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.

http://www.ekathimerini.com/219950/opinion/ekathimerini/comment/time-for-greece-to-rejoin-global-markets

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.

Comment

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….

 

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Greece, how long can it keep going like this?

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

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

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

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

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

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

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

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

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

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

The same result?

Last week saw yet more sad economic news from Greece.

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

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

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

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

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

Again again again again, again again again again

The Time Problem

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

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

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

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

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

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

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

QE for Greece

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

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

Comment

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

Well there is this from Greek Reporter.

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

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

 

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.

Er?

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

Comment

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

 

 

A better year for the UK Public Finances ends with a disappointing March

Today we move onto the UK Public Finances but before we do so it is time for some perspective and as so often these days it is Greece that provides it. Let me explain with this from the Financial Times.

Greece’s primary budget surplus – which measures the country’s public finances when excluding debt repayments – hit 4.2 per cent last year, swinging dramatically from a deficit and far outperforming a creditor target of 0.5 per cent for 2016.

This provides two issues of which the first is the way that such data is manipulated, all our finances would be in great shape if we could exclude major repayments and outgoings! If we move to the total numbers we see how misleading this is and on the way learn how much Greece pays on its debt.

Separate figures from Eurostat today showed Greece’s overall public finances were also in healthy shape, boasting a surplus of 0.7 per cent.

My point is that the number above poses a challenge to the view that surpluses on public finances are unreservedly a good thing. On their own they are often a good sign but we need to look at other signals such as the cost.

an economy which has shrunk more than 25 per cent since 2008.

The latest improvement in the public finances that the Institutions are so keen on has come at this price as the Greek statistics agency tells us.

The available seasonally adjusted data1 indicate that in the 4th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 1.2% in comparison with the 3rd quarter of 2016,

The basic lesson of Euro area austerity and the drive for a series of budget surpluses is that it led to a collapse of the economy that is ongoing. A sign of that is the way that the national debt to GDP ( Gross Domestic Product) ratio had risen to 179% at the end of 2016. Indeed if we return to the FT nothing appears to have been learnt.

As it stands, Greece is committed to hit a 3 per cent surplus target for a decade after the end of its rescue in 2018.

A perspective on the UK

A major difference in the UK experience has been that we have seen economic growth. Yes quarterly economic output was initially hit hard as quarterly GDP fell from a pre credit crunch peak of £433.7 billion to £406.3 billion but it has risen since to £470.5 billion. Whilst we saw out budget finances plunge into a substantial deficit the growth has helped us reduce that and in a type of timing irony we reduced it to the Maastricht Treaty maximum of 3% of GDP in 2016. This led to us finally having a smaller deficit than France which was driven by our better economic growth performance. Moving onto our national debt it was at 89.2% of GDP using the European measuring rod.

So the overall experience has been of an improvement except of course it has been much slower than that promised as we were supposed to have a budget surplus by now. Much of that was caused by the fact that the 2 UK governments back then ( Labour and then the Coalition) lived in a fantasy world where the UK economy would grow at 3% per annum whereas 2011 and 12 for example were well below that. Remember the phase when there were concerns about a “triple dip”? Added to that whilst there have been cuts and people affected overall UK austerity has meant more of a reduction in the rate of growth of government spending as opposed to outright cuts.

The fiscal year to 2017

This morning’s update confirms much of the above and let me jump to a signal which we look at as a measure of economic growth.

In the latest full financial year, central government received £674.1 billion in income; including £507.0 billion in taxes. This was around 6% more than in the previous financial year.

So we see that the situation here indicates economic growth although we need to subtract a bit over 1% for the pension related changes to some National Insurance contributions rates. So far so good.

If we move to expenditure then as we note that year started with very little inflation there were increases in real terms.

Over the same period, central government spent £698.6 billion; around 2% more than in the previous financial year.

The combination of the two led to better news for the UK as shown below.

This meant it had to borrow £52.0 billion; £20.0 billion less than in the previous financial year (April 2015 to March 2016).

Meaning that we are now comfortably within the Maastricht criteria for this.

Initial estimates indicate that in the financial year ending March 2017 (April 2016 to March 2017), the public sector borrowed £52.0 billion or 2.6% of gross domestic product (GDP).

Let me present the improvement in a way that is against one of the media themes of these times. The theme that we do not tax companies faces a reality that half of the annual improvement came from higher Corporation Tax revenue. Of course there are tax dodging companies around…….

What about March itself?

The latest monthly data was more of a disappointment.

Public sector net borrowing (excluding public sector banks) increased by £0.8 billion to £5.1 billion in March 2017, compared with March 2016;

There were several factors at play here and let me start with one which will be in the back ground as we see inflation rise. That is that debt costs in March rose by £700 million due presumably to higher RPI ( Retail Price Index) based repayments. In addition to this Income Tax revenues fell and VAT receipts only nudged higher.

Care is needed on the monthly data but we may be seeing another sign of UK economic growth fading a bit here. This is of course consistent with other data such as the way that annual retail sales growth fell to 1.7% in March.

National Debt

The UK uses its own measure of this which in an episode of the television series, Surprise! Surprise! gives an answer lower than the international standard.

Public sector net debt (excluding public sector banks) was £1,729.5 billion at the end of March 2017, equivalent to 86.6% of gross domestic product (GDP); an increase of £123.5 billion (or 3.0 percentage points as a ratio of GDP) on March 2016.

On its measure the Bank of England with its bank friendly policies is responsible for a debt burden of some 5.9% of GDP.

Comment

This has been a long journey for the UK economy and we have already travelled beyond the promised end point which was a budget surplus. On this road we have seen economic growth but also rises in our national debt. Whilst the establishment talk has been of headwinds there is very little talk of the role played but the very low-level of government bond yields which have been reinforced by £435 billion of purchases by the Bank of England. This was reinforced in 2015/16 by the lower rate of inflation which kept our index/inflation linked debt costs low. The inflation gains are currently being reversed.

As to the position now we face the probability of growth fading a bit in 2017 as real incomes are hit by higher inflation. This will slow any further improvement in the public finances which is a shame after a relatively good year. Let me finish by putting our national debt in perspective because is we use the official number it is some 2.6 years of tax revenue.

 

 

It is always about the banks or in central banker speak “The Precious”

If we look back over the credit crunch era we were told that bailing out the banks would lead us into a better future. The truth nearly a decade later in some cases ( Northern Rock in the UK) is that we see a situation where central banks have enormous balance sheets and low interest-rates dominate with the Euro area and Japan in particular having negative interest-rates. That is most odd in the Euro area as of course we have been told only this morning by the Purchasing Managers indices that growth in France and Germany is strong. So something has changed and is not quite right and if we look we see signs of trouble in the banking industry even after all the bailouts and accommodative monetary policy.

Royal Bank of Scotland

This has turned out to be the doppelgänger of the concept of the gift which keeps on giving. Each year we have had promises of recovery at RBS from whoever is in charge and each year that fades to then be replaced by the same in a so far endless cycle.  Rather like Greece actually. Also the original promise of the UK taxpayer getting their money back seems further away than ever as the price of £2.40 is less than half of what was paid back then. Quite an achievement when we see so many stock markets close to all time highs.

As to the economic effect well claims of benefits have had to face a stream of bad news of which there was more yesterday. From the BBC.

Hundreds of jobs will be lost following a decision to close almost 160 RBS and NatWest branches.

RBS blamed a “dramatic shift” in banking, with branch transactions falling 43% since 2010.

In the same period, online and mobile transactions have increased by more than 400%.

Whilst online and mobile transactions have plainly surged it is also true that all bad news is claimed as somebody else’s fault. If you have a zombie bank wallowing on then you will of course be affected by change especially in this sort of timeframe.

RBS remains still majority-owned by taxpayers following its multi-billion government bailout almost a decade ago.

If we look back to the UK motor industry bailouts were stopped because the business model no longer applied yet that critique seems to have been forgotten. I note that after of course a fair bit of economic pain the motor industry is producing record figures.

Co-op Bank

I wrote about the latest problems of this bank on the 13th of February and this morning I note we have a sort of official denial of trouble in the Financial Times.

Co-Operative Bank says “a number” of suitors have come forward since it announced plans to fin a buyer in February.

This gives rather a different picture to this from Sky News on Tuesday.

Co-op Bank bonds have been trading at little more than 80p in the pound this week, underlining investors’ pessimism that a £400m repayment due in September will be made.

Talk is cheap but apparently those bonds are not cheap enough?! Easy money if you believe the hype especially at a time of low interest-rates and yields.

But you see I warned about this back in February.

The problem in my opinion is that when a bank has trouble the record is simply that so far we have never been told the full truth at the beginning.

And note this from Sky News.

One insider said the Bank of England had hosted a meeting last week at which the Co-op Bank’s problematic pension schemes had been discussed.

The losses of £477 million last year and the announced need for £750 million should there not be a sale are hardly good portents. Back in February I feared the Bank of England might find itself stepping in and that danger has increased in the meantime.

Portugal

My eyes were drawn to this yesterday from Patricia Kowsman of the Wall Street Journal.

Portugal state-owned bank raises EUR500M carrying hefty 10.75% interest. Says 49% of buyers asset managers, 41% hedge funds. Majority in UK.

In these times an interest-rate of 10.75% is extraordinary for a state-owned bank and compares to a ten-year bond yield for Portugal that has been around 4% for a while. Why might this be so?

Also on Wednesday, a group of major international investors that suffered losses on Novo Banco’s senior bonds issued a warning to the Portuguese authorities and indicated that an agreement to minimize those losses would be beneficial to the country. The group, led by BlackRock and PIMCO, said Portugal and Portuguese banks continue to pay the Bank of Portugal’s decision to transfer obligations from the New Bank to BES ‘bad’ at the end of 2015.( Economia)

So a past bailout has caused what Taylor Swift would call “trouble,trouble, trouble” and if we return to Patricia the record of Caixa Geral de Depósitos has been very poor.

Well, it’s a state-owned bank that had a EUR1.86B loss last year, big NPLs, in a country with a v weak banking system ( NPLs are Non Performing Loans)

We find ourselves in a situation where a past bailout ( BES) have made life more difficult for a current one and the Portuguese taxpayer ends up being held over a barrel especially after the European Commission declared this.

CGD will also take actions to further strengthen its capital position from private sources

This bit raised a wry smile.

the Commission analysed the injection of €2.5 billion of new equity into CGD by Portugal and found that it generates a sufficient return that a private investor would have accepted as well.

Can they see the future now? Shall we call it forward guidance…..

Italy

Speaking of forward guidance around this time last year Finance Minister Padoan was telling us that bailouts were not going to be required for Italy’s banks and Prime Minister Renzi was telling us what a good investment the shares of Monte Paschi were. Anyway if we move to this Wednesday Reuters were reporting this.

Italy’s plans to bail out two regional banks pose a tough dilemma to European regulators, who are still considering whether Monte dei Paschi qualifies for state aid, three months after giving a preliminary green light.

Banca Popolare di Vicenza and Veneto Banca said

If they hang on long enough with Monte dei Paschi maybe something will turn up. Oh and there is Unicredit the largest bank which I called a zombie on Sky News about five years ago. It is issuing another 13 billion Euros of shares which further dilutes shareholders who of course have had to dig deep into their pockets before. Also there were plenty of rumours that it was a big recipient from the ECB TLTRO ( cheap money for banks) this week. Looking more generally Frederik Ducrozet of  Bank Pictet thought this.

Extrapolating from the share of each country in previous operations, Italy and Spain would account for at least 60% of total TLTROs holdings.

Greece

The official mantra has been along the lines of D-Ream’s “Things can only get better” and yet this happened this week. From the Bank of Greece.

On 22 March 2017 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €46.6 billion, up to and including Wednesday, 5 April 2017, following a request by the Bank of Greece.

The increase of €0.4 billion in the ceiling reflects developments in the liquidity situation of Greek banks, taking into account private sector deposits flows.

In a situation where we keep being told the Greek economy is improving?

Comment

This is like an economic version of the never-ending story. Proclamations of success and triumph are followed by “move along please, nothing to see here” and then well you know! In addition to the bailouts there are other schemes to help the banks. For example the cheap loans offered by the Bank of England under its Term Funding Scheme have now reached some £47.25 billion. If we move to Europe I note that Bank Pictet think this.

In aggregate, the maximum subsidy from those long-term loans at a negative rate is EUR3bn on an annual basis, compared with a total cost of the ECB’s negative deposit rate of around EUR5.5bn (a number that will grow to over EUR8bn as QE continues).

As you can see some of it is hidden or to be more precise not generally known. The biggest critique is simply the “lost decade” for the banking sector we seem trapped in and we learnt explicitly from the chief economist of the Bank of England earlier this week that different rules apply to his “Precious”. From Chris Giles of the Financial Times.

why does the chief econ of BoE think banks accounting for a third of the productivity puzzle is peanuts?

When people look away though banks seem to return to type.

Credit Suisse Group AG increased its bonus pool 6 percent…….The bank is increasing its bonus pool for the first time since 2013 in spite of a second consecutive annual loss.

 

Reuters

After posting this I note that a long post from Reuters has a different perspective to mine.

Banks used to have a cosy relationship with Britain’s government. Now they say they are struggling to be heard as the country prepares to leave the EU…….

 

Or perhaps not albeit from a different corner.

Senior bankers expected special treatment from the government after Britain voted to leave the EU. They expected ministers to champion their cause, above other industries,

 

 

The claims of Grecovery turned into a continuing economic depression for Greece

Today has started with something that has become all to familiar over the past 7 or so years. From Kathimerini.

Greek farmers protesting against bailout-related income cuts are clashing with riot police outside the agriculture ministry in central Athens.

Police fired tear gas to prevent farmers from forcing their way into the ministry building, while protesters responded by throwing stones.

This is of course the human side of the austerity regime which has been applied to Greece again and again and again.

Protesters are angry at increases in their tax and social security contributions, part of the income and spending cuts Greece’s left-led government has implemented to meet bailout creditor-demanded budget targets.

Yet sadly there is also a theme where some as in those at the higher echelons of society are more equal than others. From Keep Talking Greece.

Greece’s ministers, lawmakers, mayors and other high-ranking public officials are able to enjoy generous tax reductions reaching up to 2,000 euros per year.

Even worse this was tucked away in a 2016 bill which did this.

The provision was included in the law to decrease or even cut the poverty allowance to thousands of low-pensioners.

Many of the problems could have been avoided if Greece had found a way to tax the wealthy. Yet they seem to continue on their not very merry way.

It appears that the former head of gas grid operator DESFA, Sotiris Nikas, granted himself a promotion that boosted his retirement lump sum by 100,000 euros to 258,000 euros, ( Kathimerini)

What about economic growth?

There was a familiar pattern to those who have followed the Greek economic depression as  From Keep Talking Greece.

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

Reality was not a friend to Mr. Tsipras as soon after the Greek statistics office released this.

The available seasonally adjusted data1 indicate that in the 4th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 1.2% in comparison with the 3rd quarter of 2016, against the decrease of 0.4% that was announced for the flash estimate

Which meant this.

In comparison with the 4th quarter of 2015, it decreased by 1.1% against the increase of 0.3% that was announced for the flash estimate of the 4th quarter.

If we look at the pattern then it has turned out to be what economists call an “L” shaped recovery or in fact no recovery at all. What I mean by this is that the Greek economy as measured by GDP (2010 prices) peaked at 63.3 billion Euros as the output for the second quarter of 2007 and then fell to  46 billion Euros per quarter as 2013 started and is still there. Remember all those who proclaimed that so-called “Grecovery” was just around the corner? Well it was a straight road and in fact had a gentle decline as the latest quarter had a GDP of 45.8 billion Euros. Thus the Greek economic depression over the last decade has involved a contraction of economic output of 28%.

If you prefer that in chart form here it is.

Yet the Institutions as the Troika are now called stick their collective heads in the sand.From Amna on the 7th of February.

The recent IMF report saying that Greece’s debt load is unsustainable was “unnecessarily pessimistic,” Eurogroup President Jeroen Dijsselbloem said on Tuesday.

The banks

Where an economy is really in trouble then we can find a banking system which has had a type of heart attack and the Greek banking system did as Kathimerini points out.

the huge pool of NPLs ( Non Performing Loans) in Greece that now add up to 107 billion euros after their increase by 1.5 billion in the first couple of months of 2017.

As to the deposits in the banks they have yet to regain the losses of 2015. Care is needed about the many claims that bank deposits have plunged again as the numbers has seen some ch-ch-changes with the order of 6 billion Euros removed. Any way the recent peak at 179.1 billion Euros for domestic residents the the summer of 2014 compares with 130..9 billion Euros in January.

The main growth industry for Greek banks seems to be this.

Eurobank Financial Planning Services (FPS), is the second bad-loan management firm to obtain a license from the Greek authorities to operate in the local market. It follows the permit issued to Cepal, a joint venture by Alpha Bank and Aktua.

On my way to looking at past house prices I found the Bank of Greece 2008 Interim Report which told us this.

the Greek banking system remains fundamentally sound, safe and stable.

Oh and this.

In the euro area, the situation is less worrying than in the United States as far as financial stability is concerned; however, risks of a deterioration do exist.

House prices

It was only yesterday I was looking at the central role of house prices in the UK economy but in spite of a barrage of measures the ECB ( European Central Bank) has failed to influence them much at all.

According to data collected from credit institutions, nominal apartment prices are estimated to have declined marginally on average by 0.6% year-on-year in the fourth quarter of 2016, whilst in 2016 as a whole apartment prices fell on average by 2.2%, compared with an average drop of 5.1% in 2015. ( Bank of Greece )

Ironically that is the sort of medicine which would benefit the UK but for Greece there has been another feature of the economic depression where “apartment prices” have fallen by 40% since 2007.

The shadow economy

The shadow or unrecorded economy has seen a few name changes in recent times but I have been trying to find out more about it in Greece since the crisis began. Yesterday there was a flash of light from Bloomberg.

When Maria’s employer, a large communications company in Athens, gave her additional tasks at one of its new units, it told her she wouldn’t be paid for the work in euros.

“I was informed that this extra payment of 150 euros per month would be in coupons that I can use in supermarkets,” said the 45-year-old, declining to provide her last name for fear of losing her job.

So as the austerity grip tightens more slips through the net.

Payments in kind are among practices companies are using in Greece as they seek to cap payroll costs, undermining efforts to balance the books of the country’s cash-strapped social security system………By some estimates, the so-called black market already accounts for as much as a quarter of Greece’s economy.

What we would like to know is how much the size of the shadow economy has grown. The fact that it has grown seems beyond doubt but how much?

Comment

As the Greek economic depression heads towards the decade mark where even “lost decade” simply does not cut it there have been many themes. A sad one I found in the 2008 Bank of Greece report which told us about structural reform, yes the same structural reform that is still being promised now.

Some time ago I wrote about the “Roads To Nowhere” in Portugal which were empty because of the high tolls charged. Well here is a view on Greece.

It’s often cheaper to fly to Berlin than pay the road tolls for a small car from Thessaloniki (Greece’s 2nd city) to Athens…….The insanely priced and ever growing road toll network in Greece is a major drag on economic development.Roads too expensive for many to use (h/t @teacherdude )

International Women’s Day

Let me mark this with the exchange between Sarah Jane of Sky News and Lord Heseltine.

Lord Heseltine: ‘She’s got a man-sized job to do’ : ‘It’s a woman-size job now’ ( about Prime Minster Theresa May)

This led to some humour from Charlie Reynolds

If I was Michael Heseltine’s mother’s dog I’d watch my step today

 

 

 

 

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?