13/7/19: Great Recession in Europe and the U.S. Great Depression

In a one-chart summary, why Euro has been a painfully failing experiment in monetary policy:

The above chart shows the comparative in real GDP levels between the Great Depression in the U.S. (1929-1936) and the Great Recession in Greece (starting from 2008 with data through 2018, and then using IMF estimate for 2019 published in April 2019 WEO, and IMF WEO forecasts from 2020 through 2024, data from 2025 on is taken at a linear trend using 2024 growth forecast). In simple terms, the U.S. real GDP reached its pre-Great Depression levels in the 7th year following the onset of the crisis, although some estimates put this to year 10, depending on the base used.  Greek Great Recession is now in year 11, and counting. By the end of 2019, the IMF estimates that the Greek economy will be 22.1 percent below the 2007 levels, and by 2024 (the furthest IMF forecast we have), it is expected to be 16.2 percent below the 2007 levels.

While one can make the point on Greece's 'unique status' as an economy that should never have been in the Euro in the first place, three arguments stand out against this point:

1.  Greece is a member of the Eurozone, and if this membership was attained over all rational arguments against it, this very fact shows that the Euro is a poorly structured monetary arrangement; 
2. As a member of the Eurozone, Greece should have been provided with monetary and fiscal tools for addressing the massive crisis the country experienced. Per chart above, it clearly was not accorded such: and
3. Greece is hardly the only economy in this situation. Italy is patently in the same boat, and as shown in the chart below, nine out of the EA19 states have experienced longer duration of recovery from the Great Recession than the U.S. from the Great Depression.

20/9/15: Euromoney: "Cyprus almost as safe as Portugal"

"The Cyprus risk score has steadily improved this year in Euromoney’s crowdsourcing survey, rebounding in Q2, and is seemingly on course for further improvement in Q3 as economists and other risk experts make their latest quarterly assessments. Chalking up almost 53.1 points from a maximum 100 allotted, Cyprus has managed to climb one place in the rankings to 56th out of 186 countries surveyed, leapfrogging India and closing in on Portugal into a more comfortable tier-three position:"

Read more here.

Here are my notes on the topic (to accompany the quote in the article):

In my view, Cypriot economy recovery after 3 years of deep recession and banking sector devastation is still vulnerable to growth reversals and deeply unbalanced in terms of sources for growth. Firstly, the rate of growth is hardly consistent with the momentum required to deliver a meaningful recovery. Cypriot GDP rose 0.2% y/y in 1Q 2015 and 1.2% y/y in 2Q 2015. This comes on foot of 14 consecutive quarters of GDP decline. Quarterly growth rate in 2Q came below flash estimate and expectations.

Positive growth was broadly based, but key investment-focused sector of construction posted negative growth. Deflationary pressures remained in the Cypriot economy with HICP posting -1.9% in August y/y on top of -2.4% in July. Over January-August 2015, HICP stood at -1.6% y/y.

Despite some fragile optimism, the Cypriot Government has been slow to introduce meaningful structural reforms outside the financial sector. The economy remains one of the least competitive (institutionally-speaking) in the euro area, ranked 64th in the World Bank Doing Business 2015 report - a worsening of its position of 62nd in 2014 survey. This compares poorly to the already severely under-performing Greece ranked in 61st place.

Thus, in my view, any significant improvements in the country scores relate to the policy-level post-crisis normalisation, rather than to a measurable improvement in macroeconomic fundamentals.

3/10/2014: East Asian Crisis, European Disaster: Tale of Two Recoveries

My post for Learning Signal blog on IMF report covering East Asian Crisis of the 1990s comparatives to the Euro area crisis 2007-present is available here: http://blog.learnsignal.com/?p=55 

30/3/2013: Euro area sovereign risk rises in March 2013

Here's an interesting bit of data (pertaining to analysts' survey): per Euromoney Country Risk survey:

"As of late March 2013, the survey indicates that 13 of the 17 single currency nations have succumbed to increased transfer risk [risk of government non-payment or non-repatriation of funds] since... two-and-a-half years ago." And the worst offenders are?.. Take a look at two charts (lower scores, higher risk):

Per definition of the transfer risk: "The risk of government non-payment/non-repatriation – a measure of the risk government policies and actions pose to financial transfers – is one of 15 indicators economists and other country risk experts are asked to evaluate each quarter. It is used to compile the country’s overall sovereign risk score, in combination with data concerning access to capital, credit ratings and debt indicators."

15/8/2012: Total Insolvency in Greece Meets Total Denial in Europe

And so as predicted here back in February, Greece is now in a complete meltdown when it comes to fiscal targets (report here). The only thing that is keeping this Euro charade still rolling is seemingly endless willingness of the European 'leaders' to deny the reality of Greek complete and total insolvency.

23/7/2012: Eurozone, Greece and the IMF - Part 2

On foot of my previous post on Greece and the IMF, the Fund has issued the following statement, quoted in full:

"We have received a number of inquiries related to the Der Spiegel report on Greece. You can attribute the following to an IMF spokesperson:

“The IMF is supporting Greece in overcoming its economic difficulties. An IMF mission will start discussions with the country’s authorities on July 24 on how to bring Greece’s economic program, which is supported by IMF financial assistance, back on track.”"

Key words here are "...to bring Greece's economic programme... back on track" which is a de facto admission by the Fund that the programme is 'off track' now. Another key issue with the statement is that it does not directly reject the claims made in Der Spiegel that the IMF is considering exiting the programme funding Greece.

Now, here's a problem the Fund is facing: it has two options now:

1. Admit that the programme is off track and hope that meetings with Greek authorities will put it back on track via some new additional measures to deliver more savings. In which case Greece buys few months more until that new sub-programme gets off track again, or
2. Admit that the programme is off track and cannot be restored to any reasonable level of performance. In which case the Fund must exit the programme.

Economically, (2) is the only rational choice. Politically (1) is the only feasible option. 

So long and thanks for all the fish, as they say...

23/7/2012: Eurozone, IMF and Greece

One must treat seriously the possibility that Greece will see its funding from the IMF cut-off or suspended. For a number of reasons, extending well beyond the simple financial arithmetics of aid.

Here are the details of the report.

Assuming the report is true, the questions it raises are:

• Validity of the Troika assessment during the structuring of the 'aid' packages: Greece received two 'bailouts' including a partial debt restructuring. Both packages were heavily criticised during their structuring as being insufficient in scope and excessively restrictive / ambitious in terms of fiscal adjustments required. In all cases, Troika rejected any criticism and pursued adjustments as planned.
• Validity of the Troika monitoring: since May 2010, there were ample signs that Greece will not be able to deliver on the 'bailouts' targets due to: (1) political constraints, (2) lack of real policy enforcement by Troika, (3) structural economic failures in the economy incapable of generating growth, (4) nature of the 'bailouts' that did not correct for debt overhang, and (5) social breakdown within the Greek society. Yet, the Troika continued to insist on compliance with the programmes that were clearly misfiring.
• Validity of the Troika assessments: since May 2010 numerous Troika reports were issued, all in effect (albeit with caveats) confirming that the programme in Greece was 'on track'. There was not a single report that sounded an outright alarm. Prior to each report publication, Greece was pressured to deliver on targets, with some marginal noises from the Troika that the programme is at risk. However, every tranche of loans was delivered in the end. With every bogus report being published, Greek authorities and international markets received a wrong and purposefully deceitful signal that no matter what, Greece will be provided loans to cover its ongoing obligations.
• Validity of the Troika capacity to design functional economic programmes: since May 2010, Greek economy continued to accelerate in the rates of decline - as measured by growth, unemployment, and growth components metrics. Objective assessment of the Greek situation can only conclude that an outright and full default on the country debts back in 2010 would have by now corrected the major debt imbalances and most likely restored economy to some positive expansion path. Objective assessment of the Greek situation also clearly shows that the Troika measures have not only failed to do this, but actually made the situation far worse.

Now, given that the Troika programmes for Greece were effectively driven by European, not the IMF, structuring, the questions above clearly reinforce the view of the EU authorities as being (a) incapable of economic policy formation, (b) unwilling to be honest and transparent in the assessment of the economic, political and social conditions in the member states, and (c) completely out of touch with reality of what is happening within a member state.

And at this stage, the IMF is left with few options but to present this exact assessment of the situation to the EU counterparts in a hope that they wake up and smell the roses. Unfortunately, to do so would require the IMF to exit the programme of assistance to Greece. Doing so might rescue the IMF reputation. Or it might not. But doing so will also clearly expose the EU's failure, with implications not only for Greece, but also for the rest of the euro area 'periphery'. Contagion will, therefore, be carried over straight to Spain and Italy - the heart of the EU core.

21/6/2012: Flash PMIs for Euro Area, Germany & France - June

Flash PMIs out for France, Germany and euro area. Predictably, not a pretty sight...

Here are the details:

Eurozone:

Germany:

 France:

There's a lot of surprise today in the media about 'German economy showing cracks' right... let's see:

• The Chinese stopped buying Mercs & BMWs on foot of their own property bubble deflating... &
• European companies & sovereigns stopped buying high end capex equipment on foot of euro bubble deflating... & 
• German consumers... well, they've been dead since 1991... & 
• German banks are discovering Greece-sized skeletons in their closets... 
• Oh and per leading indicator for Germany - look at France...

so those cracks in German economy's facade... what a surprise then!


In reality, what is happening out there is simple -  a bunch of junior journos who got promoted into online news start-ups are all hopping mad over data they don't really quite know how to read. And lacking any real business experience, they are drawing conclusions no one can quite understand. 

14/5/2012: Euro area austerity - a chart

Austerity in Europe? Ok, table below shows General Government expenditure as % of nominal GDP in 2011-2012 compared to 2000-2007 average.

Chart below shows nominal values of General Government expenditure, in billions of euros.

Chart above clearly shows that during the entire crisis, euro area General Government Expenditure dipped  only once - in 2011 compared to 2010. The 'savage' cut was €13.02bn for EA12 combined, or 0.14% of 2011 GDP. Continuing with 'savage austerity', 2012 is forecast by the IMF to post General Government Expenditure increase of €43 billion for EA12 and €43.9 billion for EA17. By the end of 2012, under 'severe austerity', euro area Governments will be spending €30 billion more than in 2010.

Things get even worse under the 'savage cuts' of 2013. In 2013, EA12 governments will be spending €66.2 billion more than in 2012 and €96.2 billion more than in 2010.

Oh, yes, and the trend continues into 2017 projections by the IMF.

In family analogy, 'Darling, with one of our jobs lost, try not to buy a fancier Gucci bag, next time you go out for groceries!' 

24/1/2012: Europe's Latest Non-Leadership on ESM/EFSF

Another heated non-debate is sweeping Europe. In the latest round of bizarre, outright Kafkaesque rhetorical contortions, European leaders are now engaged in a heated discussion on the 'enlargement' of ESM. Alas, the whole thing is clearly heading for the same outcome as Europe's previous rounds of 'solutions'. Here's why.

Recently, as reported in German press (here) Angela Merkel started to yield on the idea that the 'permanent' ESM fund should be increased from €500 billion to closer to €1 trillion by, among other things, allowing for concurrent running of existent €250 billion EFSF facility and the setting up of the new ESM.

Sadly, this 'solution' is really a complete red herring, despite all the hopes the EU is pinning onto it. In fact, it so much of a fake, the markets are simply likely to laugh their way through it.

The EFSF is designed to run out of time in the end of 2013. ESM is designed to start the earliest in mid-2012. Which means that even in theory, combined ESM/EFSF can last not much longer than 12 months. In practice, however, even this is not going to happen.

Firstly, EFSF is becoming increasingly funded through short term debt issuance and this means that as we hit 2013, the rate of EFSF paper maturing is going to accelerate. To roll this into longer-dated paper will require more than just re-writing the statutes of the EFSF. It will require EFSF raising funding at the same time as ESM is raising funding. The likelihood of this being a successful market funding strategy is zero.

Secondly, ESM capital basis of (meagre) €80 billion is not going to be fully invested on the initiation of the fund. Which means ESM even in theory is not going to come out on day 1 and borrow full €500 billion capacity. In practice, it can't be expected to raise even 1/4 of that in the first year of operations.

Which means that even running concurrently, EFSF+ESM duo will not constitute a fund with anything close to €750 billion capacity. And this means that European leadership is clearly in line for winning the Global Non-Leadership Prize again this year. IMF, insisting on the concurrent running of EFSF/ESM as well, is going to be a runner up.