One of the features of the economic crisis affecting Greece has been the way that the so-called rescue of her always has hitches and glitches before disappointing again. The latest example of this is the Greek debt buyback plan that I have mentioned several times on this blog. Let me start with the simple mechanics about which we were told this by the Reuters news agency.
Athens has no plans to extend the deadline for bids beyond Friday, finance ministry officials said…….A second official confirmed the 1700 GMT deadline.
The words of Sir Humphrey Appleby are echoing in my ears at this point.
Never believe anything until it is officially denied
Because it is now Monday and we have a new deadline of 12pm tomorrow (December 11th).
The Greek buyback plan
What is trying to be achieved here is for Greece to take advantage of the fact that her government bonds are trading in price well below par of 100. For example if we use the current plan we see that buying them back at 33 and then cancelling them reduces her liability on these bonds by 67 (100-33) or two-thirds. So to use the numbers for the current scheme she can spend 10 billion Euros to cancel 30 billion Euros of her bonds.
Put like that it seems an outstanding idea does it not? Unfortunately there have been issues along the way.
Problems with this
1. I have pointed out before that this should be done at as low a price as possible and yet authorities have dithered whilst bond prices have risen. Let me give you an example of the consequence of this. Back in May Greece’s ten-year bond was trading at a price of 24 and now it is at 38. So back then she could have retired the same amount of bonds for only spending 7.2 billion Euros or 2.8 billion less than the current theoretical plan. I say theoretical because as you may have noted the current price is well above the 33 assumed.
As we consider the 2.8 billion Euros we might like to consider how much Greece needs that and we see that the answer is desperately. Instead the money has gone elsewhere of which more later. Some will have gone to vulture funds who saw a chance and took it but there is an even deeper malaise and problem here. If you think that Vultures preying on Greece is bad enough an image I am afraid that there is something worse to come.
2. Greece has to borrow an extra 10 billion Euros from the EFSF to do this. So still a gain as she retires 30 billion of bonds? Er not quite as many of the bonds will be sold to her by her state owned banks which will then need yet another bailout. So of whatever is gained here some will have to be given back to the banks or they will collapse. Any extra funds here will need to be added to the 25 billion and 23.5 billion Euro bailouts they have already received or been promised. So there will have to be extra borrowing from the EFSF to finance this and the gains from the scheme start to dribble away even further.
Is this just another disguised bank bailout?
This is a chilling conclusion but if we examine the events we see that the evidence does fit such a scenario. Greek banks start with Greek government bonds priced at around 20 and end up with them priced in the mid to high 30s. A “nice little earner” particularly in percentage terms as Arthur Daley used to say. They then exchange paper with the Greek sovereign stamp on it for paper with the Euro area’s stamp on it (EFSF) which with apologies to Greek readers is another gain.
A very cynical game which gets worse if you consider the fact that the Vulture funds were if this is true a required part of the process and the authorities have connived in their populace being ripped off. When you consider the state of Greece’s finances that should be shocking in its concept. But someone or something had to drive the price higher for the gaming to work.
Meanwhile the Greek nation becomes ever more indebted as even plans to reduce it end up having such a small effect. Regular readers will recall that the debt haircut or PSI scheme of the spring had a similar effect. By the time it was over the gains were much smaller than the promised ones.
Has Greece already had her own “lost decade”?
On Friday Greece published an update on her economic growth figures. The latest numbers were a little better as her economy shrank at an annual rate of 6.9% in the third quarter of 2012 rather than 7.2%.
However we see also that the area which has been doing best is beginning to struggle too.
Exports decreased by 4.5% in comparison with the 3rd quarter of 2011
In case you were wondering how this can be a positive influence as reported by many this is because imports fell much faster (-21%). It is one of the flaws of the GDP system that collapsing import levels improves the number.
If we look at the third quarter of 2012 we see that in real terms the recorded GDP was 12.2% below that of the same period in 2005 (the earliest year in the report). Unfortunately as we look back we are not comparing like with like as changes to some Greek data only go back to 2005 but one cannot help but feel that we are back to the levels of ten years ago. If we consider that due to the import effect described above that GDP numbers are likely to have an upward bias compared to reality we see that things are probably worse than even that.
Today’s industrial production numbers
The way that they are presented does allow a brief basking in the sunshine.
The Production Index in Industry (IPI) in October 2012 compared with October 2011 recorded an increase of 2.0%.
A turn at last? If you think that you need to address two issues. The first is that output has in fact fallen by 6.5% between September (78.8) and October (73.7),and this is not in the headlines but in the detail. The second is that October 2011 was a particular trough in output where it fell by 14.8% on the month before.
Also as we review an underlying index of 73.7 compared to 2005 being 100 we can indeed be sure that a lost decade is sadly well underway here.
Last Christmas I recommended that Greece should default and devalue and take advantage of the Christmas break to do so.
If you consider the implications of a default and a devaluation then a lot of organisation and actual work is required. At the simplest level you need to have printed a new currency and there are many other changes that would be required.
If we examine the calendar we see that there is an opportunity again especially if one includes Christmas Eve which many nations in Europe treat as part of Christmas anyway. So having sorted the timing let us examine the why.
However if we move from rhetoric to reality we see in my opinion a situation that is so desperate that we may already be seeing a nation in a 1930s type depression. Accordingly if I was involved I would put it on the agenda for tonights meetings and I would vote yes.
As you can see my fears of a 1930s type economic depression in Greece have come ever more true as 2012 has progressed. The worst part of this is that there is an exit door. It would not be what economists call a “free lunch” as there are dangers such as the risk of inflation from the currency devaluation but rather than the hopeless future that Greece now faces it does offer hope. Rather than being a bankocracy Greece would have the opportunity to regain control over her own destiny.
In essence what Greece has to do is explained well by these lines from the song Hotel California.
Last thing I remember,
I was Running for the door
I had to find the passage back
To the place I was before
Last year I pointed out that this was a rare view.
I do not recommend this lightly as there are many costs and risks in such a move and I realise that there are hundreds if not thousands of commentators who reject the very idea.
As I wonder about how much they all must regret that, as after all the economic collapse that they predicted post-devaluation has occurred on their watch so to speak I issue the same challenge this year. Greece needs to devalue and default if she is to have a chance of recovery.
What Greece certainly does not need is any more of the “cunning plans” which have hit her in 2012.