Greece to receive

10th May 2012

Yesterday there was an example of a political and media furore over the matter of a 5.2 billion Euro payment from Europe to Greece due today. In essence some Euro officials were attempting to threaten Greece and much of the mainstream media followed them like lap dogs. But this payment and the paper tiger threat surrounding it illustrate nicely some of the themes of this blog and also allow me to address a subject I often get asked about which is the monetary merry-go round of the Euro zone "rescue" system. So in best Play School fashion if you are sitting comfortably I shall begin.

Why does Greece need the money?

This is the easy bit. She is in severe economic distress and not only is running a considerable fiscal or budget deficit -which contrary to promises and claims is showing little sign of improving- but she has a considerable national debt which needs refinancing regularly due to its size.

Step forward the European Financial Stability Facility or EFSF

This part seems simple as the EFSF was due to make the payment today and according to its website it offers this:

"EFSF bonds offer top quality diversified supranational class exposure. This is due to the guarantee of the shareholders, the euro area member states."

As figuring out if the first sentence actually means anything may need a post all of its own let us consider the second and think about the shareholders/guarantors. In fact let us consider just one Spain. She is a guarantor of 92.5 billion Euros out of the 780 billion theoretical capacity of the EFSF and was engaged in the part-nationalisation of Bankia (45%) which was announced last night. This puts Bankia at step 7 of my time line for a bank collapse. It also puts Spain with a ten-year government bond yield of over 6% again and looking more likely than even to be a recipient of EFSF funding itself.

I was being nice to the EFSF about its 780 billion guarantee as Greece,Ireland and Portugal have already "stepped out" and accordingly it is down to 726 billion Euros. Now if you face the prospect of taking Spain away too you begin to see why I christened it the unstable lifeboat. In fact in my view it is so unstable it needs its own lifeboat! In a severe crisis it will founder.

Let me give you another illustration of this and it also came yesterday. The EFSF raised some 1.96 billion Euros of 3 month money. You may already be smelling a rat here and you would be right to do so. An organisation that is providing long-term financing to Greece- as let's face it Greece will not be able to repay this money for a very long time if at all- is raising three month money. Sounds a bit like the Northern Rock business model of lending long and borrowing very short does it not? Whatever happened to Northern Rock?

And if we look at the 1.96 billion it does not compare favourably with the 5.2 billion required does it? And of course there are the programmes for Ireland and Portugal too. Apparently it is called a "diversified funding strategy" although it slips its mind to say that much of the funding is coming from the European Central Bank. It seems to bother few people that the EFSF has loaned some 103.7 billion Euros and rising to Greece whilst it has only raised via bond issues some 58.5 billion Euros! And of course much of that was for Portugal and Ireland.

The "lifeboat" looks ever more like the Titanic to me….

The European Central Bank

The European Central Bank has been busy as you can see above electronically creating money to fund the EFSF. Or if you prefer to think of it this way the ink-jet printers have been whirring frantically! These days though central bankers prefer not to use the old fashioned method of actually printing notes and currency as you see it doesn't create the money fast enough. Modern electronic methods are much more to their liking. Indeed they seem to have taken their motto from a children's cartoon character (h/t Alen Mattich)

"To infinity and beyond"

You scratch my back I'll scratch yours!

So far it seems that the ECB is helping out the EFSF like a friendly Labrador but of course we know that it is more of an Alsatian and we find out from the EFSF the details of this and the emphasis is mine:

"An amount of €4.2 bn will be disbursed on 10 May. The remaining funds of €1.0 bn are not needed before June and will be disbursed depending on the financing needs of Greece. As with previous disbursements to Greece, the EFSF will transfer the €4.2 bn into a segregated account which will be used for debt service payments."

Debt service payments? What about actually helping Greece?

Continue reading…


More on Mindful Money:

Europe: Where next for investors?

Recession permeates Eurozone

Could Greece leave the euro this summer?

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10 thoughts on “Greece to receive”

  1. Anonymous says:

    Thank you for a great column, Shaun. I thought the “being trapped by gangsters on both sides” remark was so funny I had to share it with my wife. There was a meeting at Carleton University about the Crimean intervention that I went to. All the speakers seemed to be poli sci experts so there wasn’t a lot of talk about the economy. However, Professor Joan DeBardeleben said she had heard that Christine Lagarde wanted to address Ukraine’s financial problems sometime this week, but that it wasn’t urgent for her. If the situation in Ukraine isn’t the near the top of Mme Lagarde’s priority list right now, one wonders what is.

    I believe the 100.2 estimate you provided for Ukrainian inflation was just the index number for the January 2014 CPI on a December 2013 base, was it not? However, the State Statistics Service of Ukraine has a table online showing CPIs with the previous Decembers as base, and that table confirms your statement that inflation has been very low in Ukraine lately. For the last five years, 2009 to 2013, the 12-month rates of change for December have been: 12.3%, 9.1%, 4.6%, -0.2% and 0.5%.

    Yet if one looks at the document “Monetary principles of the monetary policy for 2013”, the stated inflation objective is to keep price increases in the 4.8% to 6.1% range. You would think that when inflation has been brought down from double digits to less than 1% in just four years, the National Bank of Ukraine would have opted for an inflation target going forward that was a little stiffer than that. Andrew Baldwin

    1. dutch says:

      As a student of this column and central banking in general,one does wonder how a central bank has come up with 4.8%-6.1% as tending toward stability?

    2. Anonymous says:

      Hi Andrew

      Yes I agree that the annual rate of consumer inflation in the Ukraine was 0.5% in January and the 0.2% I quoted was a monthly rise. Apologies.

      As to the inflation target it would appear that the disinflation memo which I started sending out a year ago did not arrive in the Ukraine! Frankly the current inflation target looks rather silly even if we allow for some imported inflation, and the imported inflation was not intended. The comment by Dutch below clearly has a point.

  2. Anonymous says:

    Shaun, not that it matters much, but I would suggest that you retitle your column “What next for the economy in Ukraine?” I believe the position of the Ukrainian government is that the usage of the article is suggestive of a region (“the Scottish highlands”, “the American South”) rather than a sovereign state. I’m not sure that this is altogether true. No one doubts the sovereignty of the Netherlands. Just the same, a country has a right to choose how it is referred to.

    Incidentally, the same problem occurs in Russian-language references to Ukraine. Previously, Russians wrote на Украйнe [na Ukrayne] for “in the Ukraine”, на being the preposition commonly used for a region. Now, Russians generally write в Украйнe [v Ukrayne] , в being the preposition more commonly used for countries, although not all Russians have switched.
    Andrew Baldwin

  3. Anonymous says:

    Hi Shaun
    The economy of the Ukraine does look as if another recession is about to hit it. I fear that this quieter spell may turn out to be the calm before another storm.

  4. dutch says:

    It would seem they’ve been steadily printing the cash and depleting forex reserves

    Although their borrowing doesn’t seem excessive.

    I guess it’s who you owe though hey?

    1. Anonymous says:

      Hi Dutch

      If we look at the public finances then it is the fiscal deficit which is the issue. It rose to 4.4% of GDP in terms of the official numbers but if we include quasi-official borrowing it rises to more like 6% with 7% expected for 2014. This is combined with a trade deficit now a weakening economy and a volatile currency…

      As you say who wants to finance that? This is the road where debt haircuts get mentioned when the official national debt is only about 40% of GDP. It is the rate of change again which is an issue.

  5. Rods says:

    Hi Shaun,

    Thank you for another interesting analysis of the Ukrainian economy.

    Economically, Ukraine only currently seems to have painful options. On the inflation front petrol has jumped from 80 odd pence a litre to about £1 in the last few days due to what has happened.

    Where Ukraine’s economy goes from here is inevitably tied into the geopolitical situation and solutions, so it is hard to speculate. Crimea has been a net drain on Ukraine’s resources where there have had to be subsidised in much the same way as are many country’s peripheral economic regions, so if Russia permanently annexes it, it will be a net drain on them.

    Ukraine has traditionally had high inflation and interest rates due to the excessive printing of money.

    The EBRD were predicting in their 2014 forecast that the Ukraine would see weak growth in 2014, I would have thought this is now unlikely. But at some point they may see some repatriations from Switzerland and Austria from Yanukovych’s frozen accounts!

    1. Anonymous says:

      Hi Rods

      Thanks for the petrol price numbers. For heavy users such rises will be quite a burden and at times like that I am reminded of my brothers career as a driving instructor which uses plenty of fuel. How it will resonate through the rest of the economy depends on how long this lasts. Indeed the uncertainty and the disruption will squeeze the economy. I hope that you relatives there are okay.

      As to the currency fall I wonder if the IMF was planning to suggest a depreciation anyway. Of course it would not have wanted it in this fashion!

    2. Jer says:

      I think a Russian annexation will be good for the economy of Crimea in the long term. The tourist trade is in need of investment which is only likely to be Russian, and that is also a big market. The Russian navy is another source of money likely to be enhanced by direct Russian rule.
      Ignoring the political – and the risk of a US inspired economic war of course.

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