As we open this week we find that yet again Greece is the word,with apologies to Frankie Valli. Markets are increasingly worried about a Greek exit from the Euro and the consequences of it. This is true throughout Europe and we have seen the Eurofirst 300 equity index drop some 1.45% to 1007 so far today,so it may potentially flirt with the 1000 level. In Greece itself the Athens General Stock Exchange Index has dropped some 3% to below the 600 level as it is now at 592. If we look back to when Greece joined the Euro it was over 6000 and no I haven’t put in an extra zero by mistake. Yet again the main fallers are the Greek banks with Piraeus Bank,EFG Eurobank and Alpha Bank all falling by around 7%. Remember it was only last August that the Qataris backed EFG Eurobank and pushed the share price above 2 Euros compared to the 0.46 Euros of this morning.
If we step back for a moment and consider what has happened in Greece and the way that equity markets have responded we can see that they have been far from the perfect signal that some claim them to be. Of course there is so much official and unofficial intervention in them as an excuse but even so we return to the theme that they are a guide rather than an exact map and sometimes they are quite flawed.
Scaremongering is rife
If we start with the current world specialist in losses JP Morgan we see that they have estimated that there would be some 400 billion Euros of immediate losses from a Greek exit from the Euro. And no they do not mean just for themselves! At least I think not…
Let us first consider that as many of these operations are zero sum games one could also say that there will also be profits for those on the other side of the ledger. But as ever losses fill headlines more easily than profits. And we return to the fear maxim which strikes me as odd in many ways as a departure from the Euro offers the hope of a brighter future for Greece. Perhaps news organisations such as the BBC and others many of whom invested some much intellectual capital in the Euro are still suffering from the effects of this.
Greece’s national accounts
This is one of the main measures of the Greek situation as the indebtedness of her public sector has been the most visible sign of her difficulties, at least before her economic output collapsed. If we were to “Step Back in Time” as Kylie Minogue puts it to the “shock and awe” days of May 2010 then the Greek public finances should be improving with her economy growing by 1.2% this year. Meanwhile if we return to reality we are expecting further heavy falls in economic output to be reported tomorrow with the consequences highlighted below.
for the four months January – April 2012, on a modified cash basis, the State Budget deficit amounted to 9,098 million Euros, a significant improvement relative to the target deficit of 11,009 million Euros set in the 2012 Supplementary Budget.
Let us consider the phrase “a significant improvement” by looking at the numbers for 2011 and 2010 which oddly were missing from this statement.
the four months January – April 2011, on a fiscal basis, the deficit amounts to 7,246 million euros compared to the target of 6,924 million euros set in the 2011 Budget. During the same period in 2010, the State Budget deficit amounted to 6,371 million Euros.
So we can see that a programme which set out to reduce the fiscal deficit of Greece has in fact raised it. I think therefore that we can safely call it an utter failure. Whilst this year’s numbers are preliminary and subject to revision we can see that going 6.38,7.25 and now 9.1 billion Euros is a consistent rise and not a fall. And if anything it appears to be getting worse and not better.
Why is this so?
Greece has failed to control her public expenditure so that we see that whilst yet again we are regaled with claimed improvements on target we see expenditure which has risen as shown below.
State Budget expenditures for the first four months of 2012, equalled 25,291 million Euros, 2,359 million Euros lower than the year-to-date target
And if we compare to 2011 we see this.
On State Budget (Ordinary and Public Investment Budget), expenditures are lower than the budget target (23,292 mil. Euros) by 942 million euros
So we see that expenditure has in fact risen from 22.35 billion Euros to 25.29 billion Euros over the last year. And in another perversion of what should happen we see that something which should have contributed to an improvement has in fact helped make it worse.
primarily due to a year-on-year increase in net interest payments by 3,600 million Euros as part of the implementation of the PSI (Private Sector Involvement) debt exchange.
Time and time again we have seen that it is increased debt costs which have derailed Greece’s public-sector finances. This returns us to the theme that it is very difficult to solve a debt problem by creating more debt. The so-called bailout of Greece has piled so much extra debt on her that even the debt haircut she has just been through has helped little. This has been exacerbated by the shenanigans I outlined on Friday where official creditors such as the European Central Bank have emerged without losing a penny and by the booking of coupons paid are no doubt declaring a profit! As we also see that her banks look in need of further support it may be that Greece ends up more indebted than before the debt haircut.
Greece is taxing herself more heavily
We see that revenues from taxes have risen from 14.47 billion Euros in January to April 2011 to 16.19 billion Euros in the same period this year. However whilst better it is less than one might expect from all the announced tax rises including some now collected via electricity bills to help stop avoidance and evasion. And we see the real reason tucked away in something of a euphemism in the statement.
domestic demand contraction
We can take this further because what do we expect if we raise taxes in response to a domestic demand contraction? Yes more contraction and a continuation of the death spiral which has been inflicted on the Greek economy as the word “rescue” finds its way into my financial lexicon.
There is a way
Slowly but surely Greece is improving her primary deficit.
During the same period, the State Budget primary deficit amounted to 1,679 million Euros, notably better relative to the 3,262 million Euros primary deficit required to be in line with targets.
Indeed and it is an improvement on the performance in the same period last year where the primary deficit was more like 3.3 billion Euros. In case you are wondering why this matters the primary balance subtracts interest payments and accordingly is a measure of how effective a default might be. Ideally you would have a surplus. Of course Stephanie Flanders the BBC’s Economics Editor claimed that Greece had achieved a primary surplus at the end of last year but this has not been backed up by the evidence as you can see.
Whilst there would be costs from a Grexit from the Euro there would be benefits too and I feel that these would outweigh the costs. In the immediate maelstrom of it happening with the new Greek drachma falling and banks announcing yet more losses it would be easy to think that this was a new stage of the crisis whereas it would be one of the few occasions where we have turned towards the sunlight. One thing that Greece has taught us is that the costs of the bank bailout route are like trying to irrigate a desert. No matter how hard and fast you pump money in you return later and it is bone dry again.
And apart from the Grexit issue there are plenty of other problems to consider in the Euro area. Today March industrial production was announced to be down 2.2% on a year ago and this bit of detail caught my eye.
Eurostat: The largest decreases were in Luxembourg (-11.3%), Greece (-8.5%), Spain (-7.5%), Estonia and Finland ( -6.1%) and Italy (-5.8%)
There are some familiar names there but also some unexpected ones…