Greece needs genuine reform and a devaluation not ever more debt and “wage adjustments”

Today will see an auction which will determine the final value of the credit default swaps which were written on Greek government debt. So we should see some form of closure on this matter. We will also find out what the net exposure actually was with estimates ahead of the event being around US $3.2 billion although as it is an not an exchange traded market there is more doubt about the exact number than if it was. If it does turn out to be of such size then it will reinforce my theme that whilst Credit Default Swaps are a factor they have turned out to be a much smaller factor than many have claimed along the way.

The European Financial Stability Fund

The EFSF will today loan Greece some 5.9 billion Euros and this represents two significant factors. Firstly we have been seeing more and more of the components of the second bailout for Greece coming into play, and this is the first tranche of actual payment. Secondly the EFSF will assume a large role in this bailout which is a considerable change in the scope and size of its actions.

Those who have followed my description of it as an unstable lifeboat prone to capsizing will be aware that I feel that this is a risky move. Let me give you an example of this. Until recently the EFSF found its ability to raise money so restricted it was reduced to borrowing on a six monthly basis (17th of January and 21st of February) rather than the ten or twenty years of its plans. Now suddenly its Chief Executive talks of issuing thirty -year debt. Only an expansion of sixty fold! If I wished to be harsher I would point out that there have been times when the EFSF has been reduced to issuing three month debt.

Indeed if one looks for the time period over which the EFSF has raised today’s money it is not possible to say as it has not raised it and will have to rely on the European Central Bank’s largesse for now. So the “pack of cards” which is the financing system of the EFSF looks even more unstable to me just as it embarks on a big expansion of its operations. It is at least advancing into calm seas as following the three-year liquidity operations of the ECB which supplied over a trillion Euros we are seeing much calmer credit markets. But when rough seas return we will see that the EFSF has a narrow margin of operation leading to tweo possible problems.

1. Its cost of funding (which is passed onto Greece) could rise to uneconomic levels for Greece.

2. The EFSF may not be able to fund itself at all as it usually operates on a “just in time” basis and has no capital.

Greece’s situation

The Prime Minister Lucas Papademos was interviewed in the Financial Times and amidst the hyperbole we did get some confessions as well as some extraordinary claims. There were also two rather remarkable understatements!

However, in the short term we are still experiencing negative side effects

The weakening of economic activity and the increase in unemployment were greater than initially expected.

Later on he is kind enough to specify the side effects.

The country is in the fifth year of recession, unemployment is about 20 per cent, youth unemployment is close to 50 per cent,

“Side effects” does not really cover it, does it? If it was a drug it would deserve to lose its licence for sale. Another problem area in the interview was the lack of implementation of economic reform.

There have been implementation delays and gaps – there is no question about this.

One reason was that policies were not implemented in a timely manner.

provided the policies are implemented fully

Of course according to Prime Minister Papademos this time is different although I note he adds the rider “if implemented effectively”. Indeed I detect a clash between his previous central banker caution and the hyperbole of a Euro zone official. You see whilst he talks of “a virtuous circle of structural reform, increasing activity and faster fiscal consolidation” I note that he says “it should be sufficient”. Also I note that he is very cautious about Greece returning to financial markets and funding herself.

If by 2015 market access is not possible then it may be necessary to rely more on official funding.

And as a final point whilst I go out of my way to avoid politics even to me the break-up of the Greek political system means that the quote below is misleading.

A significant factor that can help to this end is that now Greece’s two major political parties are committed to the new programme.

It remains to be seen how many votes they will get in the upcoming elections.

What is happening in Greece’s economy?

If we consider how rose-tinted official statements usually are there is something a touch ominous about the statement by the European Unions special task force head in Athens that Greek exports will probably decline in 2012. It is not helped by the fact that due to strike there will be no ferry services in Greece either today or tomorrow. Whilst many may be less concerned by the fact that a 48 hour strike by lawyers starts tomorrow it does reinforce the image of a country almost at war with itself. A gunman at the Athens tax office does not help either.

Hopefully Construction is not a leading indicator

From the Greek statistics office

The Production Index in Construction (IPC) for the 4th quarter 2011 compared with the 4th quarter 2010 recorded a fall of 34.6%. A year ago, the year-on-year growth rate of the index was -33.5%.The Production Index in Construction (IPC) for the 4th quarter 2011, compared with the 3rd quarter 2011 fell by 16.8%.

This index adds together three separate indices and the weakest of these is the Production Index of Building Construction. In a series where 2005=100 it now registers 27.54 which is a calamitous fall. It has improved slightly but at 27.54 even a high growth rate will take a long time to improve things.

The Service Industry

This is the major part of any modern economy and whilst there are some strengths here for Greece there are pleny of weaknesses. For example on an index based at 2005=100 we see that Information Service activities is at 198.1 although it is now falling. However, we see publishing falling from 106.2 two years ago to 56.1 now, telecommunications falling from 97.2 to 75.5  and computer programming and associated activities falling from 136.5 to 90.4 over the same timescale.

Can tourism help?

For many this is the industry most associated with Greece, but even here there have been problems and declines.

The turnover index in Tourism Sector, during the 4th quarter 2011 as compared to the 4th quarter 2010, decreased by 18,2%, while the index for the corresponding period of 2010 as compared to 2009 decreased by 15,8%.

Looking back we see that the more important third quarter was weaker than previous years too, but that the fourth quarter signalled further weakness.


As we can see from the analysis above Greece’s economic situation continues to deteriorate. And even her own Prime Minister can only muster this about the likely future.

Positive growth rates should be achieved within less than two years down the road.

One of the ironies of the Euro zone plan is that in a market based economy there are stabilising measures which would likely have begun to help her now like a falling exchange rate. But locked into the Euro she is trapped. For there to be any improvement then the “far-reaching labour reforms” will have to do much more than what the IMF in a significant euphemism calls “wage adjustments”. So far all we have seen is “wage adjustments” and as there has been a lack of reform we can see a major cause of her current malaise. For there to be any real improvement genuine reform is needed and another debt haircut which includes the official sector this time.

Oh and a devaluation would help too….


This entry was posted in Euro zone Crisis, General Economics, Greek Financial Crisis, IMF, Quantitative Easing and Extraordinary Monetary Measures. Bookmark the permalink.
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  • Anonymous

    Hi Shaun,

    You ask if tourism can help Greece – the politicians & press have hyped up the hatred of 70 year old war in order to avoid blame for the economic crisis. It cannot help tourism to demonise the consumers of Europe’s largest economy. Also with the weak sterling, British consumers have cheaper holiday options in Bulgaria, Croatia,Turkey, etc. Civil strife and strikes are another turn off for tourists.

    Did the Greek statistics give a number for 2011 tourism as compared to 100 in 2005 ?

  • Anonymous

    All designed for failure, including the EFSF, or is the huge EU 
    bureaucracy really that  inept?

  • Anonymous

    Hi Shaun
    I thought the EFSF was a holding operation for the new ESM. The ESM appears to be a sub contracting form of the IMF for the Eurozone – let’s call it the EMF. What strikes me is that it’s loans will have preferred creditor status secondary only to IMF loans. The idea is to institutionalise private sector haircuts in to the procedure so that ( fairly some would say) private lenders take their share of the pain. Jose Manuel Gonzalez-Paramo ( Spanish ECB guy) has just admitted that monetary union has failed on its lack of political union and appropriate Federal institutions. He has admitted that what is now happening is a ‘patch-up’ job which may or may not work. So, we might see the Commission chuck out national budgets, fine countries who dont comply and sovereign litigation in the event of disputes. An EZ hotchpotch backed up by an EMF…

  • James

    All very interesting as always. One does have to ask at what point social breakdown will overwhelm the Greek government. How high doew youth unemployment have to go before people start to wonder about revolution?
    I know that you don’t do politics, which I applaud, but it seems to me that the whole Euro fiasco is about politics trying to trump economics (and reality, common sense etc). If the mainstream parties are swept away in the forthcoming Greek elections, then it seems to me that all bets are off for this so-called bail-out as the conditions will not be met.
     In that case, either Greece will leave the Euro or the Eurocrats will have to swallow a breach of the rules on austerity.  If Greece leaves the Euro and then the eceonomy becomes as bad as Eurocrats like to predict, austerity will rule Europe for a decade at least. However, if things improve outside the Euro, surely others will take note and leave the Euro.
    We could therefore be in a position wher the Euro elite will want Greece to become a complete disaster outside the Eurozone to frighten anyone else from adopting the heresy of departure from Eurozone. A sacrifice of a pawn to protect your precious Euro!!

  • Rods

    I can see three issues:

    1. The Greek Government’s budget deficit and the economic austerity death spiral. If Greece continues to run a deficit through continued depression then another haircut will become inevitable. The can for this has probably been kicked down the road for about 12 months.

    2. Political will to implement the agree austerity measures and also market reforms to make their economy more competitive. With elections in April this may unravel very quickly, if the new Government that gets elected, refuses to implement them. This will invoke a major EU / Greek political crisis which could have one good outcome Greece leaves the Euro, but also a number of very nasty ones. The can won’t be very far down the road for this one, could happen anytime from May onwards.

    3. The population take matters into their own hands to force a solution and a new direction for their country and economy. If democracy does not survive, then this would be incompatible with their EU membership. Once a population has been pushed, so they feel they have nothing lose, this becomes a very dangerous scenario. This outcome maybe the worst of the lot as the people may lose political freedom and freedom of expression. This could happen anytime from when the weather gets hot as most riots and revolutions happen in hot weather.

    Rather than subscribing to Sarkozy’s view of: “Problem solved”, personally I think Greece is is not dead, but still very much on the critical list.

    And there is Portugal, Spain and Italy to deal with yet!

  • Anonymous

     Mariano Rajoy of Spain has told the EC, ECB and Merkozy that he will not comply with their austerity. Given that Rajoy has a veto, the EC, ECB and Merkozy appear unable to enforce their “rules”

    Why should Greece comply when Spain is already breaking the rules ?

  • JW

     Hi Rods
    You can add Belgium to that list, debt/GDP ratio over 140% and economy beginning to go the same way.

  • Anonymous

    Hi Alex

    Yes they did. On a scale where 2005=100 then 2011 was 88.1. The pattern was rises up to a peak of 113.9 in 2008 and then 103.6 and 95.1 in 2009 and 2010 respectively.

    The peak season between 2010 and 2011 was only slighly down but as I put in the article the fourth quarter had a further heavy fall of -18% on the annual comparison.

  • Anonymous

    Yep and am EMF which is due ( as far as there ever is a timetable) this summer but with a size still to be decided….

    A bit like Kits point above.

  • Anonymous

    Hi Rods

    I see that JW has added Belgium whereas I was thinking of Ireland and France. The list is getting a bit long isnt it?

    And that is without another Swiss Franc surge which would challenge Austria’s banking sector again. Rather ominously a likely cause of a Swiss Franc surge would be more trouble for the Euro…

  • Anonymous

    Hi James

    The problem for them is that places like Iceland are doing much better following the “alternative” strategy. Whilst I do not think that Iclenad is out of the woods yet she looks in better shape than Greece after a worse start.