As we move to the end of 2013 and the beginning of 2014 let me first wish all of you a happy and prosperous New Year. As we come to the turn of the year there is something rather familiar coming over the airwaves as the Prime Minister of Greece Antonis Samaras took to them to tell the Greek population this. From Greek Reporter.
The difficult part is behind us, 2014 will be the first year of growth.
Unfortunately the Greek people have heard this sort of message on several preceding new year messages. Instead they have seen their economy turn for the worse rather than for the better. Also Prime Minister Samaras made this statement.
It was only yesterday that I gave quite a different view on the current position in Greece.
For example Greece has the worst debt burden of 170% of economic output (and rising) whilst consumer prices and the GDP deflator are falling. The fact that wages and economic output are falling too makes this situation extremely toxic as another haircut or default looks inevitable. On every measure it looks less and less affordable.
What arguments can Samaras use to back up his arguments?
There have been two developments which support his case. Firstly the Greek budget deficit has fallen substantially in 2013 as shown below.
the State Budget deficit for the 11 months of 2013 amounted to 3,155 million Euros against the revised target for deficit of 4,290 million Euros and the deficit of 12,853 million Euros for the 11 months of 2012.
If we ignore the target which has been revised so often there has been quite an improvement leading Prime Minister Samaras to emphasise this development.
The State Budget Primary Balance amounted to a surplus of 2,778 million Euros
The primary balance is often emphasised by politician’s as it is usually more easily achieved than the overall one! Also I take an interest as it hints at a state where a country could for example default and devalue (an option sadly not taken by Greece this Christmas).
Also the price of Greek debt has risen in 2013 by an average of 48% according to the Bloomberg index of it which made it the best performer of those they follow. The other side of this is that the yields have fallen to an average of 8.4% and from this Prime Minister Samaras takes great cheer.
The flies in this ointment
If we stick for now to the specific issues and look at the deficit improvement we see that the largest factor has been this in the 11 months of 2013 recorded so far.
the reduction in net interest payments by 5,501 million euros or 48.1% comparing to the same period of 2012.
Thus 57% of this year’s improvement is due to the fact that Greece’s Euro area partners have stepped up to the plate to help her. In the terms of 1066 and all that this is a good thing but it does create a misleading impression about the improvement in the underlying Greek situation.
Also the way in which this has been done poses perhaps an even more formidable challenge. Greece is currently borrowing from its Euro area partners at an interest-rate of 1.5%. Can you see the flaw in the presentation of the fact that being able to borrow at 8.4% rather than 1.5% is an improvement? Immediately Greece did so it would be declaring itself insolvent and unable to finance its debts and borrowing. Whilst much of her debt has been rolled forwards in the form of Buzz Lightyear’s “To Infinity and Beyond” progress is still required to reach a place where no borrowing is required. Such progress involves more contractionary pressure on the Greek economy which many would argue is no progress at all.
If we move beyond Greece’s borders one day it may bother people that even Germany (ten-year bond yield 1.94%, thirty-year bond yield of 2.75%) cannot actually finance such rates let alone France,Italy,Spain. But apparently together they can…….These things have a habit of running for a while before imploding,sometimes quite a while.
One of the themes of the credit crunch has been the behaviour of wages and the way that they have fallen. Earlier this year I discussed the grim situation on this front in Greece and over the holiday period the Greek statistics authority has updated us.
The unadjusted Index of wages of the 3rd quarter 2013, compared with the corresponding index of the 3rd quarter of 2012, recorded a decrease of 5.9%, while a decrease of 10.3% had been recorded when comparing the corresponding Index of
2012 with that of 2011.
If we look at the underlying index it was set at 100 in 2008 and rose in the pre-credit crunch boom to 107.9 later that year. It is now at 80 for a chilling decline of 26% from the peak. So another page gets ripped from economic theory text books as we see that nominal wages do not always have rigidity and can fall substantially.
Whilst Greece has falling prices right now until more recently there was inflation and this has been approximately 9% over from the wages peak until the end of the third quarter. Thus real wages in Greece appear to have fallen by 32/33% since there peak which I think we all can agree symbolises a depression.
Looking forwards is more problematic as we see that wages are falling at an annual rate of 5.9% and consumer prices at 2.9% for a toxic mix which terrifies central bankers who fear a downwards wage/price spiral above all else. Of course the Governing Council of the ECB deserves some sleepless nights for its role on the road to here.
Returning to today’s subject neither falling wages nor falling prices do a country with a massive debt burden like Greece any good at all. Indeed they make it even less affordable than before.
What about trade?
The austerity and reform programme had as part of its “internal competitiveness” agenda the implication that it would turn around Greece’s balance of trade problem. However the improvements on this front are slowing. From the Greek statistics office.
The total value of exports-dispatches, for the 10-month period from January to October 2013 amounted to 23204,9 million euros (30759,5 million dollars) in comparison with 22369,6 million euros (28784,2 million dollars) for the corresponding period of the year 2012, recording an increase, in euros, of 3,7%
Indeed whilst single month figures are erratic it was worrying to see this for October released on Christmas Eve.
The total value of exports-dispatches, in October 2013 amounted to 2324,6 million euros (3179,2 million dollars) in comparison with 2572,4 million euros (3347,4 million dollars) in October 2012,recording a drop, in euros, of 9,6%.
This,however, can be added to a drop of 2.2% in September and a drop of 5.5% in August for a worrying trend development over the latest three months.
Today’s numbers illustrate both sides of the case.
The retail trade volume index, including automotive fuel, decreased by 1.0% in October 2013 compared with October 2012. The Index in October 2012 recorded a decrease of 18.1% compared with October 2011.
So on the one hand perhaps something of a bottoming out but on the other we can express surprise that it has not happened before now. With an underlying index at 65.6 compared to 2005′s 100 there must have been no fat left to cut some time ago and also it is some anti-achievement to have kept up the falls for this long.
With the levels to which many economic measures have sunk it is likely that in 2014 it will be possible to claim signs of improvement in Greece in 2014 just like we were promised “Grecovery” in 2013. It may not be a gross overstatement to say that the building of only a few houses might begin to turn around the construction figures (down 34% so far this year alone) for example. But if we look at the behaviour of two key indices of the credit crunch era which are wages and trade there is little or no sign of any significant improvement and indeed trade may have turned for the worse. So perhaps we will see a further divergence between the claims for the Greek state and the circumstances and experience of the ordinary Greek individual.