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…….