Today has some of the elements of groundhog day as we see yet another bailout for Greece although these days the mainstream media uses the word “rescue” much more rarely. One strong element of such meetings is bombast and hyperbole from policians and as I like to operate in an equal opportunities fashion let me quote the words of the UK Chancellor George Osborne.
Greece had no alternative
Developments last night were very encouraging
In fact of course neither statement has any basis in reality. Only on Monday of last week I explained how there not only was an alternative but that it was and indeed is preferable to the ongong farce and tragedy being inflicted on Greece. And as I shall demonstrate below there is nothing “encouraging” in this deal as it has relied on fantasy to theoretically achieve a self- imposed target which is irrelevant and of no help to Greece.
On the subject of the media I watched some of the BBC’s Newsnight and after wondering if the BBC was attempting to make a 180 degree U-turn on the Euro project, Greece’s former Finance Minister Mr.Papaconstantinou uttered a rather chilling phrase when he called the Euro a “one-way ticket”. So much for elctions and democracy then…
The self-imposed target of 120% of GDP
Let us analyse this emperor with no clothes. Is there any significance in having a national debt which is 120% of your economic output as measured by Gross Domestic Product? The answer is simply no. There has been some analysis which establishes 100% as a measure and I can see some point in that both psychologically and mathematically.
The Euro zone,however, has two problems with using 100% as a measure. Firstly for Greece it looks unachievable without a very heavy dose of default. The other is that Italy has a national debt to GDP ratio of around 120% and if Greece aimed for a lower target there would be obvious repercussions for Italy. So there is a strong element of realpolitik here rather than economics.
Why would you aim to do it in 2020? After all Greece is in crisis now
This part is easy. Two factors coincide. Firstly politicians can indulge in their favourite sport of can-kicking as few to none of them will be in power in 2020! Secondly it allows them to use all sorts of assumptions in their calculations that because they are in the future they rarely get challenged. I have pointed out many times on this blog that future economic forecasts over the period of the credit crunch have been outrageously optimistic in the UK,US and Europe. They do it to make the debt burden look smaller. Yesterday someone who I do not often agree with David Blanchflower agreed with this point.
How have things gone with past efforts at this?
From the latest documemtation leaked to Reuters and the Financial Times.
a number of developments have pointed to a need to revise the DSA. The 2011 outturn was worse than expected, both in terms of growth and the fiscal deficit; the macroeconomic outlook has deteriorated significantly, due to events in Europe; the fiscal outlook has deteriorated due to the economy and due to delays in developing fiscal-structural reforms;
In other words when fantasy has a dose of reality it collapses.
Last night’s further dose of fantasy Greece’s future economic growth
To get anywhere near the target established above the Euro zone had the problem that somehow it needed to “improve” the numbers. It started mildly by assuming an economic contraction of 4.3% this year and a flat outcome in 2013 although already it is probably too mild. The current figures point to a worse outcome for 2012 and if there is any evidence for a turn-around in 2013 I hope they will present it. But then we see the dark-side of such analysis as look at Greece go!
2.3%; 2.9%;2.8%;2.8%;2.6%;2.5%;2.2%
You may have spotted that they over-egged the early numbers and then cut them back! If we look forwards we see that they expect economic growth in 2030 to be 1.4% which begs a question of why it will be better in the next decade.
The treatment of debt interest is maybe even worse
This section will read a little like the Mad Hatters Tea Party. In this the Euro zone or March Hare is forecasting that Greece will be able to issue new debt at just below 4% in the eraly part of the next decade and then just above it. Alice meanwhile will be pointing out that the one-year bond yield is over 600%, the two -year is over 195% and the ten-year is 34%.
Should he have a burst of sense the March Hare might blurt out that the “temporary rescue” for Greece shows no signs of having an end. Indeed prospective investors in Greek bonds may be unable to tear their eyes from this section of the proposed plan.
which essentially implies that any new debt will be junior to all existing debt
Is there anybody out there who wants to be a holder of second-class Greek government bonds?
The Private-Sector Involvement or debt haircut scheme
As evening moved to night the early hours and then morning,sleep deprivation made the March Hare flutter before Eurogroup members eyes once more. His words shown below suddenly seemed reasonable.
Those investors who did not accept a 21% debt haircut will be keen to accept a 53.5% one!
Of course they will! Meanwhile back in reality I expect plenty of trouble from this. I hope that the new forecasts for Greek public expenditure allowed for expensive legal bills.
Official debt haircuts
These are noticeable in the main by their absence and I am reminded of the words of George Orwell
All animals are equal, but some animals are more equal than others
And if I may mix my literary allusions the March Hare is back again as the European Central Bank which bought Greek bonds at 80 which are currently worth 20 will share its “profits” with Greece. I kid you not! Does that mean that buying at 20 and selling at 80 creates a loss? Perhaps the March Hare can explain….
Just to be clear the ECB does have income from the coupon or interest-payments on the Greek debt that it holds. However this is far smaller than the capital losses described above and even worse is another “round-tripping” exercise. Greece is receiving bailout money from the Euro zone to help it pay the interest which this part of it is being paid back to the Euro zone representative the ECB. Yes taxpayers do not only subsidise the activities of private-banks these days they also do the same for central banks.
Whatever the cost you must protect the banks
Estimated bank recapitalization needs have increased . The Blackrock diagnostic exercise, the PSI exercise (including its likely accounting treatment), and refined estimates of resolution costs (as opposed to recapitalization costs) have pointed to higher needs than assumed at the time of the Fifth program review (€50 billion versus €40 billion previously). Recoveries, through the sale of bank equity, are not expected to be materially higher in the medium-term.
You may note the last sentence too.
Meanwhile the Greek economy continues to struggle
I reported last week on the latest Balance of Payments numbers for Greece. The Bank of Greece has updated them and added in oil imports and exports as well as shipping.
In December 2011 the current account balance showed a deficit of €2.2 billion, up by €354 million or 19.4% year-on-year.
Not inspiring to say the least although fortunately the hopefully more reliable full year figures were better.
In 2011, the current account deficit fell by €1.9 billion or 8.3% year-on-year, to €21.1 billion.
The trouble is that for all the economic pain that Greece is suffering from this seems an awfully thin improvement. And it was accompanied by this from the Greek statistics agency.
The decrease of the New Orders Index in Industry by 9.4% in December 2011, compared with December 2010, was due to the annual changes of the indices of the markets as following:
The New Orders Index in Industry for the domestic market decreased by 30.2%.
The New Orders Index in Industry for the non-domestic market increased by 5.1%.
It would appear that collapse is not too strong a word for what has happened to domestic orders. The underlying index for new orders where 2005=100 is now at 75 and for the domestic market alone it is 52.8.
After reading this you might like to cast your eyes upwards to the latest Eurogroup economic growth estimates for Greece.
Comment
It would appear that there is to be no halt to the economic vandalism that is currently being inflicted on Greece. Another 3.3 billion Euros of public-spending cuts will be piled on an economy which is spiralling downwards in 2012. So we can expect more of the vicious circle of austerity leading to economic decline meaning more austerity is needed and repeat.
It will not be too long before bailout number three is required and as the amounts spiral it is quite plain that not starting the process with a debt haircut was a fatal error in methodology.
