Greece is falling further into a debt-filled abyss

25th September 2012

If you are polite you would call these forecasts rose-tinted if you are less so you might consider it another version of kicking the can into the future. Actually they have been tantamount to lies and in the way that they have put Greece on the wrong course with false hope they have been very dangerous lies. It must be very demoralising for the Greeks to find that again and again they have to do more because reality keeps being ignored and replaced by wishful thinking.

The International Monetary Fund

If we go back only to March this year we saw an example of this from the IMF as it produced this on the 9th of March after Greece's debt restructuring or private-sector involvement:

"A key ingredient in the government's revamped economic strategy was the successful conclusion on March 9 of a substantial write-down of Greece's bonded debt, which will dramatically reduce the country's medium-term financing needs. The IMF has maintained that Greece must reduce its debt-to-GDP ratio to 120 percent by 2020 if its debt is to become sustainable in the medium term. The debt exchange, which saw private sector investors agreeing to write down 75 percent of their Greek bond holdings, is the largest and steepest debt reduction agreement in history."

The problem was that the 120% of GDP target for Greece's National Debt was never very likely as a result of that move alone. A large factor in this was the fact that a substantial investor in Greek debt the European Central Bank excluded itself from the process. A so called rescue vehicle -purchases of Greek government debt under the Securities Markets Programme to support their price and reduce yields- actually became a punishment for Greece as otherwise the bonds would have been subject to a restructuring.

To get anywhere near the 120% of GDP level for Greek national debt in 2020 both the present and the future needed to be manipulated as I discussed back on the 21st of February:

"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!


Just to make it even worse all this manipulation of the future was to achieve a national debt to GDP ratio that does not actually mean anything. Research on the subject has suggested that ratios of 90% and 100% may have significance as barriers. The only possible reason for using 120% was that otherwise you gave Italy a problem.

At the time I criticised such analysis as being like the Mad Hatters Tea Party. As time goes by I am starting to think that I may have been somewhat unfair on the Mad Hatter.

Reality has begun to unfold in the meantime

The Greek economy is already behind on the absurdly optimistic growth forecasts shown above and as I discussed on August 8th Standard and Poor's gave a very different view:

"We project GDP will contract by 10%-11% cumulatively during 2012-2013, versus the negative 4%-5% assumed by the EU/IMF Program for 2012-2013."

This much more realistic view had a sting like a Scorpion's Tail attached to it:

"the related worsening of the fiscal position imply a high likelihood that Greece will require additional financing of as much as €7 billion (3.7% of GDP) for 2012"

At that time I suggested that Greece would need bailout mark 3.0.

What is the significance of this now?

Last night Christine Lagarde who is the managing director of the IMF gave us a clear hint of problems with the Greek programme:

"The last thing we want is for programs to be off track and off track and off track again"

If we review the economic forecasts for Greece that were signed off by Mademoiselle Lagarde we can see that the fact that the programme is off track again is because it was full of fantasies. Indeed she continued one of the fantasies as she repeated the importance of the Greek national debt coming down to 120% of GDP.

Whilst there have been genuine problems with the Greek implementation of her austerity programme it is not even remotely fair to blame her for forecasts which were of the garbage in garbage out variety. Unfortunately Christine Lagarde has a long record of failure which is simply getting longer.

What is happening in Greece now?

Back on August 8th I discussed the claims of Greek politicians that they were near to a resolution of the issue of another 11.5 billion Euros of cuts. Well it would appear that they are still near to it! Frustration with this lack of progress must be a major reason why the inspectors of the troika (ECB,IMF,EC) have left Greece for a week.

It looks as though the Greek Prime Minister is planning to give a national address on television to try to rally support for the austerity plan. This comes at an unfortunate time as Portugal's Prime Minister has only just been forced to reverse measures announced in a televised addressing of his nation. Tomorrow's General Strike in Greece will only increase the difficulties she faces. I doubt that their mood will be improved much by passing this sort of evidence of Greece's economic collapse. From Kathimerini:

"In the city's «commercial triangle», where generations of merchants had run successful businesses a stone's throw from the central Syntagma Square, an August census by retail lobby group ESEE found 31 percent of shops had closed."

Even if this is achieved issues remain

As ever the troika process is leaking details and they have been making a steady progression in terms of extra austerity required by Greece from 10 to 20 and now apparently 30 billion Euros if she is to achieve the targets under her second bailout programme. The reason for this will come as no surprise which is mostly that Greece's economy has underperformed the fantasies that the troika made on its behalf. No wonder she is suffering from bailout fatigue!

One issue that never seems to go aw
ay is the fact that the Greek government has continued to use not paying its bills as a way of keeping expenditure under control. Her finance minister admitted to unpaid bills of 6.5 billion Euros only last week. Such numbers make one wonder how what is reported below by her Ministry of Finance has actually been achieved:

"State Budget expenditures up to August 2012 were reduced compared to same period a year ago by 5,657 million Euros or 11.0%. It is noted that most individual spending categories were reduced with the greatest saving achieved in Primary Expenditure which presented a 9.3% decrease (or 3,170 million Euro), a figure constituting the main indicator of State Budget expenditure restriction."

Greece's Balance of Payments

Greece's statistics office has released her latest trade figures for today and they show a worrying sign. The improvement in her exports seems to have stopped as July 2012 showed a 1.3% fall on July 2011 in value terms. As there is positive inflation this is a larger fall in real terms. Monthly figures can be very erratic so care is needed but it looks as though Greece's export boom is slowing as for 2012 so far her exports had increased by 6.1%. As one thing that IMF style programmes can usually achieve is balance of trade improvements this is very worrying if it should continue.

Also there is food for thought for one of the supposed benefits of being in the Euro as Greece's trade performance improvement in 2012 so far is much more marked with nations with whom she does not share a common currency!

Continue reading…


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