2/2/15: Greek Primary Surplus: A Steep Hill to Climb

My comment for Expresso (January 31, 2015, pages 8-9) on Greece:

Greece has undertaken an unprecedented level of budgetary adjustments as reflected in the rate of debt accumulation on the Government balance sheet and the size of the primary surplus. Stripping out the banking resolution measures, Greek Governments have managed to deliver general government deficit consolidation of some 13.8 percentage points based on forecast for 2015, compared to the peak crisis, with Irish Government coming in a distant second with roughly 9 percentage points and Portuguese authorities in the third place with 7.7 percentage points. These figures are confirmed by the reference to the structural deficits and primary deficits. 

Given the level of austerity carried by the Greek economy over the recent years, and taking into the account a significant (Euro16 billion) call on debt redemptions due this year, it is hard to see how the Greek Government can deliver doubling of a primary surplus from IMF-estimated 1.5% of GDP in 2014 to forecast 3% of GDP in 2015 and 4.5% in 2016. Even assuming no adverse shocks to the Greek economy, these levels of surpluses appear to be inconsistent with the structural position of the Greek economy and I would have very severe doubts as to whether even the 2-2.5% range of surpluses can be sustained over the medium term (2015-2020) horizon.

16/5/2014: Summary of euro area 'peripherals' risk ratings

A neat summary of sovereign risk ratings by the majors and Euromoney Credit Risk:

Rankings on the left reflect country position in risk league tables per ECR (lower rank, better performance) and in the brackets give changes on ranks since 2013 (so, for example, Ireland improved its risk position by 5 places to 38th out of 186 countries covered by ECR). ECR score is a risk score (higher score, lower risk) and ECR tier is a tier of risk that groups of countries cluster into (lower tier, closer the tier to top performing lowest risk countries).

The lesson, probably, is:

• Greece is due no upgrades
• Cyprus is due no upgrades
• Portugal is due an upgrade on Fitch to BBB+, Moody's to Baa2 or Baa3; and S&P to BBB
• Italy is due no upgrades
• Spain is due no upgrades
• Ireland is due no upgrades post Baa3 upgraded to Baa1 (+positive outlook) by Moody's today

One way or the other, things are starting to move more positively on ECR scores side, but ratings agencies are still lagging. But that is not new - exactly the same lags took place on the downside of trade back in 2008-2012.

7/5/2014: Eurostat backs out of Greek data mess

Here's Ifo Institute press release on Eurostat and data manipulation for Greece:

I have covered the issue here: http://trueeconomics.blogspot.ie/2014/04/2542014-stretch-of-numbers-here-bond.html

25/4/2014: A stretch of numbers here... a bond sale there... Greek Deficit in 2013

This week we had the data release by Eurostat showing the fiscal position of the euro area sovereigns for 2013, followed by the statement by the Troika (EU Commission, the ECB and the IMF) on Greece's fiscal position.

Based on data-driven Eurostat conclusions (see details here: http://trueeconomics.blogspot.ie/2014/04/2342014-some-scary-reading-from-eurostat.html) Greek fiscal deficit was 12.7% of GDP in 2013. Based on the Troika conclusions, Greece has managed to generate a budget surplus of 0.8% of GDP in 2013. The two numbers are so widely apart that the case of 'thou shalt not spin too much' comes to mind.

In reality, to arrive at 0.8% surplus, the Troika had to do some pretty extreme dancing around the real figures: they took out non-recurring spending out of the Greek deficits (all banks measures and all interest paid on gargantuan 175.1% of GDP Government debt). Just how on earth can debt interest payments be non-recurring is anyone's guess. But even removing that (to arrive at normal definition of primary deficits), the official primary deficit for Greece at the end of 2013 stands at 8.7% of GDP. The swing of 9.5% of GDP bringing this to a surplus of 0.8% is 'banks measures'.

The problem is that with 12.7% of GDOP deficit and 8.7% primary deficit in 2013 and with debt of 175.1% of GDP, Greece is plain simply and undeniably an insolvent state. This is precisely why exactly at the time of the above data publication and at the time when the Troika was extolling the virtues of the fiscal surplus in Greece, the very same European authorities praising Greek Government were announcing that they have engaged in a new round of debt relief negotiations with Greece (http://www.ft.com/intl/cms/s/0/9ec817d8-cadf-11e3-9c6a-00144feabdc0.html#axzz301XTTXyT).

Meanwhile, bust, bankrupted and in new default talks, Greek Government is hell-bent on buying votes into the upcoming European elections. Per FT account linked above:

"About 70 per cent of the [bogus Greek] primary surplus has already been allocated for current expenses rather than for writing down existing debt, according to the finance ministry. The government has set aside €524m as a one-off payment to low-income families and pensioners ahead of next month’s European elections. Another €320m will cover a projected deficit this year at IKA, the main social security organisation, following a decision agreed with international lenders to cut employers’ contributions."

This is truly epic: European authorities praising national Government for bogus surpluses that are explicitly being used to fund giveaways to vulnerable voters groups at the time of elections. This is 'reformed Europe'?

This is precisely the circus that is driving up valuations of peripheral bonds (http://mobile.bloomberg.com/news/2014-04-23/samaras-met-dimon-for-greek-bonds-on-way-to-a-400-return.html?alcmpid=markets) and that has an exactly negative correlation with the underlying strength / structural health of some of the peripheral economies (see my comment on this here: http://trueeconomics.blogspot.ie/2014/04/2542014-ecb-denmark-negative-rates.html).

25/4/2014: ECB, Denmark & Negative Rates, 'Peripherals' & Russia: today's links

Rumours mills been busy of late with all the talk about ECB doing 'whatever it takes' to get inflation going again. See this for example: http://www.spiegel.de/international/europe/ecb-prepares-measures-to-combat-possible-deflation-a-965636.html

Here is the best take on Denmark's brief brush with ECB's (allegedly) favourite weapon: the negative deposit rates:
http://www.bloomberg.com/news/2014-04-24/danish-central-bank-exits-negative-rates-first-time-since-2012.html


But while we are on topic of things monetary and fiscal, here is Euromoney take on what's been happening in the markets for 'peripheral' sovereign debt (note: my comment at the bottom): http://euromoney.msgfocus.com/c/123DSxhABTIFoVxuegyp64hKZL and alternative link: http://www.euromoney.com/Article/3334400/Category/14091/ChannelPage/8959/Ireland-and-Spain-lead-the-way-on-a-long-road-back-for-the-eurozone-periphery.html

To give you more context, here is the full comment I made:

The numbers cited are even better summarised in my earlier post on the subject here: http://trueeconomics.blogspot.ie/2014/04/2342014-some-scary-reading-from-eurostat.html

Meanwhile, here's what has been happening in the sovereign debt markets today - CDS spreads:

And finally, Russian credit downgrade: http://in.reuters.com/article/2014/04/25/russia-economy-ratings-idINL6N0NH19I20140425

23/9/2013: Everyone is doing more of the same, alongside German voters

And here we have it, folks: Germany votes for status quo, markets seem to be voting for the same...

Meanwhile, ECB is promising to do nothing new in larger quantities, should markets decide to follow Merkel in repeating more of the past...

25/3/2013: The False Vacuum of the EU: a must-read essay

On rare occasions does one come across an essay so brilliantly argued and provocative in its depth. A must-read: Nucleating the False Vacuum of the European Union

22/11/2012: Net cash - EU27

Via zerohedge.

In case you wonder who funds who in EU in 2012:

Do note that all peripheral economies of the EA are net recipients of EU funds and that is on top of the lending of funds by various European mechanisms. 

10/11/2012: 'Special' case redux?

Just in case Angela Merkel reads EU Commission research... here's a chart summarizing the 'structural' adjustments to-date courtesy of JMP Research:

And the chart shows that 'special' Ireland:

• Delivered second largest drop in unit labour costs in the periphery (much of that, as in Greece's case and Spain due to massive spikes in unemployment)
• Produced 4th largest (or second lowest) improvement in current account dynamics and had 3rd highest increase in unemployment.

In other words, as with fiscal adjustments, our 'structural' gains are far from being 'special' or exemplary, but rather represent below average levels of achievement compared to other 'peripheral' economies.

And in case you need more, here's a bit on wages 'moderation' in Ireland:

The chart above shows pretty clearly that while Ireland claims to have achieved tremendous gains in labour costs competitiveness, in reality our gains are only spectacular if we forget the rapid inflation experienced in 2000-2009. Let's run some maths: between 2000 and 2012:

• Greek nominal labour costs relative to EU average fell 0.37%
• Irish rose 7.69%
• Portuguese fell 4.21%
• Spanish rose 6.4%
• Dutch rose 8.9%
• Italian rose 1.97%
• French rose 1% and
• German fell 16.36%

In other words, Ireland's labour costs still are up more than for any other peripheral state and, in fact, are only lower relative to the EU average against the Netherlands. Spot anything 'special' here?

25/9/2012: One hell of a mess...

A quick quote from the recent Citi report on euro area economics, relating to ESM (emphasis is mine):

"Of the €500bn, €100bn is earmarked for future Spanish bank recapitalisation. If Ireland retroactively gets full mutualisation of sovereign debt issued to recapitalise its banks, that would require another €64bn. Equivalent treatment for Greece would cost €45bn and for Portugal €8.5bn. That would leave €282.5bn, a pittance compared with the likely future funding needs of Spain and Italy, unless the ECB
does most of the heavy lifting through the OMT."

Puts matters into perspective: Irish banking mess would cost EZ more funds than Greece and Portugal combined. Put alternatively, Irish taxpayers have done more to underwrite risks within the EZ banking system than Greek and Portuguese taxpayers combined. Take your pick of the option for interpreting...

To wet your appetite for explicatives further, here's another quote:

"We are still likely to see multiple sovereign debt restructurings of EA periphery sovereigns, starting possibly with Greece and probably lasting into 2015.

• We expect Portugal will likely require sovereign debt restructuring, possibly in 2014-15, but could happen even earlier, both through OSI and through PSI (Private sector involvement). 
• Unless Ireland benefits from major OSI, say in the form of a mutualisation through the ESM of up to €64bn worth of sovereign debt – the counterpart of the capital injection into its banking system provided by the Irish authorities between 2008 and 2010 – we believe it too is likely to see sovereign debt restructuring.
• The Spanish sovereign and banking sector taken together are most likely insolvent. The relevant question then becomes what combination of mutualisation, bank debt restructuring and sovereign debt restructuring will occur...
• Italy should never suffer a sovereign default due to inability to pay in our view. It is a rich country with massive private wealth and, by the standards of the periphery, is in a relatively good economic shape, although massive structural reforms are required to get out of the swamp the country now finds itself in."

9/9/2012: September Euro area bonds supply

September 2012 bonds supply and auctions for euro area countries (via Morgan Stanley):