Greece’s latest public finance figures show that the current medicine is not working

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.

Perfect Markets?

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…




This entry was posted in Euro zone Crisis, General Economics, Greek Financial Crisis. Bookmark the permalink.
Subscribe Find an Adviser
  • Walt Kowalski

    Morning Shaun– have you looked at the Spansh & Italian 10yr Bonds this fine morning ? How long before Magic Mario pulls another LTRO to calm the storm ? Thanks

  • Andy Zarse

    The next logical step is that Greeks need to recognise the Euro is not just a bit of paper with some rather natty architecture drawn on the back. It is a whole monetary system with a very heavy membership price to pay. I’m not sure this has been made clear to them so far, their media has a lot to answer for on this front. However, my view is that they’re rapidly coming to the correct conclusion, or they may get there by accident.

    There’s no easy way out for Greece now, but I agree default and devaluation is the least awful option. What must be worrying the Euro-wonks most is what happens if Greece actually makes a success of a new Drachma? What if tourism explodes on the back of cheap holidays, Germans start buying Greek holiday villas and British youths start coming back to Corfu to get drunk and start punch-ups for a fraction of the cost of “pint and a fight night” in England. There’s no reason why Portugese folk won’t see the economic benefits after another winter or two of austerity and decide, “Hey you what…!” And then Spain might see how well it’s going for her nearest neighbour…

    The problem is the Euro-wonks are very clever politicians and brilliant financiers too. Trouble is, the immutable laws of economics always trump both in the end.

  • JW

    Hi Shaun
    Luxembourg’s industrial output is dominated by steel, it exports to US and China. I think this is a clear indicator that the Chinese economy is facing a hard landing, their electricity consumption is almost flat this year. Weaker oil again today, more of the same message. Finland’s numbers presumably reflect Nokia’s problems as electronics is their biggest industrial sector.
    Sounds like the German’s are getting ready to push the Greeks out. I doubt whether they will jump themselves. Real risk of capital controls being imposed across swathes of europe if/when this happens.

  • Drf

    “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.”  So there is a parallel with several other fiscally-troubled EU states then, which whilst they are not yet quite in the same dire position as Greece are nevertheless heading in the same direction, including the UK? 

    The problem is that cutting public expenditure in real terms, in any country which has become used to Socialist welfare systems and careless abandon over real costs, is political suicide and in any supposed democracy there are few politicians who will therefore dare to do it.  This is why they usually choose the option of debasement (as in the UK), which is much more clandestine, and if accompanied by falsified government statistics can fool the majority into not understanding what the politicians are actually doing with intent. Eurozone members do not have that option and this is the real difficulty.  If Greece reverts to the Dracma it will have that option again, but the economic destruction will be severe and long lasting.

    However, what politicians find it difficult if not impossible to understand is that once they start the easy “Quick Fix” method of balancing their budget in a fiat currency system, it like a drug becomes addictive!  In the end they continue it for so long (as in the Zimbabwe the Wiemar Republic and the UK) that they eventually impeed and then finally destroy the real-wealth creating processes in their economy.

  • Andy Zarse

    Everyone seen this photo taken inside the Greek Finance Ministry by some German journalists who managed to get inside a film behind the scenes? Then wonder why they are in the mess they’re in…

  • Anonymous

    Hi Shaun    A good description is that of George Papandreou ( the Greek guy who found New Democracy’s blackhole and then awarded Berlin’s highest honour for civic responsibility) when he calls Greece’s relationship with the euro as an umbilical cord. Not even Tsipras can bring himself to call for a Euro exit because he wants to gamble that Germany will blink first. Your economics is fading as the real issue for the moment IMO.

  • Shaun Richards

    Hi Mr.K

    Yes I had been watching the further falls in Spanish govt bond prices. Her ten-year yield has closed at 6.22% and we look like we will have to remove the Super/Magic moniker before Senor Monti’s name. Still the Spanish plan tonight to merge some more cajas which I believe in the words of a famous baseball coach is just like deja vu all over again!

    For those who havent followd this story you only have to look at the troubles of Bankia which I reported on last week as it was the result of 7 cajas being merged.

  • Shaun Richards

    Hi JW

    Thank you I had been wondering what had caused Luxembourg’s rather calamitous drop in output. Although a fall in steel production rather goes against the reported firing up again of a UK steel plant or two doesn’t it?

    I was wondering why Portugal wasnt on the list and as it’s year on year figures were the same as Italy’s it is not quite fair that it was not.

  • Shaun Richards

    Hi Drf

    What is crippling the Greek effort is in effect all the debt being piled on it by the so-called rescue that has turned out to be nothing but. So the costs in terms of interest that has to be paid on it has crippled her because piling debt on debt simply does not work.

  • Shaun Richards

    Hi Andy

    Which part of the Ministry was that? Let’s hope it was somewhere unimportant.

  • Shaun Richards

    Hi Shire

    There will always be swings and roundabouts on such matters and I do not regret ignoring the political battles. Quite a few new people took my twitter feed today so I do not think that the economics ready to be hidden under a muchroom just yet! Not if I have anything to do with it anyway!

  • Andy Zarse

    I think it’s the Troika’s office, you should see the state of the Greek bit!

  • Sovjohn


    The amount of “scaremongering” you are quoting has reached epic proportions in Greece. All traditional media (TV, radio) and many internet news portals have thrown away their journalistic objectivity (if it ever existed) and have actively been proclaiming the Apocalypse for their Greek viewers.

    While a percentage of the population nowadays dismisses these tactics as just scaremongering, a significant (I daresay, greater) percentage does believe them.

    It has become “absolutely vital” to “form a government”, which is understandable as we are more than a week after the elections, but the media have been crying wolf from day 1! As if coalition governments are formed within 24 hours…

    Also, every news story, no matter how insignificant, of ANYONE inside the Eurozone proclaiming something about Greece leaving the Euro is duly covered. Even if it’s quoted to “German officials” or “the EU” in general without names.

    Apparently, the Four Horsemen of the Apocalypse will decapitate all mortgage owners and play football with their heads. Well, not quite, but the climate is not far from that.

    My honest assessment – Politicians (both Greeks and EU ones) are playing for time, once again. In June 2012 a vast bombardment of austerity measures (valued at more than € 11 bn I believe) has to be “specified”, and I think that no political leader wants to be associated with these.

    Everyone wishes, in their heart, to be in the opposition and “cry foul” of the “crimes committed against the Greek people”. And I mean every party leader.

    The usual suspects to govern, PASOK (3rd in MP’s) & New Democracy (1st in MP’s), can’t do it on their own because they have 149/300 MP’s together. SYRIZA (2nd in MP’s)wants to either stay in opposition, or come 1st in the next elections, which would entitle them to the +50 seats bonus of the first party.

    Independent Greeks (4th in MP’s), a New Democracy spin-off party with “national independence, rot in hell Troika” manifesto has said that they won’t cooperate with PASOK / N.D. “not even dead”.

    Democratic Left (5th in MP’s) is a peculiar case, they are advocating a “pro-Euro, pro-EU left stance”, and they are damned if they do, damned if they don’t. If they listen to half of their voters, who voted for a “responsible Left party” as they were calling themselves, they have to join in the government with PASOK/ND, and get obliterated from the electorate, which may well leave them outside Parliament until the end of time for this. If they listen to the other half of their own voters and say “No” to government participation, they will be accused of “letting the country drift towards destruction and Drachma” instead, again losing some power.

    Communists, KKE (6th in MP’s) are strongly anti-Europe, anti-NATO, anti-everything, pro-Lenin/Stalin USSR (no kidding) so noone expects them to join anything.

    Golden Dawn, the neo-fascist party of the far extreme right (7th in MP’s) is snubbed by everyone as an “abomination of the political system”.

    It is my belief that the most plausible combination (PASOK/ND/Dem.Left) can’t go on because (you’ll love this), apart from Dem. Left’s problems, they have 168 MP’s altogether, can’t guarantee if all MP’s would agree with the government, and are afraid that they may drop to 160 or less. Then, when the next obedience to Troika laws have to be passed, they may well lose 10-15 more because they, as MP’s, won’t want to get associated with passing such laws, so <150 again.

    It may sound incredible, but I really think that they are pushing for some sort of government with 2/3 or more of the overall MP number just to ensure it won't fall apart in 3 months or less. This is my take on things.

    And I wrote too much again. Good night from Athens.

    -Ioannis M. aka Sovjohn

  • David Lilley


    I think it was Mr. Conway, the Sky News economics editor, who demonstrated today how easy it was to devalue the Greek Euro. You just tear off the corner or stamp it D for Drachma. I assume it may be differentiated from other Euros by having a picture of Plato or similar. It is therefore possible for them to devalue tomorrow. And we also learn today that they have been talking about Grexit since 2010 but not with De La Rou.

    Here is where we are. They have a very efficient private sector that cannot support a “big state” and they have a tax collection system that has been compared to “a voluntary charity can”. As a result they got into defict after defict and built a massive national debt. They lost the ability to borrow from the fixed income market, failed to correct and choose instead to beg from the troica. They took E130b and again failed to correct their failings and came back for another E110b from the troica and now look forward to a third bailout. They defaulted on their private sector loans and have therefore said goodbye to any future market loans.

    All this against a background of the IMF fixing hundreds of failing states on time and on budget and with interest. Yet the IMF is a member of the troica but the troica can say goodbye to its loans to Greece. Haiti and Russia always default. Germany always pays. But now we have the home of Socraties and Democratus begging for loans but refusing to pay their installments.

    Going forward.

    They are a member of a club that has delivered great benefits to them and they do not wish to give up those benefits. When I was at school P, I, I, G and S and Norway were poor countries. Norway now has oil and gas beyond its dreams but little has changed for  the PIIGS other than they have kidded themselves that they could afford a welfare state and an NHS on easy money. And when there was jobs available they just imported labour like the UK.

    They need to get off the Big Issue and make their own way in the world. But they have chosen the route of benefit dependency and will not even form a “war cabinate”.

    Is it not time for the club to withdraw their membership? Germany should abstain to remain whiter than white and greener than green and distance themselves from such things as self immolulisation which was entirely down to Greek mismanagement. Future handouts could be directed towards the NGOs to provide for the poor rather than to the Big State.

  • Spacemanc

    The Politicians  fiddle while Athens burns – Events are really going to overtake them. 

    I think that the next bailout payments will be withheld and a new left anti austerity government will be elected next month. As soon as that happens, any money that the rich have left in Greece will moved out. This will be reported in the press and then ‘the man on the street’ will try the same. Capital controls will be introduced and then the meltdown will get into full swing, with riots and general anarchy. Greece will be kicked out of the Euro whilst the rest of Europe tries their best to contain it.

    Should be a very ‘interesting’ Summer. Good luck in Athens – I’d be out of there! 

  • Sovjohn

    Being out of there is an interesting idea, I may as well do that, I think I’ll make meaningful decisions once I find out if we’ll have elections in June. I have some friends in continental (not southern) Europe where I might stay for a while, and damn the elections… ;-)

  • JW

     One ‘I’ please. Italy may have had its ups and downs but it has never been ‘poor’, and isn’t today, unless that classification also includes the UK.

  • Anonymous

    In my opinion, the fundamental problem of the Euro is obvious: it is the German Mark in disguise and does not suit the economies of the south (in my opinion Greece would have had problems with a drachma as well because not all of Greek problems come from the Euro). I think that it is short-sighted teh view that it is taken that this won’t change. It could change. There is and there will be more of a battle between Germany et al. and the rest of Europe (might be that Greece is not in the rest but this is not my point) for transforming Euro in a real common currency which takes into account the needs of other economies as well. In other words, the end game for Euro (if it does not collapse) is not that everybody becomes Germanic, the end game is that everybody (including Germany) transforms to something else, something in between. This has been the grand plan of the Euroideology all along. We will see if it prevails or collapses.

  • DaveInSpain

    Hi Shaun

    Something I’m curious about that I haven’t seen mentioned anywhere is Swiss Franc/Euro peg. Surely as the € declines it is costing the Swiss central bank bucketloads to keep the peg at €1.20(ish) weighted against other denominations.

    I was wondering about how much influence this peg has had in recent months on the relative strength of the Euro, and the effect on the currency if the SNB ditched it and allowed the CHF to rise.

  • Anonymous

    I doubt the EC wants to change Germany or Greece – the only grand plan they have is for a grandiose administrative centre and ever more grand salaries for themselves.

    Austerity is not needed in Brussels when everyone else is struggling they want a 6% budget increase. Austerity for you the people, but not for us the eurocrats ….

  • Drf

    Hi Shaun,

    But the point is that it does not matter whether the public expenditure is on debt servicing or on throughput expenditure in this context, since it is the total public expenditure amount per month which is crippling Greece’s economy, not the fact that much of it is due to debt or debt piled on debt.  Money is money, and cash-flow is cash-flow! This why there is only one long term solution, which is to reduce TOTAL public expenditure (including debt servicing) to what can be balanced against the real wealth actually being produced. This is true for all such insolvent economies, including the UK (just as for all insolvent entities and individuals). I believe it is quite misleading to term this discpline “Austerity” just as it is even more misleading to term intended unredeemed debasement “QE”. It is in fact sound macro management accountancy which is required to restore and maintain a position of true solvency.

    Politicians always think for the short term only. So now they think their problems are only due to the debt servicing costs which they have profligately incurred; but it was politicians who borrowed this money owed, just like debt junkies. When Greece exits the EZ and re-issues the Drachma the politicians will be able to use the usual easy trick of debasement again.  That is all they know, since to do what should be done to restore a sound economy is political suicide to them, since this will make Socialism-addicted electorates vote against them. The only eventual outcome then is similar to that which occurred in the Wiemar Republic, because continuous sequential debasement destroys the wealth creating processes. I do not thus see how your response relates to my original comment?

  • Anonymous

    There is this perspective also but do not underestimate the Euroideology. And it could be that when things get even worse, when we are in the real tipping point (not for Greece but for EZ) then and only then things could change dramatically. Spain, Italy, France go along with Germany for the time being on small and weak and to some extent irrelevant Greece but they plan their end game and their stings and their own ultimatums to the core. Greece is too small to blackmail, they are not and I have no doubt that when the moment comes, well before their societies reach the point of Greece, they will do it. Many are the failings of Greece but they are fundamentally different to the rest and a special case I doubt it, not that special.

  • Anonymous

    Euroideology avoids hard facts and promotes belief in an ideal. If they want to build a good and stable united Europe they need to face hard facts and make reasonably good decisions.

    Sadly the euroideology deemed that Greece should not be allowed a referendum and that the banks should not bear losses. the problems Greece now faces are a direct result of bad decisions and ignoring of fundamental flaws.

    Greek and German culture are very different – putting in a German style currency union and expecting Greek politicians to follow rules seems naive.

    The current mess between Merkel’s moralising, Greek people suffering and Greek career politicians continuing to live well is mad. Worse still it should not be an argument between Greeks and Germans – the banks made stupid loans – they should bear the losses, not Europe’s taxpayers.

    Anyway, Spain is too big for Germany to “rescue” without huge opposition to ECB money printing. This mess may eventually create a German political crisis too.

  • Anonymous

    I can say a lot about Greece and Germany not very different to what you say, but the end game is not Greece, it is the big countries that cry we are not Greece as if they do not have similar problems and indeed Germany will be in trouble not too far away into the future.

  • Rob

    Hi Expat & Vassilis,

     Both of you make interesting points.

    There needs to be a solution to this problem and fast. It should be made by the Greek people that it will be affected not the Eurocrats or Politicians.

    If there is to be another election there should only be one question..In or Out of Europe? 
    The people are going to suffer one way or another but at least they will have made the decision.

  • Anonymous

    Greece can default on loans and not leave either the euro currency or the EU. Greece can veto any attempt to force it’s exit ….

    Germany also has the option of choosing to leave the common currency, but they cannot forcibly exclude others.

  • Rob

    Agreed Expat but that would cause chaos in Greece as well as the rest of Europe. Who would lend Greece money?

    Germany leaving would be my preferred option.

  • Justin

    Hi Dave

    Bruce Krasting offers an explaination of what he thinks is happening with the SNB and the peg:


  • Anonymous

    Hi Dave

    I see you have had a reply covering Bruce Krasting view from early May. Since then the Swiss Franc/Euro has virtually been a fixed exchange rate stuck at 1.201.

    We can see that there has been selling pressure on the Euro so I suspect that either investors are buying ahead of the SNB so that they have almost a free trade or the BIS is stepping in and buying for the SNB. Otherwise we might have seen a rally at some point if nothing else out of boredom. So in short I think its like a Swan serene on the surface but lots going on underneath!

    to naswer your question  if there had been no peg then the Swissy would be at 1.10 now not 1.20 and maybe higher.