Greece is the word and a forerunner for likely central bank intervention failure in Italy

16th November 2011 by Shaun Richards

Having over the past few days looked at the newer additions to the list of Euro zone casualties it is time to recheck the situation of the oldest member of this list I think. Before I do one thing that has changed in that the porcine metaphor  is no longer accurate or comprehensive but for the inventive there is scope for a new one! No-one seems to have covered all of the new entries in one acronym yet. I await your thoughts on this matter.

I have to confess that the political situation in Greece has me slightly confused at this time. I understand that she has a new technocratic leader and that Lucas Papademos has only just been appointed as a leader of a coalition government. I am a little less sure why a man who was only appointed last week is facing a vote of confidence in the Greek Parliament today! Whst the vote of confidence may tell us is the extent of opposition to a man who is bound sooner or later to be labelled as in effect a leader appointed by the EU/ECB/IMF troika.

The Greek economy

We now have from the Greek statistics agency the first estimate of economic growth for the third quarter of 2011.

the Gross Domestic Product (GDP) at constant prices of year 2005 decreased by 5.2% in comparison with the 3rd quarter of 2010.

It is symptomatic of the depth of the Greek crisis that many news agencies have presented these numbers as an improvement as they show a slowdown in the rate of decline of the Greek economy. However I counsel a little caution as if you can stretch your minds back to the first quarter of this year I did have suspicions about the reliability of the numbers we were given then. If you recall we were told this.

The first quarter of 2011 showed positive growth of 0.8 percent at stable prices (relative to -2.8 percent in the previous quarter) …… In addition, the recession year-on-year in the first quarter 2011 has slowed by 3.4 percentage points in real terms (from -7.4 percent in Q4 2010 to -4.8 percent)

It occured to me to check how this had worked out last night so I took a look at what we are told now about the first quarter of 2011. According to El Stat the Greek economy as measured by GDP declined by 8.3% rather than the 4.8% shown above, so quite a difference and in the second quarter it fell by 7.4% rather than the originally reported 6.9% ! Now if we look at the third quarter numbers again we can see that rather than being an improvement they are actually worse than what we were originally told the first quarter had been. I am reminded again of the words of Sir Walter Scott.

Oh what a tangled web we weave, When first we practice to deceive

What are we being told now about the depth of the Greek recession?

The first quarter of year on year real negative economic growth was the second quarter of 2010 when it was -0.7% and from then to now we have seen this: -4.6%; -8.6%;-8.3%;-7.4% and now -5.2%.

I will come to why we only have numbers from 2005 but the first quarter of 2011 had the weakest level of overall output of 43,273 million Euros in that period. The latest quarter had the usual tourism boost at this time of year and came in at 47,987 million Euros which was the worst third quarter in the same period. To give a comparison the peak for Greece was a real economic output of 54,980 million Euros in the third quarter of 2007. So in the following four years the Greek economy has shrunk by just under 13%.

This shrinkage is a reason for the blowout in the Greek fiscal deficit on its own as back in 2008 the numbers would have assumed growth of 13% and so any forecast has received a double-whammy from this factor alone.

Why care is needed with these numbers

I have discussed before the fact that Greece’s GDP growth statistics are no longer seasonally adjusted ( this is why I have compared third quarters above), well that is not the half of it as these numbers are full of,ahem “improvements”


The quarterly GDP estimates for the period Q1 2005 – Q2 2011 have been revised mainly due the recent revision of annual national accounts for 2005‐2010; the use of an improved method (Denton method) to benchmark the quarterly GDP estimates to the annual GDP figures; the implementation of the new EU classification of economic activities (NACE rev. 2); the use of new indicators (quarterly turnover indices and producer price indices for services); and the implementation of improved methodology for data processing at a more detailed level of analysis of the branches of economic activity.

You do not have to understand the details to get the general idea I think and it is why I have resorted to comparing actual real output numbers from the same quarter in this post. In my opinion all this statistical manipulation is a sign of the times and is not something that reflects with credit. If there ever was a time when reliable numbers were needed thsi is it and instead look what we have.

We are left with a Greek recession that has been revised deeper again and let me give it a proper title as it is clearly no longer a recession it is a depression. It was back on August 22nd that I first pointed out that Greece had moved into an economic depression. Back on August 12th I pointed out this.

At constant prices so in real terms Greece’s economic output has gone back to the levels of the spring of 2006. In essence she has gone back five years.

Sadly she has now gone back six years or more….

A Consequence of this: missed fiscal deficit targets

I took a look at the Greek medium term financial strategy from the summer and spotted that it was forecasting economic growth of -3.5% in 2011 and a fiscal deficit of 7.5% of GDP. So it was no surprise when I read that the Greek Prime Minister Lucas Papademos said that it would now be 9% last night and regular readers will be aware that I have said that this was likely for some time. And as the Greek economy continues to contract rapidly we have to question the forecasts for 2012 (6.5%) and 2013 (4.8%) too.

Greek government bond yields

The story here is one that shows economic collapse. Greece’s one year government bond yield has gone above 260% today and her two year yield has risen to 114%. The benchmark ten-year is now at 28.8% which is another high in this crisis. Apart from the effect of all this on Greece I have two main thoughts for you.

1. How can you possibly have a currency union when one has a benchmark bond yield of 28.8% and another has one of 1.83% making a gap or spread of 27%! Hands up those who think that this is sustainable?

2. We see here that the template for European Central Bank intervention has failed utterly in its objectives. Rather than raising bond prices and reducing bond yields the effect after a year and a half has been the reverse. And a reverse on the scale of General Custer at Little Big Horn in my opinion.

If we look at the Greek bond market the amount of official intervention has been enormous. It is often forgotten that Greek (and other) banks were encouraged to pile into the market by the terms available for getting liquidity from the European Central Bank so that there has been indirect as well as direct purchases. Also some of the market will be in what you might call core holdings at insurance and pension funds where they are matched against liabilities such as annuities. So if you are left with the impression that there may not be a lot more left to buy there is a little exaggeration but the principle holds, but the market has still collapsed.

Now project this onto Italy with her 1.9 trillion Euros of government debt and I hope that you get why I do not feel that ECB intervention in this market can ever be the panacea that I see many are claiming. You might buy a trillion Euros worth and if the Greek experience is any guide you would still fail to achieve your objectives and you would be losing hundreds of billions of Euros. Or rather you would be losing hundreds of billions of Euro zone taxpayers money. Oh and you may have to pay for the reconstruction of the German Bundesbank which I suspect might enact in reality what Charles Dickens suggested in fiction, spontaneous combustion!

I do not believe that those who argue for continued extensions of the Securities Markets Programme have ever considered the possibility that on the current evidence we have one should expect it still to fail. This is only the first order effect as there would be second order effects from what would be debt monetisation on a grand scale. More commodity and precious metal price rises could easily be a second-order effect  and look what they did first time around. Also it could easily be interpreted abroad as a type of indirect competitive devaluation which could easily go very wrong just like the 1920s and 30s in fact.

A potential lesson for the UK

If we look at the Greek experience we see the following, indirect purchases of  government debt by banks (check) and direct purchases by a central bank (check). But as we stand a completely different result as our ten-year gilt (government bond) yield has fallen to 2.15%. There are differences as we have our own currency, own exchange- rate and our own interest-rates but my point here is that I do not think that this can work forever and that sooner or later we will hit trouble too.

Some light relief the Group of Debt

As the football results came in last night some wag rang radio fivelive and suggested that it was possible that Euro 2012 could feature a Group of Debt comprising Portugal, Italy Greece and Spain. You could also have Ireland in this.

And yes as this was the BBC you could also that those who live in glass houses should not throw stones…….

28 thoughts on “Greece is the word and a forerunner for likely central bank intervention failure in Italy”

  1. Dontmindme says:

    Acronym suggestion for you: BAND : Being Anywhere Not Deutschland 

  2. Jameslalexander says:

    Confidence vote – a necessary mechanism to demonstrate Parliamentary majority support and hence legitimacy of appointment when the normal electoral process and demonstration is missing.  Will happen v soon in Italy too. 

    1. Andy Zarse says:

      The Technocrats in charge will enact legislation that absolutely nobody would vote for in any general election. So what happens when the recession bites, following Snr Monti’s Thatcherite labour reforms and “sound money”, when an election falls due?  Will the main parties still support it, or will there be votes available for having a Plan B involving an expansionary budget?

      I have said since the start of this crisis, the folk calling the shots have grossly underplayed the socio-political element to the situation….

  3. James says:

    The acronym that I would suggest to replace the now redundant PIIGS would be STOOGEs, being Soon To Operate on the Orders of the German Empire.

  4. James says:

    Soon To Operate on the Orders of the German Empire (STOOGEs)

  5. Anonymous says:

    May I propose CHAOS (Countries Having to Accept Outside Support)

  6. John Hurrel says:


    I presume your request for a new acronym is to include France and Belgium so I suggest


  7. JW says:

    Shaun, excellent piece. I think there is a big difference between Greece and Italy. Greece is incapable, period. Italy is rich, and can get itself out of this hole if it can make same awkward decisions. I fear for Portugal, but Spain can also make the necessary decisions. France is in almost exactly the same situation as the UK would be if we had tied ourselves to Germany, its going to be painful , but can be done.
    So no ECB money printing inflation, the ‘gold standard’ of German productivity increasingly forms the bedrock of the EZ. Maybe 2 countries drop away, pain in 3/4 others. Takes next 3/4 years to resolve.
    Result; the Euro replaces Dollar.
    Side effect, God help the UK!

    1. Germany’s increase in trade surplus happened after the Euro introduction and was closely matched by a deterioration of the trade deficit in Greece, Italy, Portugal, France. Where do you think the necessary increased demand will come from?

      1. JW says:

        ‘necessary’ for what exactly? the new tighter EZ could well be in balance overall, or indeed run a small trade credit.

        1. The EZ already has a balanced foreign account. The problem is the internal imbalances. Periphery countries run strong deficits while Germany and Holland run strong surpluses. A balance can occur if:
          1) Periphery countries completely destroy their demand through austerity and depression.
          2) Germany/Holland increase their own demand and lower their deficits.
          3) A strong transfer mechanism is created, just like in any federal state.
          4) A foreign entity increases its imports from EZ, especially the periphery countries. That would also mean a devalued euro.

          (4) proponents should be more specific about where that demand will come from. Personally i cannot think of any place big enough willing to do the job.

          1. JW says:

            How much ‘internal transfer’ would you say New York pays Alabama, for instance?

          2. Anonymous says:

            Good point.

            The USA has a federal justice system. The federal authorities have convicted Alabama officials in the Jefferson county sewer bond bankruptcy.

            How would Greek politicians like being tried for corruption in the Hague ?

          3. USA is a federal system. When unemployment rises in one state (due to an asymmetric demand shock) unemployment benefits rise, public workers keep their wages, federal taxes do not rise (but rather fall because of lowered income and progressive taxation). In other words, federal automatic stabilizers kick in, increasing ‘transfers’ to the state’s economy. If a federal system did not exist then New York would have to pay Alabama.

          4. JW says:

            KK, the point is that Greece et al joined the EZ knowing it wasn’t a federal system. Its not possible to make the statement ‘New York would have to pay Alabama’, because you don’t know that it would. The EZ is a ‘confederation’ not a ‘federal’ system, it might be far from perfect, but everyone knew what they were getting into when they joined. I feel great sympathy with the average citizens of the EZ who were not and are not greatly responsible for today’s mess; but its difficult to extend that sympathy to the ‘state’ or its leaders. Its easy to blame the ‘vendor’ state Germany , for selling all its stuff and helping finance the sales; but at the end of the day no-one was forcing the purchaser to buy.

          5. The EZ is just like the old gold standard, in the sense that EZ member countries actually lose reserves when in deficit, just like countries lost dollar reserves with the gold standard. No one forced a country to become a deficit country but that’s just the terms of trade. One is in deficit and the other is in surplus. In the gold standard, deficit countries always had to adjust through deflation, while surplus countries just enjoyed their increased reserves. No one wanted to be the deficit problem but not everyone can’t be in surpluses.

            Fortunately, that was eliminated by fiat currencies and flexible exchange rates. Now the EZ has reintroduced it and is calling for adjustment only by the deficit countries, like we can live in a world where everyone is in surplus. Germany did not provide any real increase in wages for a whole decade and relied on deficit countries for its surplus and GDP growth. If someone feels that’s the way to go for all of Europe then he should point to the part of the world that will assume the deficit position large enough to provide for European growth. He should also tell that to the workers class of Europe.

          6. JW says:

            KK, totally agree with this. As I have been saying on this site, the new gold standard in the EZ is ‘German productivity’. And no one has stated that to anyone directly, although politicians and their advisors should have realised.
            I tend to agree with the MMS ‘economists’ , however its clear that Germany is stuffed full of ‘Austrians’.
            If this was just an intellectual exercise, it would be interesting to see how a ‘gold standard’ system, a mercantile system ( China) and a MMS fiat system ( US, UK) resolved themselves. However real people are being squashed by this mess and ‘interesting’ is not a good adjective to describe their fate.

          7.  Greek Parliament today! Whst the vote of confidence may tell us is the
            extent of opposition to a man who is bound sooner or later to be
            labelled as in effect a leader appointed by the EU/ECB/IMF troika.

    2. Anonymous says:

      Re: Spain. Let’s see what happens in Sunday’s elections. Maybe there will be some economic changes, maybe not.

      1. Anonymous says:

        Hi Barncactus

        The very weak bond auction that has happened today has put the situation in the spotlight ahead of the election. Spanish bond yields are now in hot pursuit of Italy’s…..

  8. Anonymous says:

    Acronym suggestion: CHAOS (Countries Having to Accept Outside Support)

  9. Let’s say you are a bond holder/trader. First, the ECB starts making larger haircuts on periphery bonds to match ‘market risk’ on collateral it accepts. That makes sure there’s no arbitrage opportunity for market values to move again closer to face values and that new auctions will carry higher interest rates.

    At some point a voluntary haircut based mainly on Net Present Values is requested, something which, under current arrangements, would mostly strengthen the bond issuer’s repayment capabilities.

    A few months later, bond holders are ‘requested’ to accept a 50% haircut or else they might lose  all their money. Oh and by the way, no CDS will be triggered, so if you were looking to be insured against such an event.. tough luck. Just two weeks later Merkozy introduce exchange rate risk by insisting that the Greeks vote on if they want to stay in the Eurozone or not.

    So you have large margin calls, face high default risks, cannot insure yourself against them and an exchange risk is added to make things even nicer.

    It’s really impressive that a market for Italian bonds still exists!

  10. Sovjohn says:

    I’m reading today that banks request an 8% (!) interest rate in order to accept the 50% haircut of Greek bonds.

    Despite the capital being reduced, I somehow don’t think the majority of the bonds are being in the 8% area currently, so if the government willingly accepts this, it will be a major, um, failure in the process to say the least.

    And an acronym suggestion: BIFPIGS (refers to 2 types of meat in 1 acronym) would have my vote =)

    1. Anonymous says:

      Hi Ioannis

      There are lots of problems with the plan for the 50% haircut of private sector bond holdings not least that it is simply not enough!

      Here is todays statement from the Ministry of Finance

      “Athens. The Ministry of Finance of the Hellenic Republic today announced that it has commenced a series of consultations with holders of Hellenic Republic bonds (through the IIF, other industry bodies, and directly).  These consultations are being undertaken as part of the preparation for a transaction affecting those bonds consistent with paragraph 12 of the Euro Summit Statement of 26 October 2011.

      The October 26 Statement calls for an exchange of Hellenic Republic bonds in the hands of private sector creditors for new bonds of the Hellenic Republic in order to achieve a 50% nominal reduction in the outstanding stock of that debt.  That transaction will be designed to place Greece on a path to achieve a debt-to-GDP ratio of no more than 120% by 2020.

      “Within the parameters of the October 26 Euro Summit Statement,” said Evangelos Venizelos, Greece’s Minister of Finance, “our goal is to structure a transaction that will attract the broadest possible support from the bondholder community.  To this end, we will be listening to the IIF, other industry bodies and individual creditors’ ideas about how best to design this transaction.”

      The October 26 Statement envisions the launch of this transaction in early 2012. ”

      Meanwhile the ten-year government bond yield is 28.9% and has been rising recently in a  rather eloquent statement as to the progress achieved so far.

  11. tony graham says:

    I love Greece with all my heart Shaun,and have spent as much time as I could afford there.My big dream was to build a house on the magnificent acre of land I bought some years ago in Kefalonia…………now all turned to dust.
    I’m just waiting now for some sort of new tax demand from these maggots that call themselves ‘Greek politicians’ since the new mantra there seems to be if it exists-tax it.
    As the Aussie lady married to a Greek said to me over there in September….they are killing us stone dead with their taxes.
    Are these so-called politicians just thick,or just so completely in the thrall of the demonic EUSSR kleptocrats, that they cannot see that they will kill their tourism industry.
    Petrol was 1.80 euros per litre in Sept,and everything else was dearer than in Britain,other than stuff off the back of a pickup truck.
    Default now for God’s sake and get your country back I say. 

    1. Anonymous says:

       The Greek kleptocrats are receiving money from the EU kleptocrats. It’s self interest, not thickness ….

    2. Anonymous says:

      Hi Tony and welcome to my part of the blogosphere

      I am sorry about your house and the way that things have turned out for both you and Greece in general. But in my opinion there is no solution to be found in the current austerity mantra and a change is needed.

      The problem is that those in charge have done very well out of what has happened and in a problem whcih also exists in the UK many politicians seem unable to distinguish between their own good ( plenty of well paid EU jobs for politicians including those who lose their seat) and the good of their country……

  12. Anonymous says:

    Interesting, but disconcerting, that the new EU appointee in Greece is both PM and Finance Minister. There are bad precedents for this combination, see Dr Brown in the UK (sorry Alistair).

    What happened to checks and balances? Isn’t there anyone in Greece who can/will act as Finance Minister? 

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