15th July 2010 by Shaun Richards
Yesterday drifted along for much of it with no great news and no great direction to financial markets but tucked away in the report from the June Minutes of the Federal Reserve’s (America’s Central Bank) was this phrase.
“Members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably”.
That sentence is quite significant. There is an element of ill-logic in it as how can you be planning an exit from stimulus measures at the same time as you are considering new ones? However I believe that what they are saying is that they are concerned that the US economy is slowing and that they may have to try to stimulate it again. As the Meeting took place on June 22/23rd and the economic data since then has generally been weak those who felt this in the Federal Reserve will be more concerned now than they were then.For example not only did June’s retail sales drop 0.5% but previous months were revised down. If we stop for a moment and think of the implications of this should it take place then one cannot avoid the thought that it is looking increasingly possible that the enormous stimulus programmes that were poured into the US economy may not be working. In an irony of timing the White House released a report saying that President Obama’s stimulus programme or Recovery Act has saved or created between 2.5 and 3.6 million jobs and raised growth by 3% in return for the 787 billion dollars spent. Perhaps it was not the best day to try to slap yourself on the back.
Regular readers will know that I follow bond yields and consider the current yield of ten-year US government bonds to be rather extraordinary at 3.05%. For those who want to know more about this please look at my article of the 2nd of July on US inflation and look at the yield again. However if we should get monetary stimulus phase 2 will yields be forced lower again or are they already discounting this? I worry that we are trying to fix a bubble by creating another bubble.
Greek Public Finances in 2010
The Greek Ministry of Finance recently published figures for Greek public finances from January to May 2010 and they show a remarkable improvement. Particularly remarkable when you consider that the two phases of her austerity programme were only announced in March and May 2010 respectively and that is announced not implemented. For example it was 2 /3 weeks ago that the second increase in VAT levels actually began i.e outside the period for the new figures.
What do they say?
the state budget for the first five months of 2010 (January – May), on a fiscal basis, the deficit amounted to 8,978 million euro against 14,655 million euro during the same period in 2009. This represents a 38.7% year-over-year decline, against a targeted 35.1% annual decline foreseen in the Stability and Growth Program (SGP)………..Furthermore, these data do not yet fully reflect the additional measures introduced in March and May, 2010.
Breaking these numbers down
net revenues of the ordinary budget increased by 8.3% year-over-year against a targeted 11.7% annual increase foreseen in the SGP, including the additional measures of March……….Ordinary budget expenditures declined by 10.5% year-over-year against a targeted 4.8% annual decrease foreseen in the SGP. In particular, primary expenditures declined by 11.3% against a targeted 4.4% annual reduction and interest expenditures decreased by 7.5% against a targeted 5.1% annual increase
So on the face of it we have quite a remarkable improvement. If you project these numbers forward for the whole year then after last years deficit of some 13.6% of GDP we would get a reduction to 8.3% or a drop of 5.3% which would be quite an improvement. Looked at in such a way it could make you wonder if the second stage of the austerity programme implemented in May was necessary. Indeed here we hit a conundrum because EU leaders (as in the people who contributed to Greece being forced to undertake a second round of austerity) are praising Greece’s efforts and these figures. For example European Union Monetary Affairs Commissioner Olli Rehn said”The Greek program of fiscal consolidation and structural reforms is on track.”
If one analyses these figures there are some weaknesses in them. For example I notice that revenues increased by 8.3% rather than the targeted 11.7%. This is in spite of a one-off tax implemented by the previous government contributing some 779 million Euros to the total. Sadly Greece’s deficit require continuous measures and not one-offs which by their very nature end. I understand that this particular tax is considered in Greece to have impacted adversely on growth. In addition some of the improvement is due to a reduction in tax refunds of 364 million Euros, but it appears that much of this is being deferred rather than stopped. Taking these factors out of the numbers means we do not have such a good story anymore on this side of the balance sheet.
If we now consider the expenditure improvements these look extraordinary and of Herculean-like proportions (sorry!). Reducing ordinary budget expenditures by 10.5% looks excellent on the face of it. However Greek contributors to my comments column have indicated to me on several occasions that this has been achieved in their opinion by the Greek government simply not paying its bills. One has translated an article from the Greek Kathimerini newspaper which suggests the following bills are currently unpaid. According to this the Greek state has unpaid bills of 10 billion Euros in 2010 which can be broken down into 6 billion to hospital suppliers, 1.6 billion to construction companies, 1 billion in unpaid VAT refunds, and rather curiously 0.1 billion to Media all around the world whatever that is, and the rest for bills such as the financing of investment programmes. Other sources at that period claimed the figure to be even higher, probably 11 or 12 Billion Euros. It is interesting that hospital suppliers feature highly here as the Greek governments failure to pay them has featured before in this crisis (at one point it had bills to pharmaceutical companies stretching back to 2005 and I believe that some companies stopped supplying her).
So there are serious questions to be answered about both revenue and expenditure but particularly the latter. Also if you wish a cheap hit on a deficit you cut investment rather than general expenditure and “Public Investment Budget (PIB) expenditures declined by 29.6%” so this avenue is being fully used. Unfortunately the easiest place to cut expenditure is usually the worst place to start. For example apart from the impact on Greek infrastructure and the follow-on impact of her economy think of the immediate likely impact on jobs. Perhaps here we have an explanation of some of the rise in Greek unemployment (to 11.7% from 10.3%) in the first quarter of 2010. After all the industries which are likely to be impacted by this such as construction tend to be ones which cut jobs quickly.
I notice that some in the Greek establishment are also starting to forecast that the fall in Greek economic output may be less than the 4% forecast by the European Commission/IMF for this year. If this is so and they can also manage the reduction in public deficits that the numbers in this article imply then they appear to have hit on the economic equivalent of the holy grail. In such an instance the new coalition government in my own country the UK should have officials in Greece to discover how this has been done, of course they would have to peer over the shoulders of officials from Spain and Portugal trying to do the same thing but they should still learn something. You see if I may add a dose of economic reality since these forecasts were made we have seen that the Greek economy contracted at an annual rate of 2.5% in the first quarter of this year after falling by 2% in 2009 and this was pre-austerity. Another sad dose of reality is that unemployment at 11.7% already exceeds what many thought it would end the year at and as well as being distressing for the individuals concerned unemployment affects both public expenditure and revenues.
Unfortunately there is another question mark for the numbers and for once I am in complete agreement with euro zone officials. They have requested that Greek authorities incorporate into the general government deficit and public debt the net loan requirements of the public companies as well as their accumulated debts. This is likely to increase Greece’s budget deficit by 0.5 % of GDP and its national debt by 5.5 % of GDP.
I am aware that provisional figures have now been released for June as well but these lack a breakdown of the form I have discussed above and appear on the face of them to tell pretty much the same story with the scale slightly increased to a 46% deficit reduction. One factor in it does trouble me quite a bit. I have written many times about the dreadful performance over the past few months of Greek government bonds and yet
Interest expenditures decreased by 13.3% against an estimated 5.6% increase
How does that work exactly?
On this subject I have one last thought. Financial markets have many flaws but they love to make a profit. If this news was believed by them they would be buying Greek government bonds anticipating a rally and profits. However her ten-year yield is 10.39% and if we look at shorter dated maturities she has a (just under) 3 year bond yielding 11.08%.
Here as I mentioned yesterday was some good news with both registered unemployment falling by 20,800 and unemployment rate falling by 0.1% to 7.8%. On a headline basis employment (which has recently been falling) rose to 72.3% so good news all round. Except that one needs to be careful with the numbers as the rise in employment was caused by a rise in part-time employment of 117,000 to a record level and self-employment also rose by 59,000 which over-explains the rise in employment so in fact full-time employment fell. If you look at hours worked which in many ways is a better measure (although hard to compile accurately I would think) they fell. The inactivity rate fell too by 0.2% to 21.3% again reversing a recent trend.
So some hopeful news but we have yet to hit the headwinds of the public-sector job cuts and their implied impact on the private sector so let us enjoy it for what it is and cross our fingers for the future. For even the drop in inactivity looks as though it may be explained by temporary summer jobs, but then lets face it that is better than nothing. Also I keep re-reading the numbers and some of them appear to be (ahem) a little inconsistent so it may well be best to stick with the wider implications of these figures and not obsess on detail.