18/7/17: Greece in Recession. Again.

Per recent data release, Greece is now back in an official recession, with 1Q 2017 growth coming in at -0.1%, following 4Q 2016 contraction of 1.2%. Worse, on seasonally-adjusted basis, Greek economy tanked 0.5% in 1Q 2017. The news shaved off some 0.9 percentage terms from 2017 FY growth outlook by the Government (from 2.7% to 1.8%), with EU Commission May forecasting growth of 2.1% and the IMF April forecast of 2.15%, down from October forecast of 2.77%.

Greece has been hammered by a combination of severe fiscal contractions (austerity), rounds of botched debt restructuring, and extreme fiscal and economic policy uncertainty since 2010, having previously fallen into a deep recession starting with 2008. Structural problems with the economy and demographics come on top of this and, at this stage in the game, are secondary to the above-listed factors in terms of driving down the country growth.

In simple terms, this - already 10 years long - crisis is fully down to the dysfunctional European policy making.

In real terms, Greek economy is now down almost 3 percentage points on where it was at the end of 2000 and even if we are to assume that the economy expands 2.15% in 2017, as projected by the IMF, Greece will still end 2017 some 0.76 percentage points below where it was at the start of its tenure in the euro area.

Meanwhile, the 2.1-2.15% forecasts are likely to be optimistic. Past record shows that, so far, since the start of the crisis, IMF’s forecasts were woefully inadequate in terms of capturing the true extent of the crisis in Greece.

As chart above shows, with exception of just two forecasts’ vintages, covering same year estimates (not actual forward forecasts), all forecasts forward turned out to be optimistic compared to the outrun (thick grey line for April 2017).

Another feature of the more recent forecast is that 2017 IMF outlook for Greece factors in worse expectations for 2018-2021 growth than ALL previous forecasts:

The key driver for this disaster is the EU-imposed set of policies and the resulting policy and economic uncertainty. In fact, if we were to take the lower envelope of growth projections by the IMF - projections that were based on the Fund’s assumptions that the EU will live up to its commitments to accommodate significant debt relief for the Greek economy from around 2013 on, today’s Greek real GDP would have been around 20-21 percent higher than it currently stands.

All in, Greece has sustained absolute and total economic devastation at the hands of the EU and its institutions, including ESM, ECB and EFSF. Yes, structurally, the Greek economy is far from being sound. In fact, it is completely, comprehensively rotten to the core and requires deep reforms. But this fact is a mere back row of violins to the real drama played out by the Eurogroup, the ESM and the ECB. The nation with already woeful demographics has lived through sixteen lost years, going onto seventeenth. Several generations are either face permanently damaged prospects of future careers, or have to deal with demolished hopes for a dignified retirement from the current ones, and a couple of generations currently in lower and higher education are about to join them.

4/2/16: Tear Gas v Lagarde’s Tears: Greece

Here’s Greece on pensions reforms:

Source: https://www.rt.com/news/331265-greece-tear-gas-protet/#.VrN56JItCdA.twitter

Here’s IMF on same:

Note: to watch the video comment by Mme Lagarde on Greek situation, please click on this link: http://www.imf.org/external/mmedia/view.aspx?vid=4739363229001 (answer on Greece starts at 22’:22”). Otherwise, here’s official IMF transcript of it:

“I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side. Equally, no [amount of debt relief] will make the pension system sustainable. For the financing of the pension system, the budget has to pay 10 percent of GDP. This is not sustainable. The average in Europe is 2.5 percent. It all needs to add up, but at the same time the pension system needs to be sustainable in the medium and long term. This requires taking short-term measures that will make it sustainable in the long term.

“I really don't like it when we are portrayed as the “draconian, rigorous terrible IMF.” We do not want draconian fiscal measures to apply to Greece, which have already made a lot of sacrifices. We have said that fiscal consolidation should not be excessive, so that the economy could work and eventually expand. But it needs to add up. And the pension system needs to be reformed, the tax collection needs to be improved so that revenue comes in and evasion is stopped. And the debt relief by the other Europeans must accompany that process.  We will be very attentive to  the sustainability of the reforms, to the fact that it needs to add up, and to walk on two legs. That will be our compass for Greece. But we want that country to succeed at the end of the day, but it has to succeed in real life, not on paper.”

Yep. Lots of good words and then there are those ungrateful Greeks who are just refusing to understand:

1. How can Mme Lagarde insist that there’s a second leg (debt relief) where the EU already said, repeatedly, there is none? and
2. How there can be sustainability to the Greek pensions reforms if there are actually people living on them day-to-day who may be unable to take a cut to their pay? Who's going to feed them? Care for them? On what money? Where has IMF published tests of proposed reforms with respect to their impact on pensioners?

Strangely, Mme Lagarde seems to be not that interested in answering either one of these concerns.

26/1/16: Chances of Repairing Greece?..

When someone says that Europe (or anyone else) "has missed a chance to" stabilise or repair or make sustainable or return to growth Greece, whilst referencing any time horizon spanning the last 8 years - be it today or 6 months ago, or at any recent iteration of the Greek crisis, I have two charts to counter their claims:

You can't really be serious when talking about stabilising Greece. Greece has not been stable or sustainable or functioning by its Government deficit metrics ever since 1980, and by Current Account balance in any year over the same time horizon, save for the last 3 years.

Yes, there probably are means and ways to significantly improve sustainability of the Greek economy. But such means and ways would have to be radical enough to undo three and a half decades of systemic mismanagement.

17/9/15: Greek Crisis: Structural & Institutional Drivers

A lot has been written about Greek economy, with basically two divergent views (ignoring comical extreme perspectives usually harboured by the media) of the core problem:

• The first perspective is that Greek economy has been driven by wrong-footed European policies (austerity, failed restructuring of Private Sector-held debt), as well as by deceptive practices of some private sector players (that somehow facilitated Greek Governments' false declarations of deficits, questionable restructuring of pre-Euro era debts etc).
• The second perspective is that Greece suffers from chronic, long term institutional failures that have left economy deeply non-competitive.

In my view, both narratives coexist in reality, even though the first one became the dominant preferred narrative of the 'Left' while the second one became the dominant one on the 'Right' of political spectrum within Greece and outside.

Ideology aside, here is an interesting and wide-ranging view from the second perspective, courtesy of Edmund S. Phelps. Worth a read... 

As a note to this, one part of the first perspective that is glaringly false is the perception of Greece as being a victim state of the 'international bankers'' manipulation of the national debt accounting (the so-called Goldman Sachs Swap deal). Greek Government, at the time, wilfully and freely contracted Goldman Sachs to execute the deal. Informational disclosures available to the Greek Government at the time were sufficient for the Government to know exactly what it was doing and why. Eurostat was notified of the deal and did not object. There appears to have been no deception nor any coercion involved, except for the deception by the Greek Government at the time, knowing neglect of the issue by the Eurostat and soft coercion of the EU in dealing with Greek Accession to the Euro.  

Far from being a victim, Greek authorities have actively, willingly and knowingly participated, over decades, in shaping numerous institutional failures that strongly contributed to the economic destruction of the country. These authorities acted on the basis of electoral mandates. Their failures are briefly listed in Endmund S. Phelps' article linked above.

This does not, of course, diminish the pain from the crisis and does not eliminate the need for cooperative assistance and support to be extended to Greece, including direct debt relief. But it does call for a better balancing of analysis of the Greek economic situation overall. And it does call for the Greek people to engage in some serious soul-searching as to the nature and quality of the political leadership they elect. Especially, given the fact that they are about to go to the polls on September 20th.

3/8/15: Greek Manufacturing PMI: In the Land of Imaginary Numbers

Markit Manufacturing PMI for Greece is outright disastrous.

Euro area Manufacturing PMI for July came out with a slight decrease on June 2015 reading, still beating (marginally) flash estimate:

Looking at countries ranked by PMI reading, Italy showed a surprise rise, while Austria posted a surprise fall:

But the real story is Greece:

One wonders, just how much more the Greek economy is going to contract before the Bailout 3.0 is finalised and just what new wondrously well-working structural reforms will be needed to get it out of the new hole?

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.

13/11/2013: That Feta Feeling... a quick reminder...

Remember that Michael Noonan's gaffe about him missing feta cheese in the supermarket should Greece exit the euro back in 2012? Reminder:

Speaking at a Bloomberg event in Dublin, the Minister said: “Apart from holidaying in the Greek islands, I think most Irish people don’t have a lot (of connections with Greece),” he said. “If you go into the shops here, apart from feta cheese, how many Greek items do you put in your basket?”

Now, here's 2011 distribution of Greek exports via http://www.atlas.cid.harvard.edu/explore/tree_map/export/grc/all/show/2011/

All cheese exports accounted for 1% of total Greek exports. Just thought I'd share while rummaging through the data piles...

Oh, and while on the topic... latest Leading Economic Indicators for the euro area:

Spot numbers 1, 2 and 3... Let's not stay too arrogant...

23/7/2013: Ireland is not Greece... and never was...

Resting on one's laurels is a dodgy proposition. However, forgetting one's achievements is of an equally problematic virtue. To balance things up - a good reminder of Ireland's road travelled from the 1960s through 2008 and I have adjusted figures for Greece and Ireland for 2012 levels of GDP per capita based on IMF data.

Source: the original from World Bank, 2012.

Interesting bit - Ireland remains in the 'rich' club as a country that managed an elusive move from middle income economy in the 1960s to high income economy in 2000s and 2010s. Greece dropped out of the same group.

23/8/2012: More time for Greece is not an asnwer

As Greek PM, Samaras, heads for talks with Angela Merkel this Friday, here's why 2 more years won't work for Greece: link here.

26/09/2011: Greek crisis and exit strategy

At last - an excellent summary of the Greek crisis possible outcomes and exit strategies, courtesy of BBC (link here).

The bottom line is that no matter what Greece and Troika do or fail to do, the crisis will either move onto a full-blow economic implosion of Greece or global meltdown. This puts Greek dilemma, from euro area's perspective, squarely into the category of the choices faced by a patient with gangrened leg: to cut or to die. In other words, unless someone can find a node to hang a decent outcome on in the above - and I can't find one - the optimal policy mix from the point of view of both Greece and the euro area would be:

• Swap tranche release in October for commitment from Greece to exit the euro area under oversight from the IMF (staged exit with monetary support provided by the IMF and ECB). Future tranches should be tied to Greek Government progress on the bullet points below.
  
• Greece should default on sovereign and banks debts (60-70% writedown on sovereign and 50% writedown on banks), in part financed out of the current bailout package, in part netted through ECB (with ECB providing support for non-Greek banks and financial institutions writing down Greek assets on their balance sheets).
  
• Post-default, Greece should remain within the EU but outside the euro to avail of the benefits of free trade, labour and capital mobility.
  
• EU assistance to support growth via infrastructure investment should be extended to Greece in 2012-2017, in part to provide stronger foundations for growth and in part to provide an incentive to see through structural reforms in public sector and overall economy.

In effect, Greece will be incentivised via emergency supports and future investment assistance to exit the euro area voluntarily. There are no guarantees that post such exit Greek new currency and indeed its economy can gain a footing in the markets. However, retaining Greece within the euro zone does not appear to be a feasible option at this stage.


Note: The argument that Greece should default and exit euro is hardly a novel one. Nouriel Roubini recently made a very strong case for this here. Roubini also, in my view correctly, recognizes that transition from euro to domestic currency will require some financial supports from the EU.