Rising mortgage rates and borrowing costs will further weaken Greece and her economy

13th February 2013 by The Harried House Hunter

Back on the 21st of January I reviewed the economic position in Greece and even the word grim failed to do it justice. One of the issues covered was the fact that the International Monetary Fund’s view had mostly caught up with mine on Greece’s economy.

It is now projected to contract by 6 percent this year (2012) and 4¼ percent in 2013

However as I pointed out then the IMF has changed its tune and needs to answer why it was wrong before. After all observers like myself could see that policy was being set on wildly optimistic scenarios. This matters because the end result has been this.

Overall, the cumulative output decline has now reached about 19½ percent (including the impact of recently announced GDP revisions, which shaved over 1½ percent off reported growth in 2010–11).

Remember the official forecasts which continually predicted that recovery was just around the corner.Well I am afraid that the current state of the Greek economy reflects the consequences of setting policy on fantasies rather than reality. It did not have to be this way. At 10:30 am today the Bank of England faces a similar problem in concept where in its Inflation Report it will have to admit to being wrong yet again. To save you viewing a tedious press conference here is my summary. “Inflation higher,growth lower (yet again), but it’s someone else’s fault!”.

Underneath all this is the obvious issue that things would be better if these official bodies got a grip on reality rather than paraded their economic fantasies as forecasts. In the UK we have had problems due to higher inflation but they are much more minor than the economic catastrophe which has been inflicted on an increasingly poor Greece.

What is the latest data?


I am afraid that these are the sort of numbers which make me ask you to sit down before reading this. The numbers are for November 2012.

This figure corresponds to 197.0 thousand m2 of surface and 706.9 cubed of volume, reflecting respectively a 66.6% decrease in the number of building permits, a 63.3% decrease in surface and a 65.4% decrease in volume, compared to the same month of 2011.

We know that these numbers have been declining for quite some time so it would be reasonable to expect some sort of turn for the better or a slow down. But no as the averages for the three percentages above in the year to November were 37.1%,34% and 32.1%. It may be hard to believe with the declines that already have taken place but the deterioration has accelerated in November.

Remember that economic recoveries often begin in the housing/construction sector. If you looked at these in isolation you would be thinking that an acceleration downwards was now on the cards.

Trade Figures

These have been a beacon of light in the gloom for Greece but this week’s update shows a possible problem in this sector too.

The total value of exports-dispatches, excluding oil products, in December 2012 amounted to 1319,7 million euros against 1523,9 million euros in December 2011, recording a drop of 13,4%.

As ever a fair degree of caution is required with monthly trade statistics but it is quite a different number to the increase of 5.1% to the numbers for 2012 overall. Even it is a drop on the around 10% increases of 2010 and 2011. So a slowing appears to be happening and with the recent Euro strength it would not be a surprise if that continued. Indeed exports outside the European Union look as if they were already being affected by it in December as they fell by 20% on the smae month a year before.

Unlike Spain and to a lesser extent Portugal the gains in Greece have left her a long way away from the old IMF objective of eliminating trade deficits. Imports in 2012 were 32.1 billion Euros and exports were 16.2 billion Euros.

Retail Trade

Again we have a series which has fallen heavily so you might think that the scope for further falls is relatively limited. Unfortunately not.

The retail trade volume index, including automotive fuel, decreased by 16.8% in November 2012 compared with November 2011

If we look at the underlying index we see a level of 64.9 compared to  a 2005 benchmark of 100. You will not be surprised to learn that it is the lowest reading in this crisis for this series.

Industrial Production

Here we find a number which may at least be showing signs of a slowing decline.

The Production Index in Industry (IPI) in December 2012 compared with December 2011 recorded a decline of 0.5%.

It was however down 2% on November’s values and an underlying index of 71.2 where 2005 is benchmarked at 100 shows how weak this series currently is. A little bit of hope can be found in the manufacturing numbers which rose by 2% on the year before in December.

Full scale deflation?

Whilst Greece has had plenty of deflation in terms of aggregate demand she has had inflation with it as for example the indirect tax rises have pushed consumer inflation upwards. If January is any guide that looks now over.

The CPI in January 2013 compared with December 2012 decreased by 1.4%. In January 2012, the monthly rate of change of the CPI was -0.8%

If we look at the annual rate of change of inflation it has fallen from above 5% in January 2011 to 0.2% in January 2013 and looks set to go negative. Perhaps not in February’s figures as they were very weak last year and we currently have a firm oil price but March looks a possibility.

Interest and mortgage rates are rising

Having spotted this issue in Spain and being slightly surprised after all the European Central Bank’s efforts in this area I now look out for it. Here is the view of the Bank of Greece.

Finally, the average interest rate on housing loans at a floating rate or with an initial fixation period of up to one year further increased by 10 basis points to 3.04%.

This is a series I intend to look into more as “further increased” caught my eye. Indeed this seems to be happening to corporate borrowing too.

In December 2012, the average interest rate on all new loans to households and corporations increased by 13 basis points to 5.76%.

This provokes quite a few thoughts. For example in an era of ZIRP (Zero Interest Rate Policy) which the ECB represents with an official interest rate of 0.75% how do we get to a number some 5% higher? We seem to be back in the world of George Orwell’s some animals are more equal than others are we not? There was ZIRP for the Greek banks last year as they hoovered up money at 0.75% for three years but the Greek borrower seems to be paying what for these times looks like through the nose. Yes as so often we appear to have spotted that the banks are more equal in Orwell’s terms than everyone else. Or to put it another way.

In December 2012, the overall average interest rate on all deposits (including overnight deposits) stood at 2.87% and the one on loans at 5.81%.

Nice work if you can get it!

The Greek fiscal deficit

On the face of it this series looks good as we see this.

 the State Budget surplus amounted to 159 million Euros

This looks hopeful on its  own, if nothing else for the use of the word surplus! But if we look deeper we see something which is yet again ominous for Greece.

State Budget net revenues amounted to 4,418 million Euros, showing a 9.3% decrease against January 2012

If we factor in all the rises in tax rates into this we see that any like for like basis would be considerably worse than this. So we have yet another picture of a weakening economy which will be given another push downwards by this.

State Budget expenditures were reduced compared to January 2012 by 1,103 million Euros or by 20.6%.

It will not be the first time that claimed success hides a deeper failure.


As I survey the data it is the interest and mortgage rate numbers which are very important here. Not because I think that they are more important than economic growth or employment. But because they expose something of a lie in both economic theory and practice. It returns me to theme with which I started this blog over three years ago of official and unofficial interest rates. It is clear now that the low official ones apply to the banks, financial sector and savers and (often much) higher unofficial ones apply to the rest of us.

I observed this first in the UK and more recently in Spain and as you can see it is evident in Greece too. The future has many uncertainties but I do know that this is a bad development and no good will come from this backdoor recapitalisation of banking sectors.


31 thoughts on “Rising mortgage rates and borrowing costs will further weaken Greece and her economy”

  1. Justathought says:

    Hi Shaun,

    What would you expect when you read the following:”The Finance and Labor ministries insisted on Tuesday that Greece has no intention of lowering its minimum wage any further after a government official suggested that at 586 euros gross per month, the lowest salaries in Greece might still be too high” ??? BTW the French government is in talk to adjuste (reducing) pensions by some 20 % by the year 2020 (will keep you posted…)

    1. Anonymous says:

      minimum wage laws can be flouted in the black economy.

      1. Anonymous says:

        Which is why such economies are growing apace. Also see average 20% VAT.

    2. JW says:

      Hi Justathought
      I have been away from France for the last 3 weeks so I could have missed something, but a trawl of La Tribune didn’t give rise to any dramatic new initiative. Where have you got the 20% from? There is a ‘spring’ review with social partners soon to be underway, most people think the 62 yrs will be extended to 65 gradually ( although this is not the same as the UK ‘pension’ cliff face), and the ’25 best years’ may be reviewed. However I think Paris would be currently under siege if there was a 20% reduction under serious consideration.Incidentally the state pension forecasts just undertaken have a range of plus €bn1.5 to minus €bn2.7 in 2050 dependent on growth estimates. The French employees and employers pay a lot into their ‘pillars’.

      1. Justathought says:

        Hi JW here is the link
        I can not forward you the link regarding the 20% cut (reserved for paying folks) In a nutshell the proposition for not following the indexation system thoroughly until 2020 that could lead to some 20% depreciation. Actually the estimate’s hole in the financing for the pension pot is of 21.3 Billions Euro by 2017 and by 25 Billions Euro by 2020.
        Who can be sure with all those figures/data wish are constently massaged ???

        1. JW says:

          Hi Justathought
          My deficit numbers were for 2050 as there appears to be a baby boomer bulge. La Tribune run a series of articles about this. It depends on which ‘pillar’ is referred to about cuts. I can imagine a cut back in the 2nd pillar, but anything like 20% in the 1st would bring the country out on strike and topple the government.

    3. Anonymous says:

      Hi Justathought

      The minimum wage issue in Greece was something of a media/political snowball where the Finance Ministry general secretary Giorgos Mergos hinted it might be cut and the labour ministry denied it would! Now I believe the finance minister is saying he was “misinterpreted”! Personally I would have thought it hard to be misinterepreted about cutting the minimum wage but there you go….
      Just to make the waters even muddier the minimum wage is due for “review” next year.

  2. James says:

    Great (but a bit scary) analysis. I think that the official forecasts are just another way of playing for time. I doubt whether they really believed any of them about Geece or anywhere else.
    The really sad thing (apart from the poor old Greeks) is that the ploy has worked. Yes, they have to admit things are a little worse than forecast but, on the other hand, they have converted a situation of “Oh help, Greece is going to destroy the Euro” to “Who cares about Greece anyway”
    I would say that, as usual, the logic goes roughly as follows:
    1. I want to be re-elected
    2. If I run the IMF, I want to be reappointed by the people who get elected
    3. Does telling the truth to the electorate help 1 or 2 above? I don’t think so
    4. Let us use any number of things to confuse the plebs (false forecasts, QE, deficits coming down, debt coming down) so they vote for us again
    5. The people hate rich bankers but notice if they cannot get money out from their own bank, so let’s bash bankers publicly and subsidise them privately
    6. The Euro must not enter the discussion, because a collapse of the Euro would look bad on our CVs and might reduce the chances of being voted in (might even reduce the number of jobs for polticians, heaven forbid!). All problems in any Euro state are entirely a result of failed domestic policies, to which the IMF has the answer (see 2 above for IMF leadership qualifications)
    7. While wringing hands etc about Greece, let’s face it, the Greeks cannot vote in German elections (see 1 above) so who cares?
    I think that this logic roughly fits events as described above

    1. Anonymous says:

      Hi James
      Also Christine Lagarde enter the IMF with the failure of the programme she called “shock and awe” behind her. I argued at the time that she was not fit for the role on those grounds and should France itself weaken the spotlight would and indeed should be on past finance ministers….

  3. DaveS says:

    Hi Shaun

    I don’t doubt the Euro is a failed construct and Greece should never have been allowed to join. German interest rates distorted an already unbalanced economy and subsidised the dysfunctional. bloated and corrupt state. Greek lifestyles were artificially raised beyond levels that were sustainable by the Greek economy.

    But I think the fundamental question is what would happen to Greece if she were cut loose from the Euro. It seems a leap of faith to assume that somehow things MUST be better out of the Euro. I see no reason why the Greeks (or any other western Europeans) are entitled to better lifestyles than say for example the Bulgarians or the Ukranians – its not a god given right.

    Greece’s main export is tourism which is already suffering badly because Germans/Austrians are avoiding the country and this will surely get worse during the messy aftermath of a Euro exit. Future growth will rely heavily on future wealth of tourists from other northern European countries e.g. UK, Ireland, Netherlands etc – not a promising prospect in my view.

    I find it almost impossible to see how it could restructure to compete in manufacturing in a globalised world. This would take decades, poverty wages and a lot of capital which in turn would need good government and social stability,

    I think in reality the main export growth would be people.

    Given its history, I believe it is much more likely that exit would be accompanied by money printing and increased government spending. This would likely entrench the state and the associated corruption. I think hyper-inflation would be a real risk and with it, social instability.

    Unfortunately there is no way out – they will be poorer. I think its possible they may be less poor on German welfare – at least until the Euro disaster finally catches up with Germany.

    1. James says:

      A very interesting point of view, Dave S. I could not agree more as the chances of turening Greece into some kind of Germany.
      What is odd, however, is the determined refusal by everyone to sit down without a political axe to grind to consider in a sober fashion what would be the pros and cons of leaving the Euro. It may be a leap of faith to assume that Greece would be fine outside the Euro, but one thing that is not in doubt, surely, is the immense damage that the Euro has done to Greece to date.
      It hasn’t led to convergence of any sort with germany etc. It has led to the wrong interest and exchange rates for Greece. It has led to astonsihing unemployment. It has allowed the Greek government to borrow wildly at delusionary low interest rates. It has prevented the old trick every year of devaluation to attract tourists (remember every year how you got more drachmas even for your pound.
      The worry that I have with Greece is that if, as seems to be the case, Greece gets further and further from being competitive with Germany (as Germany ups its game every year), how long before there is serious social unrest?

      1. Justathought says:

        To paraphrase another commentator:”

        But as the champagne corks are liberated, and the merriment’s din fills our ears, it is worth maintaining a connection with reality. And the reality is particularly stark: There has been no progress whatsoever! Indeed, the Eurozone crisis is getting worse the calmer the bond markets seem and the more confident the
        commentariat is becoming that Eurozone is out of the woods.

        If the resolution of the Euro Crisis was all about replacing EFSF-ESM funding with the ECB, without decoupling the banking from the debt crisis and while a vicious asymmetrical recession is eating into the heart of Europe, then of course the Crisis is over.

        Alas, it was never about that. And so the ship Eurozone sails
        on, taking water in at an increasing rate that drowns more and more of those below the decks, while its first class passengers, pacified by a cunning captain, are downing the champagne.”

        1. DaveS says:

          The Euro will end badly, they will attempt to inflate their way out of the mess just as the UK has officially announced it will. This will end badly for the UK too.

          Its clear to everybody that growth isn’t coming to the rescue.

          I am afraid it will end badly for most of the West, all they can do now is delay the inevitable bankruptcy. I am suggesting that the Greeks might as well delay too…..

          1. JW says:

            Crisis ( with a big C) was about the wealthy and their banks.
            crisis ( with a little c) is about ‘average joe’ and his jobs/wages etc. ( not just in Greece, but everywhere)

            The amount of time and effort expended and coverage in the MSM is directly proportional to the size of the ‘C’.

          2. Justathought says:

            Hi Dave S,

            Recent Eurostat figs demonstrate to EuroGroup decision-makers that (finally!) unit labour costs in the periphery are not only getting better (compared to Germany, in particular) but there is a success trajectory which gives them a sense of

            That’s why ECB is forecasting (some serious) growth 2013 – may be second-half. Draghi said that officially as his year end
            assessment of impact of EuroGroup’s structural reforms, in particular.

            While the reality is … as you pointed it out “inevitable bankruptcy”…Well the Titanic’ Captain went back to sleep…

    2. Anonymous says:

      ‘Germans/Austrians are avoiding the country and this will surely get worse during the messy aftermath of a Euro exit’

      Why? The new Drachma will be one third to one half of the value of the current one. Prices in Euros will fall dramatically and foreign tourists love a bargain, particularly a sunny one. I can’t see Greeks upsetting those who want to give them Euros.

      1. DaveS says:

        Perhaps, but if the exit is messy then I think this will continue…


        …at least for a critical period after the exit.

        And drachma devaluation means making Greeks poorer – the German tourists will be getting a bargain because the Greek tourist workers will be working for less wages. It might take some time for the Greek people to accept that new reality.

        The Euro exit is fraught with risk and would be a massive challenge for any government to navigate successfully

    3. Anonymous says:

      A currency board arrangement should work well – it does in Bulgaria and the Bulgarian politicians are similar to the Greek politicians. The Bulgarian politicians understand that currency board failings will mean quick electoral defeat.

      Unfortunately it takes a crisis to motivate dodgy politicians to sign up to currency board rules and then deliver balanced budgets and spending discipline. Worse still, the bailout sent precisely the wrong signal to the Greek kleptocrats – “The EU will not hold you accountable for the problems you caused”

    4. Anonymous says:

      Hi DaveS
      As you know I am someone who has been suggesting that it has been in Greece’s best interests to leave the Euro for some time. However I would not use MUST as there are both pros and cons. On balance I think that the argument for the economics has favoured the pros by a very solid margin pretty much since the crisis began. Also there is hope that a shock to the system would shake up and reform her bureaucracy and politics too.
      It doesn’t have to be an unpleasant break simply a statement that she can no longer go on as she is but would like to remain in the EU.

  4. Anonymous says:


    Greece’s problems now compounding those of Cyprus as you discussed earlier?

    1. Anonymous says:

      Hi Chris
      Yes they must be and in more ways than one as not only is there the impact of Greek economic weakness but also the fact that otherwise she would have got a relatively quiet bailout. However other factors are at paly as there is a lot of Cypriot trade with the UK and our flatlining hardly helps much either.

  5. JW says:

    Hi Shaun
    lets be honest no-one in ‘power’ really gave a fig about Greece or its people. They were only ever worried about the effect on their banks both directly in the EZ and indirectly in the US/UK. Now that risk is ‘managed’ , the Greeks are just being left to subside back to their previous semi-rural peasant state. Its not ‘nice’ but true I’m afraid. Portugal ‘ditto’ and Spain to a certain extent. Italy is more tricky.
    The ‘EZ’ crisis was only ever a ‘crisis’ if the elite and their financial tools were under threat. Nothing to do with the people or their standard of living.

    State of the Union address last night was a non-event, more of the same. But the republican response from their new Floridian/Hispanic tyro was pretty poor. Looking at the demographics of the US its difficult to see how the democrats will contrive to lose an election going forwards.

    1. Anonymous says:

      Hi JW
      Actually as I look around virtually all leaders right now look fairly poor. Maybe they always mostly were and in the sage of omaha’s famous phrase we now can see that they were always swimming naked.
      I am no expert on democrat/republican debate in the US but there were some arguments on that vein in London and yet Boris and not Ken won.

      1. JW says:

        Hi Shaun
        The demographics I was referring to was associated with the fastest growing ‘ethnic’ group, the Hispanics. Apparently only 36% of them vote, and then overwhelmingly democrat. If this was say doubled in future years its easy to see democrat wins. Now of course if there was a democrat president who completely alienated his own voters, then it could all change.

  6. Patrick says:

    Accepting that the concepts are less fixed than their name suggests, has their been an example of a ‘first world’ economy regressing to a ‘third world’ economy, and if so, how long did it take, and what was the fallout. I know empires have come and gone, but how about supposed democracies?

    Capitalism like communism seems to be impossible to maintain due to both human nature and the statistical likelihood that only the most ruthless/cunning/self serving will make it to the top. Like the black economy in Spain, will we just see people protest, and reduction in government power via a massive reduction in tax income for the exchequer. What then for socially minded programmes for health care and education.

    If you have a population exodus from Greece, from those that don’t want to work in the Tourism or farming industries, does the subsequent housing market crash lead to Greece becoming a wasteland? Would it lead to an end of civil unrest as the employable have fled, rather than continuing to protest?

    Perhaps the wave of immigration feared from Romania and Bulgaria will be nothing compared the Greek influx.

    Is the ‘introduction’ of horse meat the first tiny step towards a Swiftian solution in which a proportion of immigrants will cross Western European borders in the form of economy ready meals.

    Would you trust something labelled ‘Hungarian’ Goulash…?

    (Now with ADDED Hungarian!)

    1. DaveS says:

      Haha – my wife and I have been wondering where all the horses are coming from ? After all the value ready meal is a big market and seems lots of them are 100% horse.

      Are horses commercially raised for meat on the continent ? Can’t see there are enough knackered old cart horses to supply this big a market. Is it cheaper to rear a horse than a cow ? Seems unlikely. So why horse meat ?

      We are beginning to believe they aren’t telling us the whole truth – but then I do like Goulash…..

      1. Anonymous says:

        We have lots of wild horses roaming the mountains here. Rural Bulgarian villages have lots of donkeys & cart horses. Virtually no cost involved.

        By comparison the cows are watched over daily by cowherds which is very labour intensive.

      2. JW says:

        Apparently the Romanians recently banned horse-drawn transport from their roads in response to an EU directive. Unintended consequences eh!

        1. Anonymous says:

          The Romanian police are unlikely to enforce it. They stop nice new(er) cars because the owners can afford to pay off the police, clapped out pieces of junk that should be off the road are ignored because because the police think it’s a waste of their time …

    2. Anonymous says:

      Hi Patrick
      Like DaveS below I like ghoulash and one of the London soup shops does a very nice soup version in my opinion, so that is a disturbing idea reminiscent of the film Soylent Green.
      As to first world to third didnt the Roman Empire go like that? Although like a dying star there were flashes of light etc. so it went on and on. Also the Chinese dynasties? This gives the suggestion that this could take decades if not centuries.

  7. Rods says:

    Hi Shaun,

    Another excellent summary of the Greek plight.

    The banks being bailed out in Greece and the UK by borrowing low and lending increasingly high is not the only things we have in common. The ONS announced today that our average wage buying power has now fallen to the equivalent to somewhere between 2002 and 2003 and it is still declining.

    So back to the future in the wrong sort of way for many of us!

    I’m sure that the UK and Greece will have many more things in common economically over the next few years, where our current Government has failed to get to grips with our deficit and borrowing. Stagflation will make the UK much poorer but in a more gentle way, until the Government can’t borrow from the markets, then the real roller coaster ride will start!

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