before all this. Please fell free to laugh at the next bit.

Altogether, staff projects an overall deficit of 2.6 percent of GDP in 2020

At some point they do seem to get a grip but then lose it in the medium-term.

Given the escalated lockdown measures and the wider
outbreak across Europe, there is a high risk of a notably weaker outturn. Growth over the medium term is projected at around 0.7 percent, although this too is subject to uncertainty about the duration and extent of the crisis.

I have long been critical of these long-term forecasts which frankly do more to reflect the author’s own personal biases than any likely reality.

If we switch to the Statistics Office we were told this earlier.

In March 2020, the consumer confidence climate slumped from 110.9 to 101.0. The heavy deterioration affected all index components. More specifically, the economic climate plummeted from 121.9 to 96.2, the personal one deteriorated from 107.8 to 102.4, the current one went down from 110.6 to 104.8 and, finally, the future one collapsed from 112.0 to 94.8.

Grim numbers indeed and as they only went up to the 13th of this month we would expect them to be even worse now.

Also there was something of a critique of the Markit IHS manufacturing numbers from earlier this week as this is much worse than indicated there.

The confidence index in manufacturing drastically reduced passing from 98.8 to 89.5. The assessments on order books fell from -15.6 to -23.9 and the expectations on production dropped from 0.7 to -17.1.

Retail too was hit hard.

The retail trade confidence index plummeted from 106.9 to 97.4. The drastic worsening affected in particular the expectations on future business whose balance tumbled from 28.0 to -9.4.

Comment

I have so far avoided the issue of Eurobonds or as they have been rebranded Corona Bonds. Mario Draghi wrote a piece in the Financial Times essentially arguing for them but there are clear issues. One is the grip on reality being displayed.

In some respects, Europe is well equipped to deal with this extraordinary shock. It has a granular financial structure able to channel funds to every part of the economy that needs it. It has a strong public sector able to co-ordinate a rapid policy response. Speed is absolutely essential for effectiveness.

Can we really see the Italian banking sector for example doing this?

And it has to be done immediately, avoiding bureaucratic delays. Banks in particular extend across the entire economy and can create money instantly by allowing overdrafts or opening credit facilities.  Banks must rapidly lend funds at zero cost to companies prepared to save jobs.

As to the general precept I agree that people and businesses need help but Mario is rather hoist by his own petard here. After all he and his colleagues wrote out a prescription of negative interest-rates and wide scale QE. There was some boasting about a Euroboom which quickly faded. Now the Euro area faces the consequences as for example the Euro exchange rate is boosted as carry trades ( to take advantage of negative interest-rates) get reversed.

Meanwhile according to his former colleague Vitor Constancio negative interest-rates are nothing to do with those who voted for them apparently.

You have certainly noticed that market interest rates have been going down for 40 years, well long before CBs were doing QE and buying investment grade bonds.

If so should they hand their salary back?

Let me express my sympathy for those suffering in Italy and elsewhere at this time.

The ECB is now resorting to echoing Humpty Dumpty

Focus has shifted to the Euro area this week as we see that something of an economic storm is building. For a while now we have seen the impact of the trade war which has reduced the Germany economy to a crawl with economic growth a mere 0.4% over the past year. Then both Italy (0.3%) and France ( 0.1%) saw contractions in the final quarter of 2019. Now in an example of being kicked when you are down one of the worst outbreaks of Corona Virus outside of China is being seen in Italy. Indeed the idea of Austria stopping a train with people from Italy suspected of having the virus posed a question for one of the main tenets of the Euro area as well as reminding of the film The Cassandra Crossing.

Tourism

This is a big deal for Italy as The Local explained last summer.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product.

The food and wine tourism sector continued to be the most profitable of all.

The study’s authors found that “the daily per capita expenditure for a food and wine holiday is in fact in our country is about 117 euros. Meanwhile it was 107 for trips to the mountains and 91 on the coast.”

The numbers were for 2017 and were showing growth but sadly if we look lower on the page we come to a sentence that now rather stands out.

Visitor numbers are only expected to keep growing. Many in the tourism industry predict 2019 will busier than ever in Italy, partly thanks to a growing Chinese tourism market.

Maybe so, but what about 2020? There have to be questions now and Italy is not the only country which does well from tourism.

Tourism plays a major role in the French economy. The accommodation and food  services sector, representing the largest part of the tourism sector, accounts for between
2.5% and 3% of GDP while the knock-on effects of tourism are also felt in other sectors, such as transport and leisure. Consequently, the total amount of internal tourism
consumption, which combines tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents). ( OECD)

Spain

The Gross Domestic Product (GDP) contribution associated with tourism, measured through the total tourist demand, reached 137,020 million euros in 2017. This figure represented 11.7% of GDP, 0.4% more than in 2016. ( INE )

Last summer Kathimerini pointed out that tourism was not only a big part of the Greek economy but was a factor in its recent improvement.

Tourism generates over a quarter of Greece’s gross domestic product, according to data presented on Wednesday by the Institute of the Greek Tourism Confederation (INSETE). The data highlight the industry’s importance to the national economy and employment, as well as tourism’s quasi-monopolistic status in the country’s growth.

According to the latest figures available, at least one percentage point out of the 1.9 points of economic expansion last year came from tourism.

It wondered whether Greece relied on it too much which I suspect many more are worried about today, although fortunately Greece has only had one case of Corona Virus so far. It not only badly needs some good news but deserves it. After all another big sector for it will be affected by wider virus problems.

That also illustrates the country’s great dependence on tourism, as Greece has not developed any other important sector, with the possible exception of shipping, which accounts for about 7 percent of GDP.

Economic Surveys

Italy has released its official version this morning.

As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) improved passing from 99.2 to 99.8.

That for obvious reasons attracts attention and if we look we see there may be a similar problem as we saw on the Markit IHS survey for Germany.

The confidence index in manufacturing increased only just from 100.0 to 100.6. Among the series included
into the definition of the climate, the opinions on order books bettered from -15.5 to -14.3 while the
expectations on production decreased from 5.6 to 4.7

As you can see the expectations  for production have fallen. Perhaps we should note that this index averaged 99.5 in the last quarter of 2019 when the economy shrank by 0.3%

France had something similar yesterday.

In February 2020, households’ confidence in the economic situation has been stable. The synthetic index has stayed at 104, above its long-term average (100).

This continued a theme begun on Tuesday.

In February 2020, the business climate is stable. At 105, the composite indicator, compiled from the answers of business managers in the main market sectors, is still above its long-term mean (100). Compared to January, the business climate has gained one point in retail trade and in services.

Really? This is a long-running set of surveys but we seem to be having a divorce from reality because if we return to household confidence I note that consumption fell in December.

Household consumption expenditure on goods fell in December (–0.3%) but increased over the fourth quarter (+0.4%).

Money Supply

This may give us a little clue to the surveys above. From the ECB earlier.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.9% in January, compared with 8.0% in December.

Whilst the number has dipped recently from the two 8.4% readings we saw in the latter part of 2019 it is much better than the 6.2% recorded last January. So maybe the surveys are in some sense picking an element of that up as the interest-rate cut and recommencement of QE bond buying feeds into the data.

Comment

If we switch to the ECB looking for clues as to what is happening in the economy then I would suggests it discounts heavily what the European Commission has just released.

In February 2020, the Economic Sentiment Indicator (ESI) increased in both the euro area (by 0.9 points to 103.5) and the EU (by 0.5 points to 103.0).

 

 

That does not fit with this at all.

GERMANY’S VDA SAYS CORONAVIRUS IS AFFECTING SUPPLY CHAINS OF CAR MANUFACTURERS AND SUPPLIERS ( @PriapusIQ )

Anyway the newly appointed Isabel Schnabel of the ECB has been speaking today and apparently it is a triumph that its policies have stabilised economic growth somewhere around 0%.

Although the actions of major central banks over the past few years have succeeded in easing financial conditions and thereby stabilising growth and inflation, current and expected inflation rates remain stubbornly below target, in spite of years of exceptional monetary policy support.

Next she sings along with The Chairmen of the Board.

Give me just a little more time
And our love will surely grow
Give me just a little more time
And our love will surely grow

How?

This implies that the medium-term horizon over which the ECB pursues the sustainable alignment of inflation with its aim is considerably longer than in the past.

Another case of To Infinity! And Beyond! Except on this occasion we are addressing time rather than the amount of the operation which no doubt will be along soon enough.

Indeed she echoes Alice in Wonderland with this.

For the ECB, this means that the length of the “medium term” – which is an integral part of its definition of price stability – will vary over time.

Which sounds rather like.

When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Although briefly she seems to have some sort of epiphany.

central banks often have only a limited understanding of the precise configuration of the forces

But it does not last and as ever I expect the result to be even lower interest-rates and more QE as the “lower bound” she mentions gets well er lower again.

Some of this is beyond the ECB’s control as there is not much it can do about a trade war and nothing about a virus outbreak. But by interfering in so many areas it has placed itself in the game and is caught in a trap of its own making. Or returning to The Chairmen of the Board.

There’s no need to act foolishly
If we part our hearts won’t forget it
Years from now we’ll surely regret it

Greece GDP growth is a tactical success but a strategic disaster

Yesterday the Eurogroup made a statement lauding the economic progress made by Greece.

We welcome the confirmation by the institutions that Greece is projected to comfortably meet the primary surplus target of 3,5% of GDP for 2019. We also welcome the adoption of a budget for 2020, which is projected to ensure the achievement of the primary surplus target and which includes a package of growth-friendly measures aimed at reducing the tax burden on capital and labour. Greece has also made significant progress with broader structural reforms, notably in the area of the labour market, digital governance, investment licensing and the business environment.

Actually of course this is another form of punishment beating as we note that the depression ravaged Greek economy will find 3.5% of GDP subtracted from it each year. It is hard not to then laugh at the mention of “growth-friendly” measures. Moving to reform well this all started in the spring of 2010 so why is reform still needed? Indeed the next bit seems to suggest not much has been done at all.

 It will be crucial for Greece to maintain, and where necessary accelerate, reform momentum going forward, including through determined implementation of reforms on all levels. Against this background, we welcome that the Greek authorities reiterated their general commitment to continue the implementation of all key reforms adopted under the ESM programme, especially as regards the reduction of arrears to zero, recruitments in the public sector and privatisations.

Anyway they are going to give Greece some of the interest and profits they have taken off it back.

Subject to the completion of national procedures, the EWG and the EFSF Board of Directors are expected to approve the transfer of SMP-ANFA income equivalent amounts and the reduction to zero of the step-up interest margin on certain EFSF loans worth EUR 767 million in total.

What about the economy?

We have reached the stage I have long feared where any improvement is presented as a triumph. This ignores two things which is how bad matters got and how long it has taken to get here. Or to put it another way Christine Lagarde was right to describe it as “shock and awe” when she was French finance minister but in the opposite way to what she intended.

Manufacturing

This week’s PMI survey from Markit was quite upbeat.

November PMI® survey data signalled a quicker improvement in operating conditions across the Greek manufacturing sector. Overall growth was supported by sharper expansions in output and new orders. Stronger domestic and foreign client demand led to a faster rise in workforce numbers and a greater degree of business confidence.

The reading of 54.1 is really rather good at a time when many other countries are reporting declines although of course the bit below compares to a simply dreadful period.

The rate of overall growth was solid and among the sharpest seen over the last decade.

However there was some good news in a welcome area too.

In response to greater new order volumes, Greek
manufacturers expanded their workforce numbers at a steep pace that was the quickest for seven months.

Also there was some optimism for next year.

Our current forecasts point towards a faster expansion in industrial production in 2020, with the rate of growth expected to pick-up to 1.1% year-on-year.

Sadly though if we look at the previous declines even at such a rate before Maxine Nightingale would be happy.

We gotta get right back to where we started from

Retail Trade

If we switch to the official data we see that the recent news looks good.

The Overall Volume Index in retail trade (i.e. turnover in retail trade at constant prices) in September 2019, increased by 5.1%, compared with the corresponding index of September 2018, while, compared with the corresponding index of August 2019, decreased by 3.9%

So in annual terms strong growth which should be welcomed. But having followed the situation in Greece for some time I know that the retail sector collapsed in the crisis. So we need to look back and if we stay with September we see that the index ( 2015=100) was 144.5 in 2009 and 129.3 in 2010 whereas this year it was 107.3. In fact looking back the peak in September was in 2006 at 167.1 so as you can see here is an extraordinary depression which brings the recent growth into perspective.

Indeed the retail sector was one of the worst affected areas.

Trade

This is one way of measuring the competitiveness of an economy and of course is the area the International Monetary Fund used to prioritise before various French leaders thought they knew better. After such a long depression you might think the situation would be fixed but no.

The deficit of the Trade Balance, for the 9-month period from January to September 2019 amounted to 16,500.5 million euros (18,313.6 million dollars) in comparison with 15,390.6 million euros (18,139.7 million dollars) for the corresponding period of the year 2018, recording an increase, in euros, of 7.2%.

However there is a bright spot which we find by switching to the Bank of Greece.

A rise in the surplus of the services balance is due to an improvement primarily in the travel balance and secondarily in the transport and other services balance. Travel receipts and non-residents’ arrivals increased by 14% and 3.8% year-on-year respectively. In addition, transport (mainly sea transport) receipts rose by 5.5%.

Shipping and tourism are traditional Greek businesses and the impact of the services sector improves the situation quite a bit.

In the January-September 2019 period, the current account was almost balanced, while a €1.4 billion deficit was recorded in the same period of 2018. This development reflects mainly a rise in the services surplus and also an improvement in the primary and the secondary income accounts, which more than offset an increase in the deficit of the balance of goods.

In fact tourism has played an absolute blinder for both the trade position and the economy.

In January-September 2019, the balance of travel services showed a surplus of €14,032 million, up from a surplus of €12,507 million in the same period of 2018. This development is attributed to an increase, by 14.0% or €1,976 million, in travel receipts, which were only partly offset by travel payments, up by 28.0% or €450 million.

GDP

Today has brought the latest GDP data from Greek statistics.

The available seasonally adjusted data indicate that in the 3rd quarter of 2019 the Gross Domestic
Product (GDP) in volume terms increased by 0.6% in comparison with the 2nd quarter of 2019, while
in comparison with the 3rd quarter of 2018, it increased by 2.3%.

The story here is of export driven growth which provides some hope. The domestic economy shrank with consumption 0.4% lower and investment 5% lower on a quarterly basis whereas there was this on the external side.

Exports of goods and services increased by 4.5% in comparison with the 2nd quarter of 2019……….Imports of goods and services increased by 0.6% in comparison with the 2nd quarter of 2019.

Comment

At first it looks extraordinary that the Greek domestic economy could shrink on a quarterly basis but then of course we need to remind ourselves that the fiscal policy described at the beginning of this article is extraordinarily contractionary. So in essence the recovery seems to be depending rather a lot on the tourism industry. I also note that if we look at the Euro area data there is an unwelcome mention in the employment section.

The largest decreases were observed in Lithuania (-1.2%), Romania (-1.1%), Finland (-0.5%) and Greece (-0.3%).

Not what you would hope for in a recovery period.

Switching to an idea of the scale of the depression we see that in the latest quarter GDP was 49 billion Euros, compared to the previous peak in the spring of 2007 of 63.3 billion Euros ( 2010 prices). So more than 12 years later still nearly 23% lower. That is what you call a great depression and at the current rate of growth it will be quite some time before we get right back where Greece started from.

 

Do not forget Greece is still in an economic depression

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

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

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

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

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

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

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

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

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

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

Greek Consumer Confidence

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

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

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

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

Economic growth

There is a reference to it.

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

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

Comment

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

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

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

An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).

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

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

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

 

What economic situation faces the new Greek government?

There was a link between the two main news stories on Sunday. Those who feel the main aim of the original Greek bailout was to allow European banks to exit the country will have had a wry smile at the ongoing travails of Deutsche Bank. Also the consequences of that bailout are still being felt in Greece which may vote for political change but finds itself continuing to be in troubled economic times. From Kathimerini.

Crucially, asked to what extent the creditors would be open to a reduction to fiscal targets, Regling said the 3.5 percent of GDP target Greece has committed to is a “cornerstone of the program,” adding that it’s “very hard to see how debt sustainability can be achieved without that.”

This was a reminder that via the fiscal target some 3.5% of economic activity each year will be taken out of the economy to help reduce the size of the national debt. A bit like driving a car with the handbrake on. It also gives us a reminder of the early days of the Greek crisis where a vicious circle was set up as austerity shrank the economy which meant that more austerity was required and repeat. Accordingly Greece was plunged into what can only be described as a great depression. Putting it another way the Greek economy is now 18.8% smaller than it was as 2010 opened.

Another disturbing feature is the weakness of the current recovery. I have written throughout this saga about my fear that what should be a “V-Shaped” recovery has been an “L-Shaped” one. So after a better 2017 ( which was essentially the second quarter) we find ourselves reviewing not much growth.

The available seasonally adjusted data indicate that in the 1st quarter of 2019 the Gross Domestic Product (GDP) in volume terms increased by 0.2% in comparison with the 4th quarter of 2018, while in comparison with the 1st quarter of 2018, it increased by 1.3%

So if there is a recovery impetus it is finding that its energy is being diverted away by the primary surplus target.

Trade Problems

Yesterday we got the latest trade data for Greece and this matters because it is a test of what has become called the internal competitiveness model. This was produced for the Euro area crisis because there was no devaluation option as the official view is that the Euro is irreversible. Thus the wages of the ordinary Greek had to take the whole strain of whipping the economy back into shape. How has that gone?

The total value of imports-arrivals, in May 2019 amounted to 5,230.9 million euros (5,832.8 million dollars) in
comparison with 4,356.6 million euros (5,130.8 million dollars) in May 2018, recording an increase, in euros, of
20.1%…….The total value of exports-dispatches, in May 2019 amounted to 3,044.6 million euros (3,415.5 million dollars) in comparison with 2,955.0 million euros (3,501.2 million dollars) in May 2018, recording an increase, in euros, of 3.0%.

In itself a rise in the import bill may not be bad as it can indicate an economic recovery on its way. Also in these times of trade wars then an increase in exports is welcome. But we need to look further as to the overall position.

The deficit of the Trade Balance, for the 5-month period from January to May 2019 amounted to 9,421.0 million
euros (10,515.9 million dollars) in comparison with 8,086.2 million euros (9,738.3 million dollars) for the
corresponding period of the year 2018, recording an increase, in euros, of 16.5%.

These numbers do not allow for two of the main strengths of the Greek economy so let is put them in.

The rise in the services surplus is attributable to an improvement, primarily in the transport balance and, secondarily, in the travel and other services balances. Transport receipts (mainly sea transports) rose by 9.8%. At the same time, non-residents’ arrivals and the relevant receipts rose by 0.5% and 22.8%, respectively. ( Bank of Greece)

Those numbers are only up to April but we see that even without the grim trade data for May the overall current account was not going well.

In the January-April 2019 period, the current account showed a deficit of €5.1 billion, up by €335 million year-on-year.

Of course the flip side of Euro membership is that the value of the currency is unlikely to take much notice of this as due to Germany’s presence the overall position is of a consistent surplus. But whilst tourism in particular has done well the idea of a net exports surge is just not happening.

Looking Ahead

The Bank of Greece told us this at the beginning of this month.

economic activity is expected to increase by 1.9% in 2019, by 2.1% in 2020 and by 2.2% in 2021, mainly driven by private consumption, business investment and exports.

Those numbers send a chill down my spine because throughout the crisis we have been told that Greece will grow by around 2% per annum. This was supposed to start in 2012 whereas in fact the economy shrank at annual rates of between 4.1% and 8.7%. For now growth via exports seems unlikely to say the least.

The private-sector Markit PMI survey told us this.

Operating conditions in the Greek manufacturing sector
improved moderately in June, with the headline PMI
dipping to its lowest since November 2017. Weighing on
overall growth were slower increases in production and new business.

The reading was 52.4 ( 50 = unchanged)  so slow growth was the order of the day as we note Greece is being affected by a sector that in the Euro area overall is contracting.

Bond Market

There has been a spate of articles pointing out that Greece now has a ten-year yield which is very similar to that of the United States. Actually that is not going quite so well this morning as at 2.17% Greece is 0.1% higher. But it is being used as a way of bathing the situation in a favourable light which has quite a few problems.

  1. Rather than a sign of economic recovery it is a sign of a policy ( primary surplus target) which is sucking growth out of the economy.
  2. Pretty much any yield is being bought these days!
  3. Greece does not have that many government bonds in issue as so much of the debt is now owned by the two Euro area bailout vehicles the ESM and EFSF. They disbursed some 204 billion Euros to Greece and now hold more than half its national debt. It is also why if you look back at the first quote in this piece it is Klaus Regling of the ESM who is quoted.

So rather than success what the bond yield now tells us is that Greece is in a program that the so-called bond vigilantes would love, otherwise known as the primary surplus target. It also has seen the ESM debt kicked like a can to the late 2050s. That is really rather different.

Why would you pay investors 2% or so rather than 1% to the ESM? A blind eye keeps being turned to that question.

It is also why I find it frankly somewhat frustrating when people like Yanis Varoufakis call for QE for Greece as via the ESM It got its own form of it on a much larger scale. Their real problem is that it came with conditions.

Comment

This has been a long sad story perhaps best expressed by Elton John.

It’s sad, so sad (so sad)
It’s a sad, sad situation
And it’s getting more and more absurd
It’s sad, so sad (so sad)
Why can’t we talk it over?
Oh it seems to me
That sorry seems to be the hardest word

There have been some improvements but the numbers below also highlight the scale of the problem to be faced.

The seasonally adjusted unemployment rate in March 2019 was 18.1% compared to 20.2% in March 2018 and the downward revised 18.4% in February 2019.

If we look back to the pre credit crunch era then the employment rate was around 10% lower than that. Also a youth unemployment rate of 40.4% is considerably improved but if we look at the past numbers we see that not only must so many young Greek’s not have a job but they must have no hope of one. Also it has gone on so long that some will now be in the next category of 25-34.

So the new Greek government has plenty of challenges so let me finish with the main two as seen by the Bank of Greece.

 This is so because, with a public debt-to-GDP ratio of 180%

and

Banks have made progress in reducing non-performing loans (NPLs). More specifically, at end-March 2019, NPLs amounted to €80 billion, down by about €1.8 billion from end-December 2018 and by around €27.2 billion from their March 2016 peak