The lies about Greece’s economy are unravelling as the IMF comes (partly) clean

Over the weekend I had time to review a very damning report written by the International Monetary Fund on the situation in Greece. This provides quite a contrast to what the polite may call rose-tinted or the less so outright misrepresentation of views in the past. If we step back in time to the debt haircut imposed on Greece for the troika we were told that after shrinking by 4.3% in 2012 it’s economy would recover to flat or stability in 2013. In my article comparing all this to the March Hare from Alice in Wonderland I asked this on February 8th 2012.

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.

Of course there was none as it was all fantasy to achieve another fantasy which is that a national debt target of 120% of Gross Domestic Product means anything. In stead we have seen the Greek economy shrink by over 6% in 2012 and open 2013 looking weak too.

How does the IMF address this now?

Here is the new very different view on the Greek economy.

It is now projected to contract by 6 percent this year and 4¼ percent in 2013.

This is a quite shocking turnaround on two counts. Firstly it exposes the untruths of the past because as you can see from above I was worried about something like this happening at the time. Also if we look at the impact of this on Greece we see falling tax revenues combined with higher social security spending as unemployment has climbed. Indeed at 26.8% Greece’s unemployment rate has passed Spain’s and climbed to the top of a table nobody wants to lead. So the fiscal deficit disappoints and under the current plan we get more austerity which gives everything another downwards push and repeat. Or as I put it back then.

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.

Was there are third bailout as you feared Shaun?

Let me use the words of the IMF Report.

The updated DSA showed that further debt relief was needed to ensure that Greece’s debt is sustainable.

Oh okay so yes there was, what form did it take?

Greece’s European partners have recognized this and have, as a first step, agreed to lower the interest rate on the Greek Loan Facility and to lengthen maturities on all of their lending, and to transfer profits earned by the ECB on Greek debt back to Greece. They also agreed to bring forward program financing to support a buyback of recently-restructured Greek government bonds, which was completed in December 2012.

So quite a lot actually! And it would appear that inspite of all this the goalposts needed moving to another pitch.

These measures are projected to bring debt to 128 percent of GDP by 2020

So not 120% anymore then? We also see that the above was not enough and that this was required.

Finally, Greece’s European partners agreed to provide roughly

€26 billion in additional financing for the period 2012–16, to help cover projected financing gaps.

Phew! But we are there now? Er no in another damning revelation the IMF tells us this.

With the relief, a gap of €5½–9½ billion remains during 2015–16

As you can see the tactics employed are the opposite to what is called “rope a dope” in boxing. There you feign apparent defeat to lure your opponent into overconfidence and complacency here you feign and claim success for pretty much the same objective. Plenty have been fooled by it but the consequences are relentless, consistent and grim. If you want to know how grim take a look at this.

Overall, the cumulative output decline has now reached about 19½ percent (including the impact of recently announced GDP revisions, which shaved over 1½ percent off reported growth in 2010–11).

Attempts at a cover up continue

The program ran off track due to a severe political crisis. The extended election period effectively put on hold….

So the economy shrank nearly 20% due to the election did it? This is really poor as the election was in fact caused by the economic crisis which the IMF admits later after attempting to deflect people’s attention.

The IMF now becomes openly critical of much of what has happened

The structural transformation of Greece’s economy continues to proceed at a slow pace (outside of the labor market), and this is making Greece’s adjustment more costly

Remember how many times we have been promised reform. Also we see that another set of fantasies have turned to dust.

Privatization targets have been missed by a wide margin

And if we look at one of the most important areas we see this.

Tax administration reform stalled

Even worse take a look at this.

The tax administration has fallen well short of its performance targets, in areas such as the number of large taxpayer and high wealth individual audits and debt collection

So one of the major factors in the Greek crisis -an inability to tax its wealthy- seems to be ongoing.

Remember how many times we have been told that a package is the last dose of austerity?

further fiscal adjustment in 2015–16 is expected

Remember when I argued that official holdings of Greek debt needed a haircut?

We are really in March Hare territory now as the European Central Bank has handed over the “profits” from its holdings. This means that profits now go into my financial lexicon as it has losses on its holdings and it and the EFSF have provided the money for Greece to buy maturing bonds of it! Anyway this and other similar measures comprise around 16% of Greek GDP but..

Since this was not enough to restore debt sustainability, Greece’s European partners gave supplementary assurances of additional conditional debt relief.

What about the future?

As ever we are promised an improvement a year ahead but if you look at the statements I again fear the worst. For example look at this.

Wages have begun to adjust at a much faster pace.

Nominal wages in the economy declined by an average of 7½ percent y-o-y in Q2. Firm-level and individual wage agreements—both instruments which are growing in share facilitated by recently introduced institutional reforms —saw even larger declines of about 20 percent

So we have a danger. This in a competitiveness sense looks good with the caveat that it has taken place in price competitive industries but think of the effect on Greek domestic demand of such falls. Something which is already extremely weak.

We see also that prices have adjusted by far less so that real wages are falling heavily too.

Prices are also adjusting, but not as quickly as wages.

Headline HICP inflation, at 0.4 percent y-on-y in November, is firmly below the euro area average.

Oh and remember all the money poured into the banks surely now they are helping a recovery?

Private sector credit declined by almost 5 percent y-on-y in November

So that’s a no then!


Whilst this IMF Report does contain some refreshing honesty it also continues the same tied and failing mantra that relief is just around the corner. This simply does not match the facts as shortfalls and problems remain. Even the good news such as the rally in Greek bonds over the past six months or so reflects partly the economic pain and also the fact that she is getting ever more support from the IMF and her Euro area colleagues.

Meanwhile the economic decline continues caused mostly by what is represented by the statement below.

The authorities have identified measures amounting to 5 percent of GDP in 2013 and an additional 2¼ percent of GDP in 2014.

So in a severe contraction you hit that brakes ever harder! I wish that press conferences held by the likes of the Managing Director Christine Lagarde asked about such matters. Her record is one of promises which have turned to dust -for others not her- and yet many reviews of her are fawning. As the Davos orgy of conspicuous consumption gets ready to start we may even get a few new ones this week. I wonder what those standing in line at the soup kitchens in Athens think?

This entry was posted in Euro zone Crisis, General Economics, Greek Financial Crisis, IMF, Quantitative Easing and Extraordinary Monetary Measures and tagged , , , . Bookmark the permalink.
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  • Anonymous

    It appears Cyprus also denied aid in the Greece – German crossfire!
    German gold held in France to be returned – all good news for the Euro exchange rate?

  • Anonymous

    I suggest that Cyprus being denied bank aid is a good thing. Greece has been receiving “bank aid” for over 2 terrible years and it is still sinking.

    Iceland did without the “aid” of a bank rescue and Iceland has already started recovering.

  • Anonymous

    Shaun, I think this is the best post of yours I have ever read. Well done. I can’t disagree with any of it. The trashing of Greece by the joint forces of the ECB, Eurogroup and IMF will go down as one of the worst examples of economic imperialism in history.

    But I would give the IMF some credit for finally speaking out, even though they have tempered their comments to some extent for political acceptability. They have been clearly uncomfortable in the Troika for some time. It is hard to see how the Troika can continue on its present path after a report as damning as this. I would say the IMF is pulling the plug.

  • pavlaki

    Spot on! This is exactly what I hear from the Greeks themselves ( maybe not the detailed numbers, but the gist of it) which completely is at odds with the garbage coming out of the EU/ ECB. They are doing a first class job of talking up the Eurozone ( and I mean this as a compliment – we need to do much more of this to restore confidence and a feel good factor) but the facts do not support the rhetoric. For example they claim bond sales are doing well but when you look at who is buying the bonds it is often the government of the country concerned using funds earmarked for other purposes! They talk of positive contagion but I just don’t see it on the ground. The question is; are they going to get away with it? Will the markets eventually recognise that the emperor has no clothes?

  • Anonymous

    Agreed the support to banks is “the gift that keeps on taking” (not my quote unfortunately) still awaiting criminal charges for those banksters involved.

  • forbin

    hello shaun,

    oh why does the the IMF mantra of its “all right , ladies and gentlemen” whilst trashing the Greek economy remind me of the book,_Ladies_and_Gentlemen

    the lie that the “inmates” had a future and that thing would be alright for them, but never , ever , tell them the truth …….Keep The Big Lie Going….

    chilling to me , and the way our leaders can see no future without the EU

    Does Japan need to join China?

    Do we need to join the Dollar zone – why not the arguements are about the same…. except we all speak a common language( mostly)

    Well , from the Stalls here the show must go on!


  • James

    Great post Shaun.
    I suspect that, just through the laws of nature, the figures will start to look better at some stage (i.e. Greece will at some point grow or at least shrink slowly). I think that I can already hear the Europhile voices claiming the great success of the Eurozone as soon as this happens. I am absolutely sure that:
    1. No-one is going to admit any of what you describe as true
    2. No-one is going openly to change policy of austerity
    3. Greeks are going to continue to suffer
    4. No-one has thought through the cost of what is happening in human or financial terms or how to reverse the borrowing
    5. No-one really believes that the Greeks can actually pay this debt off.
    So, we have arrived at the mutual back-slapping phase for the politicians, just as
    1. The Greek people are really suffering
    2. There is no solution to Greece’s debt crisis.
    It was ever thus

  • Rods

    Hi Shaun,

    Another excellent blog.

    I read about this over the weekend. The Greeks Government really don’t seem to be doing very well at all. I wonder how much of this is due to public and personal vested interests, where being a top politician is a rich persons pass time!

    With the IMF report distancing themselves from the ECB and Eurozone countries where the taxpayer is on the hook, I think this is part of a softening up process by the IMF for a Greek haircut to make the debt sustainable, while trying to avoid the same fate for the IMF part, so they don’t make their first losses in history. Time will tell of whether they will succeed!

    Economists and banks are still calling the odds of about 30% on a Grexit before 2016, but it is unlikely this year where German elections aren’t until September and Merkel making sure it doesn’t happen at all costs.

    Personally, I think the Greek Government will take the route of least resistance, which is grabbing the handouts for as long as possible and putting off most of the vital and necessary reforms until another day. But this is hardly unique to Greece, there are politicians here, in much of Europe and the US all doing the same. Kicking the can down the road in the hope that something will turn up.

    Anyway you heard it hear first! In April the Government will be blaming the ‘wrong kind’ of winter weather for our triple dip recession!

    The last few days with yellow, amber, red alerts, limited road, rail and air travel with the country in complete chaos, how are they going to cope when we have some proper winter weather? This big Government, risk adverse, can’t do, nanny state in the UK I think sums up quite well why our economy is 3% below the 2008, compared to the ‘can do’ US who are 3% above.

    At the moment we seem to be in a bit of a lull before the storms of the US debt ceiling and where they have only kicked the tax and deficit can two months down the road, continued UK stagflation and missed deficit reduction targets and more economic fire fighting required in Europe.

  • Anonymous

    Hi Chris

    I know that it is against all logic but the Euro rally seems as if it may continue for a bit. There was a bad sign for it though when JW’s 9/9 man Thomas Stolper predicted it was going to US $1.40 a while back….

    Today saw more media speculation on the £ with even Andrew Neil joining in suggesting it was due to economic weakness,which would leave a Euro analyst with something of a conundrum!

  • Anonymous

    Hi Francis
    Thank you. I have seen the build-up of a consensus tha the likelihood of a “Grexit” from the Euro has disappeared into the distance as 2012 moved into 2013. Yet the facts point in the opposite direction I think and as you say it would seem that some at least at the IMF agree with me.

  • Anonymous

    Hi pavlaki
    I think that the markets have spotted the continuing and expanding bailout and decided that the other Euro nations now have a lot of “skin” in the game. And some funds are keen for yield of which there is little to be found.
    A price or atrend in prices can be wrong…

  • Anonymous

    Hi Forbin
    When the debate over Euro entry for the UK began I pointed out that it would have been more logical for us to have joined the US $. The look of bafflement that provoked from some “experts” gave me some wry humour if nothing else.

  • Anonymous

    Hi James

    Thank you. Something like building activity would be a favourite to look better at some point as it cant keep falling 30/40% a year even with the mismanagement we have seen. As the numbers drop the chance of a slowing must increase….

  • Anonymous

    Hi Rods

    Thank you. Oh and if Friday’s number is negative for UK growth which is looking very possible then they may need to blame the weather a bit sooner than April! The catch is that in spite of the last 3/4 days this has been a mild if wet winter. But of course reality often struggles to get a look-in…

  • James

    I am sure btw that it would have been much easier from a currency perspective. I was at school in the USA in 1977 and the exchange rate was 1.7 to the £, ie only about 5% from where it is now. Rather different from the change with the Deutschemark over the same period…

  • Maggi

    Sadly this is a brilliant post. I mourn for the young people in Greece whose vitality will be sucked out of them because of the appalling economic conditions and I have sympathy for their parents who have to watch on with no hope of improving their children’s prospects.