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?