Yesterday gave us a new development in the ongoing farce which of course is also a tragedy that is the Euro zones so-called rescue of Greece. In the early afternoon we had Commissioner Rehn telling us this.
To my knowledge there is a eurogroup meeting tomorrow, to my mind it is essential that we have this meeting
The very same meeting which ended up being cancelled and may even have been cancelled before he spoke! The Greek Prime Minister was caught out in a similar embarrassing position suggesting he would be in Brussels tomorrow at the Euro-Group meeting although in these desperate times Greece does now save the airfare unless he bought the wrong ticket.
The problem with such delays is that Greece has a government bond maturing on March 20th and if a deal is to be struck to allow this to be paid time is getting short. Whilst time is passing there appears to be no progress at all on a new bail out package and even less on the debt haircut or private-sector involvement deal.
The impact of this a bond yield of 560%
Looking back in time on this blog I can see that not so long ago it seemed remarkable that the Greek one-year government bond yield passed 100%. Actually there was concrete reasons for thinking that as such a relatively short-term bond has the backing of not only the Greek government but the European Commission, the European Central Bank and the International Monetary Fund. However over time we have passed 200%,300%,400% and more recently 500% and hit a new peak this morning of 560%. The situation is extraordinarily volatile and quotes of 537% and 507% have also been seen. Frankly this sort of thing is not far off a complete breakdown.
Added to this we see a two year yield that has risen to 208%. In the disarray a question arises in my mind.
Where is the European Central Bank?
If we look at the definition of the Securities Markets Programme on the ECB website we see this.
Interventions by the Eurosystem in public and private debt securities markets in the euro area to ensure depth and liquidity in those market segments that are dysfunctional.
Now we see a Greek government bond market that is plainly dysfunctional (can 500%+ yields be anything else?) and has no depth and liquidity. So where is the ECB? It is hoist by its own petard here in my view.
If the ECB had any faith in what was going on it could be buying what Euro zone rhetoric tells us are very cheap bonds. It could also do quite a lot of averaging of its position as it was happy to buy some of these bonds at 90,80,70 and so on but is apparently less happy at 20 and 30. It could of course buy the bond which expires on March 20th and if investors were willing to sell it might solve an upcoming train crash and by solve I am using the Euro zone definition which is anything that buys time! There is enormous moral hazard in such a move but it is not me and such moral hazards do not seem to bother it like they do me.
The fundamental Euro problem
Data over the past twenty-fours hours has highlighted the scope of the problem which is tearing the Euro zone apart and on the theme of the day let us look at the major factor that has driven German and Greek one-year bond yields some 560% apart.
German economic growth
If we look below the headline of a 0.2% contraction in the German economy in the last quarter of 2011 we see this.
As further reported by the Federal Statistical Office (Destatis), the German economy grew by 3.0% (in calendar-adjusted terms: 3.1%) over the entire year of 2011. This is in line with the first calculation of January this year.
I added the second sentence as it added a rather Germanic theme and perhaps stereotype. But as we look we see more of interest I think.
When compared with a year earlier, the gross domestic product also rose in the fourth quarter of 2011: the price-adjusted GDP was 1.5% higher than in the fourth quarter of 2010.
If we use 2005 as 100 then seasonally adjusted German economic output was running at 109.77 in the last quarter of 2011.
Tucked away in the numbers was another sign of German economic strength in 2011.
The economic performance in the fourth quarter of 2011 was achieved by 41.6 million persons in employment, which was an increase of 560,000 persons or 1.4% on a year earlier.
On the German statistics website there is an interesting graph of the biggest price moves in 2011 and what caught my eye was that foodstuffs were on both sides of the coin. So it was a bad year for those who like coffee with sugar and use flour but a good year for those using leeks,onions and cauliflower. A reminder of the theme which was one which I opened this blog with which was what is a price these days? And a reminder that behind headline inflation there are many relative price moves.
Here we received a very different picture from her statistics office.
Available non-seasonally-adjusted data indicate that, in the 4 th quarter of 2011, the Gross Domestic Product (GDP) at constant prices of year 2005 decreased by 7.0% in comparison with the 4th quarter of 2010.
Unfortunately the Greek statistics office is unable to provide us with seasonally adjusted numbers at this time so the numbers are not exact comparisons. However the gap in performance is enormous and is reinforced by this. Also if we look at the first quarter of 2005 we see that Greek economic output in the first quarter was 44.7 billion Euros and in the last quarter of 2011 it was 44.2 billion Euros at 2005 prices. And that is worse than it looks as the last quarter of the year has tended to be much stronger than the first looking at the data. On that basis I fear for the first quarter of 2012.
As for employment I cannot give you full year figures as Greece has not published them yet but here are the ones up to the end of November.
The number of employed decreased by 405,785 persons compared with November 2010 (a 9.4% rate of decrease) and by 164,506 persons compared with October 2011
By looking at relative economic performance in 2011 we see the underlying force which is tearing the Euro apart. The German economic locomotive has powered ahead again and increased employment whilst Greece has plunged into an economic depression and has seen employment shrink. Actually this is much worse than such a comparison indicates because Greece has a much smaller population which I would imagine is shrinking itself due to net migration.
The European Commission published a report yesterday which begins to get the idea.
Large and persistent macroeconomic imbalances – reflected in large and persistent external deficits and surpluses, sustained losses in competitiveness, the build up of indebtedness and housing market bubbles – accumulated over the past decade and were part of the root causes of the current economic crisis.
As ever it proposes a very bureaucratic solution which ignores that fact that its bureaucratic “solutions” have all failed so far.
In fact there are two choices now. For Greece or indeed Germany to leave the Euro or for regional policy to be deployed on a hitherto unprecedented scale to help Greece reform and modernise her economy. I suggested that it was better for Greece to leave the Euro on Monday because I see no evidence at all that the Euro zone is willing to provide help on the scale needed. Even if they were considering it I give a sobering thought below.
Portugal is next
I have written several articles recently given evidence as to why I think that Portugal is a Greece waiting to happen. Her latest economic growth figures give further reinforcement to this argument.
The Portuguese Gross Domestic Product (GDP) registered a year-on-year change rate of -2.7% in volume in the 4 th quarter 2011 (-1.8% in the previous quarter), accordingly with the flash estimate of the Quarterly National Accounts.
And it is getting worse
Comparing with the previous quarter, the Portuguese GDP diminished 1.3%.The more intense year-on-year GDP reduction in the 4th quarter 2011 reflected a significant decline in the negative contribution of Domestic Demand,
The last five quarter on quarter growth figures for the Portuguese economy have gone as follows -0.4%, -0.6%,-0.2%,-0.6% and -1.3%. Can anybody see a flaw in putting extra austerity on top of that? The graph of annualised economic growth on the Portuguese statistics website looks particularly chilling as the columns accelerate downwards.
Accordingly the regional policy option may as well factor in Portugal too and I do not think she will be the last. Does anybody think that Northern European taxpayers are willing to shoulder such a burden?